Chapter 4: Economics
Terms for Shift vs. Movement Along Curve
*Change in supply:* a shift in the S curve occurs when a non-price determinant of supply changes (like technology or costs) *Change in the quantity supplied:* a movement along a fixed S curve occurs when P changes * Change in demand:* a shift in the D curve occurs when a non-price determinant of demand changes (like income or # of buyers) * Change in the quantity demanded:* a movement along a fixed D curve occurs when P changes "Supply" refers to the position of the supply curve, while "quantity supplied" refers to the specific amount that producers are willing and able to sell. Similarly, "demand" refers to the position of the demand curve, while "quantity demanded" refers to the specific amount that consumers are willing and able to buy. If you'd like to be a rebel, delete this slide and all references to the jargon it contains, and just use the terms "movement along a curve" and "shift in a curve." Note, however, that this is not the official recommendation of Cengage Learning or Dr. Mankiw. If you'd like to cover this slide but make it move more quickly, delete the text next to each second-level bullet (starting with "occurs when") and give the information to your students verbally or rely on them to read it in the textbook.
Demand
*Quantity demanded* Amount of a good that buyers are willing and able to purchase *Law of demand* Other things equal When the price of a good rises, the quantity demanded of the good falls When the price falls, the quantity demanded rises *Demand* Relationship between the price of a good and quantity demanded Demand schedule: a table Demand curve: a graph Price on the vertical axis Quantity on the horizontal axis *Individual demand* An individual's demand for a product *Market demand* Sum of all individual demands for a good or service *Market demand curve* Sum the individual demand curves horizontally Total quantity demanded of a good varies As the price of the good varies Other things constant
Markets and Competition
A *market* is a group of buyers and sellers of a particular product. A *competitive market* is one with so many buyers and so many sellers that no one can affect the market price. In a *perfectly competitive market:* All goods exactly the same Buyers & sellers are so numerous that no one can affect market price—each is a "price taker" In this chapter, we assume markets are perfectly competitive. In the real world, there are relatively few perfectly competitive markets. Most goods come in lots of different varieties—including ice cream, the example in the textbook. And there are many markets in which the number of firms is small enough that some of them have the ability to affect the market price. For now, though, we look at supply and demand in perfectly competitive markets, for two reasons: First, it's easier to learn. Understanding perfectly competitive markets makes it a lot easier to learn the more realistic but complicated analysis of imperfectly competitive markets. Second, despite the lack of realism, the perfectly competitive model can teach us a lot about how the world works, as we will see many times in the chapters that follow.
Demand Curve Shifters: Income
Demand for a *normal good* is positively related to income. Increase in income causes increase in quantity demanded at each price, shifts D curve to the right. (Demand for an *inferior good* is negatively related to income. An increase in income shifts D curves for inferior goods to the left.) *Demand Curve Shifters: Prices of Related Goods* Two goods are *substitutes* if an increase in the price of one causes an increase in demand for the other. Example: pizza and hamburgers. An increase in the price of pizza increases demand for hamburgers, shifting hamburger demand curve to the right. Other examples: Coke and Pepsi, laptops and desktop computers, CDs and music downloads If you are willing to spend a couple extra minutes on substitutes and complements, and have a blackboard or whiteboard to draw on, here's an idea: Before (or instead of) showing this slide, draw the demand curve for hamburgers. Pick a price, say $5, and draw a horizontal line at that price, extending from the vertical axis through the D curve and continuing to the right. Suppose Q = 1000 when P = $5. Label this on the horizontal axis. Now ask your students: If pizza becomes more expensive, but price of hamburgers does not change, what would happen to the quantity of hamburgers demanded? Would it remain at 1000, would it increase, or would it decrease? Explain. Some and perhaps most students will see right away that people will want more hamburgers when the price of pizza rises. After establishing this, note that the increase in the price of pizza caused an increase in the quantity demanded of hamburgers. Then state the term "substitutes" and give the definition. Before giving the other examples (listed in the 3rd bullet of this slide), do a similar exercise to develop the concept of complements. Finally, give the examples of substitutes and complements from the 3rd bullet point of this and the following slides, but mix up the order and ask students to identify whether each example is complements or substitutes. Two goods are *complements* if an increase in the price of one causes a fall in demand for the other. Example: computers and software. If price of computers rises, people buy fewer computers, and therefore less software. Software demand curve shifts left. Other examples: college tuition and textbooks, bagels and cream cheese, eggs and bacon *Demand Curve Shifters: Tastes* Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right. Example: The Atkins diet became popular in the '90s, caused an increase in demand for eggs, shifted the egg demand curve to the right. *Demand Curve Shifters: Expectations* Expectations affect consumers' buying decisions. Examples: If people expect their incomes to rise, their demand for meals at expensive restaurants may increase now. If the economy sours and people worry about their future job security, demand for new autos may fall now.
