Chapter 3: Supply and Demand

What is a shift in the demand curve?

- A change in the quantity demanded at any given price, represented by the shift of the original demand curve to a new position, denoted by a new demand curve. - Possibly an increase in demand for a specific good or service.

What is does a shift in the supply curve represent?

- A change in the quantity supplied of a good or service at any given price.

What does a movement along the supply curve represent?

- A change in the quantity supplied of the good arising from a change in the good's price.

What is a demand curve?

- A demand curve is a graphical representation of the demand schedule that shows the relationship between quantity demanded and price.

What is a demand schedule?

- A demand schedule is a table showing how much of a good or service consumers will want to buy at different prices.

What is an input?

- A good or service that is used to produce another good or service.

What is the individual supply curve?

- A graphical representation that illustrates the relationship between quantity supplied and price for an INDIVIDUAL producer. - The market supply curve is the horizontal sum of all individual supply curves of producers.

What is a supply schedule?

- A graphical representation that shows how much of a good or service would be supplied at different prices.

What is a supply curve?

- A graphical representation that shows the relationship between quantity and price. - Supply curves are usually upward sloping. - The higher the price being offered, the more of any good or service producers will be willing to sell.

What is a market?

- A group of producers and consumers who exchange a good or service for payment.

What is a competitive market?

- A market in which there are many buyers and sellers of the same good or service.

What is a supply and demand model?

- A model of a competitive market.

What is a movement along the demand curve?

- A movement along the demand curve represents changes in the quantity demanded of a good arising from a change in that good's price.

What is a normal good?

- A normal good is a good for which a rise in income increases the demand for that good (normal case).

Given that two goods are substitutes of one another, explain how an increase in one can affect the demand of the other.

- A rise in the price of one good may lead consumers to purchase the substitute good instead. Therefore, shifting the demand curve of its substitute to the right.

Given that two goods are complements of one another, explain how an increase in one can affect the demand of the other.

- A rise in the price of one will lead to a decrease in the demand of the other. Therefore, shifting the demand curve of its complement to the left.

What is the difference between a shift in the demand curve, and a movement along the demand curve?

- A shift in the demand curve is a change in the quantity demanded at any given price. There is an increase in demand even if the price is unchanged. - A movement along the demand curve is a change in quantity demanded due to a change in price.

Explain how changes in expectations can affect supply.

- An increase in the anticipated price of goods and services will reduce supply today. - A decrease in the anticipated price of goods and service will increase supply today.

Explain how changes in the number of producers can affect supply.

- An increase in the number of producers lead to an increase in supply.

Explain how changes in input prices can affect supply.

- An increase in the price of an input makes the production of the final good more costly. Producers are less likely to supply the good at any given price (leftward shift). - A decrease in the price of an input makes the production of the final good less costly. Producers are more likely to supply the good at any given price (rightward shift).

What is an individual demand curve?

- An individual demand curve is a graphical representation that illustrates the relationship between quantity demanded and the price for an individual consumer. - A market demand curve is the horizontal sum of all individual demand curves of consumers.

What is an inferior good?

- An inferior good is a good for which a rise in income decrease the demand for that good. - Goods which are considered less desirable than more expensive alternatives. - Example: bus vs. taxi, fast food vs. casual dining

Explain a typical relationship between quantity demanded and price.

- As prices fall, we move down the demand curve, and quantity demanded increases. - As prices increase, we move up the demand curve, and quantity demanded decreases. - Demand curves always (almost) slope downwards in reality!

Explain how changes in expectations can affect the demand.

- Changes in expectations includes: i) Expectations about future prices - Expectations of a future drop in prices will lead to a decrease in demand presently, and vice versa. - Example: Buying Christmas decorations immediately after the holiday season to prepare for the following year. ii) Expectations about future income - If you expect a rise in income in the future, you may increase your demand for certain goods today. - If you expect a decrease in income in the future, you are more likely to save money and decrease your demand for certain goods.

What events can cause an increase or decrease in supply?

- Changes in input prices - Changes in the prices of related goods and services - Changes in technology - Changes in expectations - Changes in the number of producers

What events can cause an increase or decrease in demand?

- Changes in the prices of related goods or services. - Changes in incomes. - Changes in tastes. - Changes in expectations. - Changes in number of consumers.

Explain how changes in taste can affect demand.

- Consumers have certain preferences and tastes, and this affects the demand goods. - The demand of goods can be affected by changes in trends, beliefs and cultural shifts. - When tastes change in favour of a good, the demand curve shifts to the right, because more people want to buy it at any given price, and vice versa.

