ECONOMICS: EXPLORE

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ECONOMICS EXPLORE APPLYby Ayers and Collinge

• CHAPTER 3
• Demand and Supply

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Learning Objectives

1. Distinguish between the general notions of demand
   and supply used in ordinary conversation and the
   precise notions employed in the study of
   economics.
2. Explain what it means to shift demand and supply
   and why shifts might occur.
3. Describe how the marketplace settles on the
   equilibrium price and quantity.
4. Specify how demand and supply shifts cause market
   equilibriums to change over time.

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Learning Objectives

• 5. Identify the changes to equilibrium that
  result from simultaneous changes in demand and
  supply.
• 6. (EA) Discuss how vouchers use competition to
  improve the quality of schooling.

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3.1 DEMAND

• Demand relates the quantity of a good that
  consumers would purchase at each of various
  possible prices, over some period of time.
• The ceteris paribus condition means that we look
  at only one relationship at a time.
• Ceteris paribus is the Latin for holding all
  else equal.

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Demand Schedule
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Demand Curve
The demand curve slopes downward because price
and quantity demanded are inversely related.
A
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Price (s)
B
4
C
3
E
2
Demand
F
1
G
0
1
2
3
4
5
Quantity
7
Shifting Demand versus Movements along a Demand
Curve

• A change in the price of a good causes a change
  in the quantity demanded,
• but does not shift demand

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Changes in Demand vs. Changes in Quantity Demanded
Price (s)
Demand
Quantity
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Changes in Demand vs. Changes in Quantity Demanded
Price (s)
Decrease
Increase
Demand
Quantity
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Demand Shift Factors

• Tastes and Preferences
• Substitutes and Complements
• Income
• - Normal vs. Inferior Goods
• Population
• Price Expectations

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Changes in Demand - Decrease

• Demand Shifts LEFT
• When
• Prices of substitutes decrease
• Prices of complements increase
• Normal good-income decreases
• Inferior good-income increases
• Population decreases
• Tastes preferences turn against the product

Price
D1
Quantity
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Changes in Demand - Increase

• Demand Shifts RIGHT When
• Prices of substitutes increase
• Prices of complements decrease
• Normal good-income increases
• Inferior good-income decreases
• Population increases
• Tastes preferences turn in favor of the product

Price
D1
Quantity
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3.2SUPPLY

• Supply relates the quantity of a good that will
  be offered for sale at each of various possible
  prices, over some period of time, ceteris paribus.

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Supply Schedule
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Supply Curve
Supply
H
Price (s)
5
I
4
The supply curve slopes upward because price and
quantity supplied are directly related.
J
3
K
2
1
L
0
1
2
3
4
5
Quantity
M
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Supply Shift Factors

• Prices of Inputs
• Technological Change
• Government or Union Restrictions
• Prices of Substitutes in Production
• Prices of Jointly Produced Goods
• Expected Future Prices
• Number of Sellers

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Changes in Supply vs. Changes in Quantity Supplied
Supply
Price (s)
5
4
3
2
1
0
Quantity
1
2
3
4
5
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Changes in Supply vs. Changes in Quantity Supplied
Supply
Price (s)
5
Decrease
4
Movement along Supply
Increase
3
2
1
0
Quantity
1
2
3
4
5
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Changes in Supply - Decrease

• Supply Shifts LEFT When
• Sellers expect price to rise in future.
• Price of labor or any input rises.
• Government or union restrictions increase cost.
• Price of substitute in production rises.
• Price of product produced jointly falls.
• Number of sellers declines

S1
Quantity
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Changes in Supply - Increase

• Supply Shifts RIGHT When
• Sellers expect price to decline in future.
• Price of labor or any input falls.
• Technological change lowers cost.
• Price of substitute in production falls.
• Price of product produced jointly rises.
• Number of sellers increases

S1
Quantity
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Individual Demand to Market Demand
Demand can be one individuals or the market as a
whole
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Market Demand Curve
Price () 5 4 3 2 1 0
6 5 4 3 2 1 0
Price (s)
1 2 3 4 5 6
7 8 9 10 11
Quantity
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Individual Supply to Market Supply
Supply can be from one firm or all firms in the
market.
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Market Supply Curve
Price (s)
5
4
3
2
1
0
1
2
3
4
5
7
6
8
9
Quantity
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Market Equilibrium
There is only one price that clears the market,
meaning that the quantity supplied equals the
quantity demanded.
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Market Equilibrium
Market equilibrium occurs where demand and supply
intersect.
Price (s)
5
Supply
Surplus of 4 Pails
4
Too High
3
P
2
Too Low
Shortage of 4 Pails
1
Demand
0
1
2
3
4
5
7
6
8
9
Q
Pails of Water
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3.3 EQUILIBRIUM

• The market clearing price and the resulting
  quantity traded comprise what is referred to as
  the market equilibrium, meaning that there is no
  tendency for either price or quantity to change,
  ceteris paribus.

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Changes in Market Equilibrium
Snew
S
Price (s)
Snew
Price (s)
S
P
P
D
D
Quantity
Quantity
Q
Q
An increase or decrease in supply.
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Changes in Market Equilibrium
S
Price (s)
Price (s)
S
P
P
D
D
Q
Q
Quantity
Quantity
An increase or decrease in demand.
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Changes in Market Equilibrium
Note In Cases 1-4 only one of the two curves is
shifting.
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Changes in Market Equilibrium
Note In Cases 5-8 both of the curves are
shifting.
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3.4 EXPLORE APPLYPolicies for Competition and
Choice in Schooling

• Charter Schools Public schools in which a
  non-profit group receives a contract (i.e.
  charter) to operate a school for a limited period
  of time.
• Vouchers Monetary amounts provided by
  government, free of charge to parents, which
  would be spendable only on the education of their
  children, at a school chosen by the parents.

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Test Yourself

• The Law of demand states that consumers
• must not buy more than they need.
• must not waste what they buy.
• must pay for what they buy.
• will buy more as price falls.

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Test Yourself

• 2. An increase in the price of football tickets
  would cause the ___________ basketball tickets to
  __________.
• demand for increase.
• supply of increase.
• demand for decrease.
• supply of decrease.

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Test Yourself

• 3. An upward sloping supply curve means that
• consumers will wish to purchase more at higher
  prices .
• consumers will wish to purchase more at lower
  prices.
• business firms will wish to sell more at higher
  prices.
• business firms that lower their prices wish to
  sell more.

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Test Yourself

• 4. A decrease in supply is illustrated as
• a downward shift in the supply curve.
• a shift to the left in the supply curve .
• an upward movement along the supply curve.
• a downward movement along the supply curve.

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Test Yourself

• 5. If research reveals that carrot juice cures
  cancer, it is likely that
• the supply of carrot juice will increase, which
  will increase the quantity demanded.
• demand for carrot juice will increase, which will
  increase the quantity supplied .
• neither the demand or supply of carrot juice will
  increase.
• both the demand and supply of carrot juice will
  increase.

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Test Yourself

• 6. When there is an initial shortage, market
  prices eventually reach equilibrium because
• supply increases.
• price decreases .
• price increases.
• equilibrium output falls.

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Terms along the Way

• demand
• quantity demanded
• ceteris paribus
• shift factors
• normal goods
• inferior goods
• substitutes
• complements
• supply

• quantity supplied
• market equilibrium
• surplus
• shortage
• consumer surplus
• marginal benefit
• marginal cost
• charter schools
• vouchers

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The End! Next Chapter 4 The Power of Prices"