Demand Curve Shifters: # of Buyers
Increase in # of buyers increases quantity demanded at each price, shifts D curve to the right. Income is the first demand shifter discussed in this chapter of the textbook. I chose to start with a different one (number of buyers), for the following reason: In discussing the impact of changes in income on the demand curve, the textbook also introduces the concept of normal goods and inferior goods. Students may find it easier to learn about curve shifts if the presentation focuses solely on a curve shift (at least initially) without simultaneously introducing other concepts. If you wish to present the demand shifters in the same order as they appear in the book, simply reorder the slides in this presentation. Beginning economics students often have trouble understanding the difference between a movement along the curve and a shift in the curve. Here, the animation has been carefully designed to help students see that a shift in the curve results from an increase in quantity at each price. (A more realistic scenario would involve a non-parallel shift, where the horizontal distance of the shift would be greater for lower prices than higher ones. However, to remain consistent with the textbook, and to keep things simple, this slide shows a parallel shift.) Beginning economics students often have trouble understanding the difference between a movement along the curve and a shift in the curve. Here, the animation has been carefully designed to help students see that a shift in the curve results from an increase in quantity at each price. (A more realistic scenario would involve a non-parallel shift, where the horizontal distance of the shift would be greater for lower prices than higher ones. However, to remain consistent with the textbook, and to keep things simple, this slide shows a parallel shift.)
CONCLUSION: How Prices Allocate Resources
One of the Ten Principles from Chapter 1: Markets are usually a good way to organize economic activity. In market economies, prices adjust to balance supply and demand. These equilibrium prices are the signals that guide economic decisions and thereby allocate scarce resources.
How Prices Allocate Resources
Prices Signals that guide the allocation of resources Mechanism for rationing scarce resources Determine who produces each good and how much is produced
Supply
Quantity supplied Amount of a good Sellers are willing and able to sell Law of supply Other things equal When the price of a good rises, the quantity supplied of the good also rises When the price falls, the quantity supplied falls as well Supply Relationship between the price of a good and the quantity supplied Supply schedule: a table Supply curve: a graph Price on the vertical axis Quantity on the horizontal axis Individual supply A seller's individual supply Market supply Sum of the supplies of all sellers for a good or service Market supply curve Sum of individual supply curves horizontally Total quantity supplied of a good varies As the price of the good varies All other factors that affect how much suppliers want to sell are hold constant *Supply Curve Shifters* The supply curve shows how price affects quantity supplied, other things being equal. These "other things" are non-price determinants of supply. Changes in them shift the S curve... Shifts in supply Increase in supply Any change that increases the quantity supplied at every price Supply curve shifts right Decrease in supply Any change that decreases the quantity supplied at every price Supply curve shifts left *Supply Curve Shifters: Input Prices* Examples of input prices: wages, prices of raw materials. A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts to the right. In the second bullet point, "output price" just means the price of the good that firms are producing and selling. I have used "output price" here to distinguish it from "input prices."