When do we consider two goods to be substitutes of production with one another?

- If an increase in the supply of one good causes a decrease in supply of another, we say that the goods are substitutes of production.

When do we consider two goods to be complements of production with one another?

- If an increase in the supply of one good causes an increase in supply of another, we say that the goods are complements of production.

Explain how changes in income can affect the demand?

- If consumers have more income, they are more likely to purchase more of MOST goods and services at any given price.

What happens when the demand curve shifts leftwards?

- If the demand curve shifts leftwards (decrease), this corresponds to a downward movement along the supply curve. - After the shift, at the original equilibrium price, the market is no longer in equilibrium. The original equilibrium price is above the new equilibrium point, meaning that the market is experiencing a surplus. - The equilibrium price and the equilibrium quantity will decrease.

What happens when the demand curve shifts rightwards?

- If the demand curve shifts rightwards (increase), this corresponds to an upward movement along the supply curve. - After the shift, at the original equilibrium price, the market is no longer in equilibrium. The original equilibrium price is below the new equilibrium point, meaning that the market is experiencing a shortage. - The equilibrium price and the equilibrium quantity will increase.

Explain how a change in the number of consumers can affect demand.

- If the number of consumers increases, the demand will increase.

What happens when the supply curve shifts leftwards?

- If the supply curve shifts leftwards (decrease), this corresponds to an upward movement along the demand curve. - After the shift, at the original equilibrium price, the market is no longer in equilibrium. The original equilibrium point is below the new equilibrium point, meaning that the market is experiencing a shortage. - The equilibrium price increases, and the equilibrium quantity decreases.

What happens when the supply curve shifts rightwards?

- If the supply curve shifts rightwards (increase), this corresponds to a downward movement along the demand curve. - After the shift, at the original equilibrium price, the market is no longer in equilibrium. The original equilibrium point is above the new equilibrium point, meaning that the market is experiencing a surplus. - The equilibrium price decreases, and the equilibrium quantity increases.

What happens if the supply and demand curves have both shifted in opposite directions?

- In general, we cannot predict the ultimate effect on the QUANTITY bought and sold. - However, a curve that shifts a disproportionately greater distance than the other curve will have a disproportionately greater effect on the quantity bought and sold. - When demand decreases and supply increases, the equilibrium price falls, but the change in equilibrium quantity is ambiguous. - When demand increases, and supply decreases, the equilibrium price rises, but the change in equilibrium quantity is ambiguous.

What happens if the supply and demand curves both shift in the same direction?

- In general, we cannot predict the ultimate effect on the equilibrium PRICE. - However, a curve that shifts a disproportionately greater distance than the other curve will have a disproportionately greater effect on the price. - The change in the equilibrium quantity can be predicted but the equilibrium price is ambiguous. - If supply and demand increase, the equilibrium quantity increases. - If supply and demand decrease, the equilibrium quantity decreases.

How is a decrease in demand represented by the demand curve?

- Leftward shift of the demand curve

How is a decrease in supply represented by the supply curve?

- Leftward shift of the supply curve

What is the key feature of a competitive market?

- No individual's actions have a noticeable effect on the price at which goods and services are sold. - An unexample: The market for cola beverages is not a competitive market, because Pepsi and Coca-Cola account for a large proportion of sales. These companies are able to influence the price at which pop is bought and sold.

In reality, is the buying price the same as the selling price?

- No. Typically there is a middleman who buys from suppliers, and then sells to consumers at a markup. - In many markets, the difference between buying and selling prices is quite small, so it is a good approximation.

How do we find the equilibrium point using supply and demand curves?

- Put the demand curve and the supply curve on the same diagram. - The price at which the two curves intersect is the equilibrium price.

What is the difference between quantity demanded and demand?

- Quantity demanded refers to changes that occur along the demand curve when prices increase or decrease. - Demand refers to a shift of the demand curve.

How is an increase in demand represented by the demand curve?

- Rightward shift of the demand curve.

How is an increase in supply represented by the supply curve?

- Rightward shift of the supply curve

Explain how changes in technology can affect supply.

- Technology improvements allow producers to spend less on inputs and still produce the same amount of output. - Reducing the cost of production causes an increase in supply, rightward shift of the supply curve.

What is the quantity supplied?

- The actual amount of a good or service people are willing to sell at some specific price.

