Economics R. Glenn Hubbard, Anthony Patrick O

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Apple and the Demand for iPods
Learning Objectives
3.1 Discuss the variables that influence demand.
3.2 Discuss the variables that influence supply.
3.3 Use a graph to illustrate market equilibrium.
3.4 Use demand and supply graphs to predict changes in prices and quantities.
By early 2007, over 100 million iPods had been
sold and more than two billion songs had been
downloaded from iTunes. Clearly the strategy of
selling an expensive digital music player and
selling the music cheaply has been very
successful for Apple. But how long will the
iPods dominance last?
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Where Prices Come From The Interaction of Demand
and Supply

• Perfectly competitive market A market in which
  there are many buyers and sellers, all the
  products are identical, and there are no barriers
  to new sellers entering the market.

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The Demand Side of the Market
Learning Objective 3.1
Demand Schedules and Demand Curves

• Demand schedule A table showing the relationship
  between the price of a product and the quantity
  of the product demanded.
• Quantity demanded The amount of a good or
  service that a consumer is willing and able to
  purchase at a given price.
• Demand curve A curve that shows the relationship
  between the price of a product and the quantity
  of the product demanded.
• Market demand The demand by all the consumers of
  a given good or service.

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The Demand Side of the Market
Learning Objective 3.1
Demand Schedules and Demand Curves
FIGURE 3-1
A Demand Schedule and Demand Curve
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The Demand Side of the Market
Learning Objective 3.1
The Law of Demand

• Law of demand The rule that, holding everything
  else constant, when the price of a product falls,
  the quantity demanded of the product will
  increase, and when the price of a product rises,
  the quantity demanded of the product will
  decrease.

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The Demand Side of the Market
Learning Objective 3.1
What Explains the Law of Demand?

• Substitution effect The change in the quantity
  demanded of a good that results from a change in
  price, making the good more or less expensive
  relative to other goods that are substitutes.
• Income effect The change in the quantity
  demanded of a good that results from the effect
  of a change in the goods price on consumers
  purchasing power.

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The Demand Side of the Market
Learning Objective 3.1
Holding Everything Else ConstantThe Ceteris
Paribus Condition

• Ceteris paribus (all else equal) The
  requirement that when analyzing the relationship
  between two variablessuch as price and quantity
  demandedother variables must be held constant.
• A shift of a demand curve is an increase or
  decrease in demand. A movement along a demand
  curve is an increase or decrease in the quantity
  demanded.

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The Demand Side of the Market
Learning Objective 3.1
Holding Everything Else ConstantThe Ceteris
Paribus Condition
FIGURE 3-2
Shifting the Demand Curve
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The Demand Side of the Market
Learning Objective 3.1
Variables That Shift Market Demand
Many variables other than price can influence
market demand.

• Income

• Normal good A good for which the demand
  increases as income rises and decreases as income
  falls.
• Inferior good A good for which the demand
  increases as income falls and decreases as income
  rises.

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The Demand Side of the Market
Learning Objective 3.1
Variables That Shift Market Demand

• Price of related goods

• Substitutes Goods and services that can be used
  for the same purpose.
• Complements Goods and services that are used
  together.

• Tastes

Consumers can be influenced by an advertising
campaign for a product.
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The Demand Side of the Market
Learning Objective 3.1
Variables That Shift Market Demand

• Population and demographics

• Demographics The characteristics of a population
  with respect to age, race, and gender.

• Expected Future Prices

Consumers choose not only which products to buy
but also when to buy them.
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The Demand Side of the Market
Learning Objective 3.1
Variables That Shift Market Demand
TABLE 3-1
Variables That Shift Market Demand Curves
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The Demand Side of the Market
Learning Objective 3.1
Variables That Shift Market Demand
TABLE 3-1
Variables That Shift Market Demand Curves
(continued)
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Learning Objective 3.1

• Why Supermarkets Need to Understand Substitutes
  and Complements

COFFEE FROZENPIZZA HOTDOGS ICECREAM POTATOCHIPS REGULARCEREAL SPAGHETTISAUCE YOGURT
Varieties in FiveChicago Supermarkets 391 337 128 421 285 242 194 288
Varieties Introducedin a 2-Year Period 113 109 47 129 93 114 70 107
Varieties Removedin a 2-Year Period 135 86 32 118 77 75 36 51
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Learning Objective 3.1

• Companies Respond to a Growing Hispanic Population

As the demand for goods purchased by Hispanic
households increases, more can be sold at every
price. Not surprisingly, companies have
responded by devoting more resources to serving
this demographic group.
You can download Spanish music from iTunes.
Apple is one of many companies responding to a
growing Hispanic population.
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The Demand Side of the Market
Learning Objective 3.1
A Change in Demand versus a Change in Quantity
Demanded
FIGURE 3-3
A Change in Demand versus a Change in the
Quantity Demanded
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Learning Objective 3.1

• Apple Forecasts the Demand for iPhones and other
  Consumer Electronics

To decide which products to develop, firms need
to forecast the demand for those products. Time
will tell whether Apples forecast of a large
demand for the iPhone will turn out to be
correct.
Will Apples iPhone match the success of its iPod?
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The Supply Side of the Market
Learning Objective 3.2
Quantity supplied The amount of a good or
service that a firm is willing and able to supply
at a given price.
Supply Schedules and Supply Curves

• Supply schedule A table that shows the
  relationship between the price of a product and
  the quantity of the product supplied.
• Supply curve A curve that shows the relationship
  between the price of a product and the quantity
  of the product supplied.