Two ways to reduce the quantity of smoking demanded
Shift the demand curve for cigarettes and other tobacco products Try to raise the price of cigarettes Shift the demand curve for cigarettes and other tobacco products Public service announcements Mandatory health warnings on cigarette packages Prohibition of cigarette advertising on television If successful Shift demand curve to the left Try to raise the price of cigarettes Tax the manufacturer: higher price Movement along demand curve 10% ↑ in price → 4% ↓ in smoking Teenagers: 10% ↑ in price → 12% ↓ in smoking Demand for cigarettes vs. demand for marijuana Appear to be complements
Summary 2.0
Supply and Demand are the two forces that make market economies work. They determine quantity and price. The term refers to how people interact in a competitive market. market: a group of buyers or sellers of a particular good or service. Buyers determine demand and sellers quantity. competitive market: a market in which there are many buyers and sellers so each has a negligible impact on market price. Perfectly Competitive: (Takes market price) 1) Goods offered for sale are exactly the same. 2) No single buyer or seller can affect market price. Because buyers and sellers in perfectly competitive markets, must accept the price the market determines, they are called price takers. Demand schedule: a table that shows the relationship between the price of a good and its quantity. Law of Demand: the claim that other things being equal , the quantity of a good demand fall when price rises. Quantity of Demand: the amount of a good that buyers are willing to purchase. demand curve: a graph of the relationship between the price of a good and quantity demanded. Market Demand: Sum of all the demands for a particular good or service. Normal good: This is what a good is called when income falls and the demand falls as well. Inferior good: If the demand for a good rises when income falls it is called this. Substitutes: When the fall in price of one good is equal to another they are substitutes. Complements: When the fall in price of one good raises the price of another. Quantity supplied: Amount of a good or service sellers are willing or able to sell. Law of supply: Quantity of a good rises with increased price and vice versa. Supply schedule: a table that shows the relationship between price of a good and quantity supplied. Supply Curve: graph of the relationship between price of a good and quantity supplied. Market supply: sum of the supplies of all sellers. Equilibrium: Market price has reached the level at which quantity supplied equals quantity demanded. Where supply and demand intersect. Equilibrium Price: Price that balances quantity demanded/supplied. Equilibrium quantity: the quantity supplied/demanded at equilibrium price. Surplus: Quantity supplied is greater than demand Shortage: Quantity demanded is greater than supplied. (excess demand) Law of supply and demand: Price is adjusted to bring demand and supply into balance.
Supply Curve Shifters: Technology
Technology determines how much inputs are required to produce a unit of output. A cost-saving technological improvement has the same effect as a fall in input prices, shifts S curve to the right. Supply Curve Shifters: # of Sellers An increase in the number of sellers increases the quantity supplied at each price, shifts S curve to the right. Supply Curve Shifters: Expectations Example: Events in the Middle East lead to expectations of higher oil prices. In response, owners of Texas oilfields reduce supply now, save some inventory to sell later at the higher price. S curve shifts left. In general, sellers may adjust supply* when their expectations of future prices change. (*If good not perishable)
Demand Curve Shifters
The demand curve shows how price affects quantity demanded, other things being equal. These "other things" are non-price determinants of demand (i.e., things that determine buyers' demand for a good, other than the good's price). Changes in them shift the D curve... *Shifts in the demand curve* Increase in demand Any change that increases the quantity demanded at every price Demand curve shifts right Decrease in demand Any change that decreases the quantity demanded at every price Demand curve shifts left
Equilibrium
Various forces are in balance A situation in which market price has reached the level where Quantity supplied = quantity demanded Supply and demand curves intersect Equilibrium price Balances quantity supplied and quantity demanded Market-clearing price Equilibrium quantity Quantity supplied and quantity demanded at the equilibrium price Surplus Quantity supplied > quantity demanded Excess supply Downward pressure on price Movements along the demand and supply curves Increase in quantity demanded Decrease in quantity supplied Shortage Quantity demanded > quantity supplied Excess demand Upward pressure on price Movements along the demand and supply curves Decrease in quantity demanded Increase in quantity supplied Law of supply and demand The price of any good adjusts To bring the quantity supplied and the quantity demanded for that good into balance In most markets Surpluses and shortages are temporary Three steps to analyzing changes in equilibrium Decide whether the event shifts the supply curve, the demand curve, or, in some cases, both curves Decide whether the curve shifts to the right or to the left Use the supply-and-demand diagram Compare the initial and the new equilibrium Effects on equilibrium price and quantity A change in market equilibrium due to a shift in demand One summer, very hot weather Effect on the market for ice cream? Hot weather: shifts the demand curve (tastes ) Demand curve shifts to the right Higher equilibrium price; higher equilibrium quantity A change in market equilibrium due to a shift in supply One summer, a hurricane destroys part of the sugarcane crop: higher price of sugar Effect on the market for ice cream? Change in price of sugar: supply curve Supply curve: shifts to the left Higher equilibrium price; lower equilibrium quantity Shifts in both supply and demand One summer: hurricane and heat wave Heat wave shifts the demand curve; hurricane shifts the supply curve Demand curve shifts to the right; Supply curve shifts to the left Equilibrium price raises If demand increases substantially while supply falls just a little: equilibrium quantity rises If supply falls substantially while demand rises just a little: equilibrium quantity falls Supply and demand together Determine the prices of the economy's many different goods and services
In this chapter, look for the answers to these questions
What factors affect buyers' demand for goods? What factors affect sellers' supply of goods? How do supply and demand determine the price of a good and the quantity sold? How do changes in the factors that affect demand or supply affect the market price and quantity of a good? How do markets allocate resources?