In the following situation, the market is initially in equilibrium. Explain the changes in either supply or demand that result from the event. After the event described below, does a surplus or shortage exist at the original equilibrium price? What will happen to the equilibrium price as a result? c. After a heavy snowfall, many people want to buy second-hand snowblowers at the local tool shop.

- The demand curve for snowblowers shifts rightwards, increase in demand. - At the equilibrium price before the heavy snow fall, the quantity demanded exceeds the quantity supplied (shortage). - The equilibrium price will rise.

In the following situation, the market is initially in equilibrium. Explain the changes in either supply or demand that result from the event. After the event described below, does a surplus or shortage exist at the original equilibrium price? What will happen to the equilibrium price as a result? b. After a blizzard, Ottawa hoteliers often find that many people cancel their upcoming vacations, leaving them with empty hotel rooms.

- The demand curve shifts leftwards, decrease in demand. - At the equilibrium price before the blizzard, the quantity of hotel rooms supplied is greater than the quantity of hotel rooms demanded (surplus). - The equilibrium price will fall.

Explain whether each of the following events represents (i) a shift of the demand curve or (ii) a movement along the demand curve. c. People buy more long-stem roses the week of Valentine's Day, even though the prices are higher than at other times during the year.

- The demand for roses increases the week of Valentine's Day. - This corresponds to a rightward shift of the demand curve.

What is a surplus?

- The excess of a good or service that occurs when the quantity supplied exceeds the quantity demanded.

What is a shortage?

- The insufficiency of a good or service that occurs when the quantity demanded exceeds the quantity supplied.

What is the market price?

- The price at which all sales and purchases in a well-established, on-going market take place.

What is the equilibrium price?

- The price at which the market is in equilibrium. - A competitive market is in equilibrium when the price has moved to a level at which the quantity of a good demanded equals the quantity of that good supplied.

What is the market-clearing price?

- The price at which the market is in equilibrium. - It is the price that "clears the market," by ensuring that every buyer willing to pay that price finds a seller that is willing to sell at that price and vice versa.

Why does the market price fall if it is above the equilibrium price?

- The price is too high, meaning that the supplier is having a hard time finding consumers who are willing to buy their products. - This offers an incentive for suppliers to lower their prices in order to entice more consumers to buy their products.

What is the law of demand?

- The principle that a higher price for a good or service, *other things equal*, leads people to demand a smaller quantity of that good or service.

Explain whether each of the following events represents (i) a shift of the demand curve or (ii) a movement along the demand curve. d. A sharp rise in the price of gasoline leads many commuters to join carpools in order to reduce their gasoline purchases.

- The quantity demanded for gasoline falls due to an increase in price. - This corresponds to a movement along the demand curve.

What is the quantity demanded?

- The quantity demanded is the actual amount consumers are willing to buy at some specific price.

Explain whether each of the following events represents (i) a shift of the demand curve or (ii) a movement along the demand curve. b. When Circus Cruise Lines offered reduced prices for summer cruises in the Caribbean, their number of bookings increased sharply.

- The quantity demanded of summer cruises increases due to a price reduction. - This corresponds to movement along the demand curve.

Explain whether each of the following events represents (i) a shift of the supply curve or (ii) a movement along the supply curve. e. Since new technologies have made it possible to build larger cruise ships (which are cheaper to run per passenger), Caribbean cruise lines offer more cabins, at lower prices, than before.

- The quantity of cabins supplied is higher at any given price. - This is an increase in supply due to advancements in technology, which corresponds to a rightward shift of the supply curve.

Explain whether each of the following events represents (i) a shift of the supply curve or (ii) a movement along the supply curve. a. More homeowners put their houses up for sale during a real estate boom that causes house prices to rise.

- The quantity of houses supplied rises in response to a increase in prices. - This is a movement along the supply curve.

Explain whether each of the following events represents (i) a shift of the supply curve or (ii) a movement along the supply curve. c. Immediately after the school year begins, fast-food chains must raise wages, which represent the price of labour, to attract workers.

- The quantity of labour supplied is lower at any given price. - This is a decrease in supply, which corresponds to a leftward shift of the supply curve. - In order to increase their supply of labour, they have to increase their wages.

Explain whether each of the following events represents (i) a shift of the supply curve or (ii) a movement along the supply curve. b. Many strawberry farmers open temporary roadside stands during harvest season, even though prices are usually low at that time.

- The quantity of strawberries supplied is higher at any given price. - This is an increase in supply, which corresponds to a rightward shift of the supply curve.

