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1. DemandandSupply Why do roses cost more on Valentine’s Day? Why do TV ads cost more during the Super Bowl ($4.0 million for 30 sec.) than during Nick at Nite reruns? Why do hotel rooms in Sun Valley, Idaho cost more in the winter than in the summer? Why do surgeons earn more than butchers? Why do pro basketball players earn more than pro hockey players? Why do economics majors earn more than most other majors? Why are some of you going to major in economics in college? The answer to these and other economics questions boil down to the workings of supply and demand – the subject of this chapter. “Econ, Econ”
2. P QD DEMAND SCHEDULE Consumers“willingness to buy” Price decreases; QD increases D $5 $4 $3 $2 $1 $5 4 3 2 1 10 20 35 55 80 0 10 20 35 55 80 Quantity Demanded …a specifiedtime period …other things being equal QD – how much will be purchased at a specific price [& date].
3. D Three Reasons Why the Law of Demand Exists P1 P2 QD1 QD1 Income Effect When things are expensive, money buys less When things are cheap, money buys more Substitution Effect When apples are expensive and their substitutes (pears) are relatively cheap, I buy fewer apples and more pears Diminishing Marginal Utility Each additional unit of an item purchased gives less marginal utility (happy points) than the previous unit. Therefore, the only way I will buy more is if the price is lower. Ex. When I’m hungry, I typically will buy2 breakfast tacos. The reason I don’t buy a third taco is because the marginal utility of the third taco is less than the price of the taco. But, if the price of the taco is less than the marginal utility of the taco, then I will buy the third taco
4. Law of Demand [Change in QD] D Reasons For Downsloping “D” Curve 1. Income Effect –current buyers buy more. 2. Substitution Effect– new buyers now purchase. 3. Diminishing MarginalUtility - because buyers of successive units receive less marginal utility, they will buy more only when the price is lowered. iPhone $399.00 Change in QD 1. Price change 2. Movement [up/down the demand curve] 3. Point to point [along the curve] Price QD $250.00 Inverserelationship QD1 QD2 “D” refers to the “whole curve”.[“all prices”] “QD” refers to a “point on the curve” based on a “particular price.”
5. Graphing The Demand Curve [Price Change, Point to Point Movement] Picture of Law of Demand
6. Elasticity of D – the way price affects QD.Elastic- QDthat isvery responsive to price.Inelastic- achg in price has littleimpact on QD. Elastic (flexible) Demand Substitutes (butter) Luxury(mink coat) Expensive(car) Has durability(refrigerator) Lasts a long time (gas-guzzling car) Inelastic (inflexible) Demand No substitutes(milk) Necessity(insulin) Inexpensive(safety pin) No durability(pencil) Lasts only a short time(bread)
7. Elasticor Inelastic(Total Receipts Test) $2 $1 Elastic Inelastic 20 30 40 50 Total Receipts Test 20 x $2 = $40 Total Receipts Test 20 x $2 = $40.00 50 x $1 = $50 30 x $1 = $30.00
8. Quantity Demandedvs.Demand Quantity Demanded [QD] is triggered by a price chg. The quantities of a good or service thatpeople will purchase at a specific priceat a given time. Demand [D] is triggered by “TIMER” [non-price]. A schedule of the total quantities of a good or service thatpurchasers will buy at different pricesat a given time. Demandis abunch of QD’s strung together.
9. “Demand Shifters” [TIMER] 1. Taste [direct] 2. Income [normal-direct] [inferior-inverse] 3. Market Size [number of consumers-direct] 4. Expectations [of consumers about future *price-direct, about future availability-inverse, or about future income–direct. 5. Related Good *Prices [substitutes-direct] [complements-inverse] D D1 D1 D2 P1 D1 D3 D2 D2 P P P2 P QD2 Complement [inverse] QD1 Substitute [Direct] Bread Butter Bagels Change in “D” [curve] 1. Non price change[“TIMER”] 2. Whole “D” curve shifts [There is a change in “QD” but it is not caused by a change in “price.” [QD-”singleprice”; D-”all prices”] QD3 QD2 QD1
10. Tastes[direct] Incomes -Normal[direct]& Inferior[inverse] Market Size(# ofconsumers)[direct] Expectations of consumers about [futureprice-direct;future income [direct];andavailability[inverse] Related Good Price Changes [substitutes-direct;complements-inverse] “TIMER” Helmets
11. Change in QS [“Change in “price”] Decrease in “QS” [caused by a “decrease in price”] Increase in “QS” [caused by an “increase in price”] S S P2 1. Price change 2. Movement 3. Point to point [“Snap shot of 1 pt in time] P1 P2 P1 QS1 QS2 QS1 QS2 Change in “S” [RATNEST] S2 S1 S1 S2 1. Non-price 2. Whole curve 3. Shift [“Time passes”] P P “Decrease in S” “Increase in S” What could cause an “increase in supply?” 4. Increase in number of producers 1. Decrease in resource cost [wages/raw materials] 5. Increase in technology 2. Decrease in the price of analternative outputfor “X”6. Increase in subsidies 3. Producer expectations of a price decrease7. Decrease in taxes
12. Quantity Supplied vs.Supply Quantity Supplied [QS] is triggered by a price change. QS means quantity of a good/service thatproducers are willing & able to supply on a given time. Supply [S]: [triggered by “RATNEST”] A schedule of the total quantities of a good or service thatproducers will supply at different pricesat a given time.Supplyisnot an amountbut abehavior. Supplyis abunch of QS’sstrung together. Price can not cause a change in “S” [shift] Price can only cause a change in “QS” [movement].