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The Supply Side of the Market
Learning Objective 3.2
Supply Schedules and Supply Curves
FIGURE 3-4
Supply Schedule and Supply Curve
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The Supply Side of the Market
Learning Objective 3.2
The Law of Supply

• Law of supply The rule that, holding everything
  else constant, increases in price cause increases
  in the quantity supplied, and decreases in price
  cause decreases in the quantity supplied.

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The Supply Side of the Market
Learning Objective 3.2
The Law of Supply
FIGURE 3-5
Shifting the Supply Curve
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The Supply Side of the Market
Learning Objective 3.2
Variables That Shift Supply
The following are the most important variables
that shift supply Prices of
inputs Technological change
Technological change A positive or negative
change in the ability of a firm to produce a
given level of output with a given quantity of
inputs.

• Prices of substitutes in production
• Number of firms in the market
• Expected future prices

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The Supply Side of the Market
Learning Objective 3.2
Variables That Shift Supply
TABLE 3-2
Variables That Shift Market Supply Curves
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The Supply Side of the Market
Learning Objective 3.2
Variables That Shift Supply
TABLE 3-2
Variables That Shift Market Supply Curves
(continued)
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The Supply Side of the Market
Learning Objective 3.2
A Change in Supply versus a Change in Quantity
Supplied
FIGURE 3-6
A Change in Supply versus a Change in the
Quantity Supplied
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Market Equilibrium Putting Demand and Supply
Together
Learning Objective 3.3
FIGURE 3-7
Market Equilibrium
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Market Equilibrium Putting Demand and Supply
Together
Learning Objective 3.3

• Market equilibrium A situation in which quantity
  demanded equals quantity supplied.
• Competitive market equilibrium A market
  equilibrium with many buyers and many sellers.

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Market Equilibrium Putting Demand and Supply
Together
Learning Objective 3.3
How Markets Eliminate Surpluses and Shortages
Surplus A situation in which the quantity
supplied is greater than the quantity
demanded. Shortage A situation in which the
quantity demanded is greater than the quantity
supplied.
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Market Equilibrium Putting Demand and Supply
Together
Learning Objective 3.3
How Markets Eliminate Surpluses and Shortages
FIGURE 3-8
The Effect of Surpluses and Shortages on the
Market Price
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Market Equilibrium Putting Demand and Supply
Together
Learning Objective 3.3
Demand and Supply Both Count
Always keep in mind that it is the interaction of
demand and supply that determines the equilibrium
price. Neither consumers nor firms can dictate
what the equilibrium price will be. No firm can
sell anything at any price unless it can find a
willing buyer, and no consumer can buy anything
at any price without finding a willing seller.
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Learning Objective 3.3
Demand and Supply Both Count A Tale of Two
Letters
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The Effect of Demand and Supply Shifts on
Equilibrium
Learning Objective 3.4
The Effect of Shifts in Supply on Equilibrium
FIGURE 3-9
The Effect of an Increase in Supply on Equilibrium
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Learning Objective 3.4

• The Falling Price of LCD Televisions

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The Effect of Demand and Supply Shifts on
Equilibrium
Learning Objective 3.4
The Effect of Shifts in Demand on Equilibrium
FIGURE 3-10
The Effect of an Increase in Demand on Equilibrium
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The Effect of Demand and Supply Shifts on
Equilibrium
Learning Objective 3.4
The Effect of Shifts in Demand and Supply over
Time
FIGURE 3-11
Shifts in Demand and Supply over Time
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The Effect of Demand and Supply Shifts on
Equilibrium
Learning Objective 3.4
The Effect of Shifts in Demand and Supply over
Time
TABLE 3-3
How Shifts in Demand and Supply Affect
Equilibrium Price (P) and Quantity (Q)
SUPPLY CURVE UNCHANGED SUPPLY CURVESHIFTS TO THE RIGHT SUPPLY CURVE SHIFTS TO THE LEFT
DEMAND CURVE UNCHANGED Q unchangedP unchanged Q increasesP decreases Q decreasesP increases
DEMAND CURVESHIFTS TO THE RIGHT Q increasesP increases Q increasesP increases ordecreases Q increases or decreases P increases
DEMAND CURVESHIFTS TO THE LEFT Q decreasesP decreases Q increases or decreasesP decreases Q decreasesP decreases orincreases
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Learning Objective 3.4
High Demand and Low Prices in the Lobster Market?
Supply and demand for lobster both increase
during the summer, but the increase in supply is
greater than the increase in demand, therefore,
equilibrium price falls.
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The Effect of Demand and Supply Shifts on
Equilibrium
Learning Objective 3.4
Shifts in a Curve versus Movements along a Curve
When analyzing markets using demand and supply
curves, it is important to remember that when a
shift in a demand or supply curve causes a change
in equilibrium price, the change in price does
not cause a further shift in demand or supply.
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The Effect of Demand and Supply Shifts on
Equilibrium
Learning Objective 3.4
Shifts in a Curve versus Movements along a Curve
Dont Let This Happen to YOU!Remember A Change
in a Goods Price Does NotCause the Demand or
Supply Curve to Shift
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How Does the iPhone Help Apple and ATT?
LOOK
An Inside
Apple Coup How Steve Jobs Played Hardball in
iPhone Birth
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Ceteris paribus (all else equal) Competitive
market equilibrium Complements Demand
curve Demand schedule Demographics Income
effect Inferior good Law of demand Law of
supply Market demand Market equilibrium
Normal good Perfectly competitive market Quantity
demanded Quantity supplied Shortage Substitutes Su
bstitution effect Supply curve Supply
schedule Surplus Technological change