What is the equilibrium quantity?

- The quantity of the good or service bought and sold at the equilibrium price.

Explain whether each of the following events represents (i) a shift of the demand curve or (ii) a movement along the demand curve. a. A store owner finds that customers are willing to pay more for umbrellas on rainy days.

- The quantity of umbrellas demanded is higher at any given price on a rainy day. - This is a rightward shift of the demand curve. - Any quantity can be sold at a higher price.

Explain whether each of the following events represents (i) a shift of the supply curve or (ii) a movement along the supply curve. d. Due to favourable growing conditions, wheat farmers in the Prairie provinces experience bumper crops.

- The quantity of wheat supplied is higher at any given price. - This is an increase in supply, which corresponds to a rightward shift of the supply curve.

In the following situation, the market is initially in equilibrium. Explain the changes in either supply or demand that result from the event. After the event described below, does a surplus or shortage exist at the original equilibrium price? What will happen to the equilibrium price as a result? a. 2016 was a very good year for Ontario wine-grape growers, who produced a bumper crop.

- The supply curve shifts rightwards, increase in supply. - At the equilibrium price from the year before, the quantity of grapes supplied exceeds the quantity of grapes demanded (surplus). - The equilibrium price will fall.

Why does the market price rise if it is below the equilibrium price?

- There is a shortage (excess demand). Either buyers will offer to pay more to get the products they want, or sellers will realize that they can increase their prices.

Why do all sales and purchases in a market take place at the same price?

- This statement is true for well-established on-going markets. - If the seller offers prices that are too high, the buyer would be better off shopping elsewhere. - The seller would not be okay with selling at prices below what they know consumers are willing to pay, and would be better off waiting for another customer.

What do we say that two goods are complements of one another?

- Two goods are considered to be complements if a rise in the price of one leads to a decrease in the demand for the other. - Usually goods that are consumed together. - Examples: cars & gasoline, cookies & coffee

When do we say that two goods are substitutes of one another?

- Two goods are substitutes if a rise in the price of one leads to an increase in demand for the other. - In some way, the two goods serve a similar function. - Example: coffee & tea, muffins & doughnuts

Why is a competitive market simpler to model than a non-competitive market?

- When a market is competitive, individuals can base decisions on a less complicated analysis than those in a non-competitive market. - In a competitive market, an individuals decisions will not affect the market price of their products. However, the contrary is not true in a non-competitive market.

Explain how changes in prices of related goods and services can affect supply.

- When a producer sells several products, the quantity of one good they are willing to sell at any given price depends on the prices of the other co-produced goods.

If the price were less than the equilibrium price, what can we say about the quantity demanded and the quantity supplied?

Quantity Supplied < Quantity Demanded

If the price were greater than the equilibrium price, what can we say about the quantity demanded and the quantity supplied?

Quantity Supplied > Quantity Demanded

For the following, determine (i) the market in question; (ii) whether a shift in demand or supply occurred, the direction of the shift, and what induced the shift; and (iii) the effect of the shift on the equilibrium price and the equilibrium quantity. a. As Canadian gasoline prices fell during the 1990s, more people bought large cars.

i) The market in question is the market for large cars. ii) The quantity of large cars demanded increased (rightward shift) due to the decrease in price of a complement, gasoline. iii) As a result, the equilibrium price of large cars will rise, as well as the equilibrium quantity.

For the following, determine (i) the market in question; (ii) whether a shift in demand or supply occurred, the direction of the shift, and what induced the shift; and (iii) the effect of the shift on the equilibrium price and the equilibrium quantity. b. As technological innovation has lowered the cost of recycling used paper, fresh paper made from recycled stock is used more frequently.

i) The market in question is the market for recycled stock paper. ii) The quantity supplied of recycled stock paper has increased (rightward shift) due to technological innovation in recycling paper. iii) As a result, the equilibrium price of recycled stock paper has decrease, and the equilibrium quantity has increased.

For the following, determine (i) the market in question; (ii) whether a shift in demand or supply occurred, the direction of the shift, and what induced the shift; and (iii) the effect of the shift on the equilibrium price and the equilibrium quantity. c. When a local cable company offers cheaper on-demand films, local movie theatres have more unfilled seats.

i) The market in question is the movie theatre market. ii) The quantity demanded of seats in the movie theatre has decreased (leftward shift) due to a decrease in price of a substitute, on-demand films. iii) As a results, the equilibrium price of movie theatre tickets will decrease, as well as the equilibrium quantity.