13. Consumers and Producers Feel Differently About High & Low prices Producers supply more at the higher price because the opportunity cost increases if they don’t. Consumers consume less at the higher price because they now have less money to spend. Producers supply less at the lower prices because the opportunity cost decreases if they don’t. Consumers consume more at the lower price because they now have more money to spend. I normally eat one, but at this low price, I’m having two. I was going to buy a Honda but this car is $4,000 cheaper. I’m saving money at the lower price.
14. Law of Supply . Price increases; QS increases Price decreases; QS decreases Direct “S”refers to the“whole supply curve”and refers to what producers will supply at“different prices”. “QS”refers to a“point on the curve”and refers to what producers will supply at a“particular price”. S Change in “QS” 1. Price change 2. Movement (up/down “S” curve) 3. Point to point (along “S” curve) P2 More of you would supply your labor for $12 than if labor were getting just $6 an hour. P1 Producers want the highest price possible. QS1 QS2 Reasons For Upsloping “S” Curve 1. There is increasing opportunity cost if you don’t produce. 2. Current producers produce more [overtime/more shifts] 3. New producers are attracted to the market.
15. ElasticSupply– a small increase/decreasein price causes significant change in QS. Elastic supply is very responsive to price changes. Elastic (Flexible) SupplyInelastic (Inflexible) Supply Can be made quickly 1. Cannot be made quickly Little expense (few 2. Great Expense (large capital capital resources required) resources required) 3. Unskilledworkers 3. Skilledworkers 4. Long time 4. Short time 5. Don’t need scarce 5. Scarcity of natural resources natural resources Examples:T-shirts, hats, Examples: Gold, diamonds, shot glasses, and posters and computers
16. InelasticSupply - regardless of price, producers are unwilling/unable to increase/decreaseQS. (QS is inflexible and unresponsive to price changes) Elastic supply results in a morehorizontalline &inelastic supply results in a moreverticalline. Elastic supply is very responsiveto price&inelasticsupply isunresponsiveto price. 0 1000 2000 3000 400 5000
17. Elastic/Inelastic Supply Curves Quantity Supplied Think of “responsiveness” as “flatness”. Quantity Supplied
18. Supply Shifters [“RATNEST”] ResourceCost[wages & raw materials] [inverse] Alternative Output price changes[inverse] Technology [direct] Number ofSuppliers[direct] Expectation(Suppliers) about future price [inverse] Subsidies [direct] Taxes [inverse] Decr in “S” of broccoli Bigger supply of games “Take this money.” Up down
19. Individual Supply Can Increase or Decrease Change in Supply [“RATNEST”] 1. Increase in resource cost 2. Alt. output price increase 3. Technological decrease 4. Decrease in # of suppliers 5. Producer exp. of price increase 6. Decrease in subsidies 7. Increase in taxes “S” is a whole bunch of QS’s strung together. P 6 5 4 3 2 1 0 S3 Individual Supply S1 S2 P Qs $5 4 3 2 1 60 50 35 20 5 Price (per bushel) 1. Decrease in resource cost 2. Alt. output price decrease 3. Technological change 4. Increase in # of suppliers 5. Producer exp. of price decrease 6. Increase in subsidies 7. Decrease in taxes Q 2 4 6 8 10 12 14 Quantity Supplied (bushels per week)
20. [TIMER] P D Q D Q P D1 A D1 S B D1 S “D” for flag after 9/11 P2 D2 P1 Slide Rule After introduction of calculator P1 P2 After “Looking For Nemo” Q2 Q1 Q1 Q2 “Decrease in Demand” “Increase in Demand” Four Possibilities Q S Q P P S [RATNEST] D D D S2 C S1 S1 $1.85 S1 $1.85 Increase in supply of gas $1.00 Decrease in “S” of gas $1.00 Q2 Q1 Q1 Q2 “Increase in Supply” “Decrease in Suppy”
21. P QD P QS MARKET DEMAND & SUPPLY Price of Corn CORN MARKET CORN MARKET S $5 4 $3 2 1 2,000 4,000 7,000 11,000 16,000 12,000 10,000 7,000 4,000 1,000 $5 $4 $3 $2 $1 $5 $4 $3 $2 $1 Market Clearing Equilibrium D 7 o Q 2 4 6 8 10 12 14 16 Quantity of Corn
22. “TIMER”[D] or “RATNEST”[S] A ___1. Increase inincomeon the market forcamcorders. ___2. Increase in # of consumers on market for computers. ___3.Producer expectations about a price increase. ___4.Consumer expectationsabout a price increase. ___5. Increase in #of producerson market fordigital cameras. ___6. Increase in resource coston the market for bagels. A D A C D ___7. Increase in the price of Apple’s iPodVideo on the market for Microsoft’s Zune. ___8. Increase in the price of tea on the market for lemon. ___9. Increase in business taxes on the market for SUVs. ___10.Consumers expect a shortage ofcell phones. A B D A
23. Effect of Changes in “D” or “S” on Price and Quantity E2 E1 E1 E2 E1 E1 E2 E2 An increase in income if Microsoft’s Zune is anormal good would: a. increase D, increase P, & increase Q. b. increase D, increase P, & decrease Q. c. increase S, increase P, & increase Q. d. decrease D, increase P, & increase Q. 2. A decrease in the price of resources used to produce laptops will: a. increase S, increase P, & increase Q. b. increase D, increase P, & increase Q. c. decrease S, decrease P, & decrease Q. d. do none of the above 3. Decrease in price ofbutteron the market for the substitutemargarine: a. increase D, increase P, & decrease Q. b. decrease D, decrease P, & increase Q. c. decrease D, increase P, & decrease Q. d. do none of the above 4. An improvement in technology used to produce DVDs will: a. decrease S, increase P, & decrease Q. b. decrease S, increase P, & increase Q. c. increase S, decrease P, & increase Q. d. decrease D, decrease P, & decrease Q. 5. A decrease in the number of consumers for Fuzzy Wuzzies: a. decrease S, decrease P, & decrease Q. b. increase D, increase P, & increase Q. c. decrease D, decrease P, & decrease Q. d. decrease D, decrease P, & increase Q.
24. Effect of Changes in “D” or “S” on Price and Quantity 6. A decrease in taste for Fuzzy Wuzzies would: a. increase D, increase P, & increase Q. b. decrease D, increase P, & decrease Q. c. increase S, increase P, & increase Q. d. decrease D, decrease P, & decrease Q. 7. A reduction in the number of firms producing laptops: a. increase S, increase P, & increase Q. b. increase D, increase P, & increase Q. c. decrease S, increase P, & decrease Q. d. decrease S, decrease P, decrease Q. 8. An increase in the price of pancakes, a complement for syrup would: a. increase D, increase P, & decrease Q. b. decrease D, decrease P, & increase Q. c. decrease D, decrease P, & decrease Q. d. do none of the above 9. A decrease in income upon the market for spam would: a. decrease S, increase P, & decrease Q. b. decrease S, increase P, & increase Q. c. increase D, decrease P, & increase Q. d. increase D, increase P, & increase Q. 10. Consumer expectations that the price of PSP will increase by 50% in the future will: a. decrease S, decrease P, & decrease Q. b. increase D, increase P, & increase Q. c. decrease D, decrease P, & decrease Q. d. decrease D, decrease P, & increase Q.
25. [D – “TIMER”; QD – price change of product (inverse)] "Increase in Demand" for computers? ___1. Which of the following will cause an a. decrease in price of computers b. decrease in income c. increase in income d. increase in the price of compu ters "Increase in QD" for computers? ___2. Which of the following will cause an a. decrease in price of computers b. decrease in income c. increase income d. increase price of computers in in "Decrease in Demand" for plasma TVs? ___3. Which of the following will cause a a. increase in price of plasma TVs b. decrease in price of plasma TVs c. decrease in # of consum ers(marketsize) "Decrease in QD" for plasma TVs? ___4. Which of the following will cause a a. increase in price of plasma TVs b. decrease in price of plasma TVs c. decrease in # of consumers (market size) [S – “RATNEST”;QS – price change of product (direct)] "Increase in Supply" for DVDs? ___5. Which of the following will cause an decrease in price of DVDs c. decrease in resource cost a. increase in price of DVDs d. expectations of price increase b. "Increase in QS" for DVDs? ___6. Which of the following will cause an a. decrease in price of DVDs c. decrease in resource price b. increase in pric e of DVDs d. expectations of price increase "Decrease in Supply" for DVDs? ___7. Which of the following will cause a a. increase in price of DVDs c. subsidies to suppliers of DVDs b. decrease in price of DVDs d. expectations of price increase "Decrease in QS" for digital cameras? ___8. Which of the following will cause a a. increase in price of cameras c. subsidies to suppliers of cameras b. decrease in price of cameras d. expectations digital camera price increase of C d. increase in price of computers A C c. decrease in # of consumers A C B D B