CHAPTER 3 DYNAMIC POWERPOINT™ SLIDES BY SOLINA LINDAHL Supply and Demand COPYRIGHT 2012 WORTH PUBLISHERS 1
CHAPTER OUTLINE Demand curve Supply curve Quantity demanded Quantity supplied Consumer surplus Producer surplus Total consumer surplus Total producer surplus Normal good Inferior good Substitutes For applications, click here Complements To Try it! questions 2
Food for Thought…. Some good blogs and other sites to get the juices flowing: 3
Demand What made him buy it? 4 BACK TO
Demand represents the behavior of buyers. A Demand Curve shows the quantity demanded at different prices. The Quantity Demanded: the quantity that buyers are willing (and able) to purchase at a particular price. 5 BACK TO
Law of Demand Price and Quantity Demanded are negatively related 6 BACK TO
The Demand Curve for Oil Price of Oil per Barrel Price $55 $5 50 Demand 5 7 25 $5 $20 $55 Quantity Demanded 25 50 Quantity of Oil (MBD) BACK TO
Reading Demand Curves Demand curves can be read in two ways: Horizontally: How much buyers are willing and able to purchase at a certain price. Vertically: The highest price buyers are willing to pay for a certain quantity. 8 BACK TO
Intuition of the Demand Curve When the price is high, oil will only be used in the high value products. If the price falls, oil will also be used in lower value products. Price of Oil per Barrel Higher Valued Uses of Oil $120 Lower Valued Uses of Oil $20 Demand 9 20 120 Quantity of Oil (MBD) BACK TO
Consumer Surplus is the consumer’s gain from exchange, the difference between the highest price a consumer will pay at a given quantity and the actual market price. Total consumer surplus is the sum of consumer surplus of all buyers. 10 BACK TO
Try it! Your roommate just bought an i. Pad for $600. She would have been willing to pay $1, 000 for a machine that could make her life so much more worthwhile. How much consumer surplus does your roommate enjoy from the i. Pad? a) $600 b) $400 c) $1600 d) $1400 To next Try it!
Consumer Surplus is the Area beneath the Demand Curve and above the Price of Oil per Barrel 80 Area of Triangle Height The President’s Consumer Surplus Total Consumer Surplus at a Price of $20 ½(80 -20)x 90 = $2, 700 Base Joe’s Consumer Surplus 20 Demand 90 12 ½(Base x Height) Quantity of Oil (MBD) BACK TO
Try it! If the price is $2010, what is the consumer surplus? a) $3, 588, 000 b) $1, 794, 000 c) $6, 000 d) $3, 000 To next Try it!
What Shifts the Demand Curve? An “increase in demand” means that consumers buy more at every price level, (or consumers are willing to pay more for each quantity. ) On the graph: the demand curve shifts outwards, up, and to the right. 14 BACK TO
What Shifts the Demand Curve? A “decrease in demand” means that consumers buy less at every price level, (or they reduce the price they’re willing to pay for a given quantity. ) On the graph: the demand curve shifts inwards, down, and to the left. 15 BACK TO
A Decrease in Demand Price per Unit Lower Willingness to Pay for the Same Quantity $50 Less Quantity Demanded at the Same Price $25 Old Demand Curve New Demand Curve 70 16 80 Quantity BACK TO
An Increase in Demand Price per Unit $50 Greater Willingness to Pay for the Same Quantity Greater Quantity Demanded at the Same Price $25 New Demand Curve Old Demand Curve 70 17 80 Quantity BACK TO
Demand Shifters Important Demand Shifters: 1. Income 2. Population 3. Price of Substitutes 4. Price of Complements 5. Expectations 6. Tastes 18 BACK TO
Important Demand Shifters: Income 1. The effect of changes in income on demand depends on the nature of the good in question. A Normal Good: demand increases when income increases (and vice versa). An Inferior Good: demand decreases when income increases (and vice versa) 19 BACK TO
Try it! When the price of petroleum goes up, the demand for natural gas ______, the demand for coal ______, and the demand for solar power ______. a) increases; increases b) increases; decreases c) decreases; increases d) decreases; decreases To next Try it!
Important Demand Shifters: Population 2. As the population of an economy changes, the # of buyers of a particular good also changes, (thereby changing its demand. ) What happens to the demand for diapers in Russia as birth rates drop? 21 BACK TO
Important Demand Shifters: Price of Substitutes 3. Two goods are Substitutes if a decrease in the price of one leads to a decrease in demand for the other (or vice versa). - What happens to the demand for travel in Hawaii if the (perceived) safety cost of traveling to Mexico increases? 22 BACK TO
Important Demand Shifters: Price of Complements 4. Two goods are Complements if a decrease in the price of one good leads to an increase in the demand for the other (or vice versa). What happens to the demand for Sport Utility Vehicles when gasoline gets more expensive? 23 BACK TO
Price of Complements Consumers often have to buy goods together. An increase in price of gasoline will decrease the demand for SUVs 24 BACK TO
Important Demand Shifters: Expectations 5. The expectation of a higher (lower) price for a good in the future increases (decreases) current demand for the good. Consumers will adjust their current spending in anticipation of the direction of future prices in order to obtain the lowest possible price. If prices for Xbox 360 consoles are expected to drop right before Christmas, what will happen to sales during November? 25 BACK TO
Important Demand Shifters: Tastes 6. Tastes and preferences are subjective and will vary among consumers. Seasonal changes or fads have predictable effects on demand. What happens to demand for boots in October? To carbohydrates during the Atkins diet fad? Or to Acai berries after newly perceived health benefits? 26 BACK TO
What Shifts the Demand Curve? A “change in quantity demanded” is NOT the same as a “change in demand. ” “Quantity demanded” changes only when the price of a good changes. It is a movement along a fixed demand curve. “Demand” changes only when a non-price factor (demand shifter) changes. It is a shift in the entire demand curve. A “change in Quantity Demanded” 27 A “change in Demand” BACK TO
Try it! When the price of a good increases the quantity demanded ______. When the price of a good decreases the quantity demanded ______. a) rises; rises b) rises; falls c) falls; rises d) falls; falls To next Try it!
Supply What made this oil field happen? 29 BACK TO
Supply represents the behavior of sellers. A Supply Curve shows the quantity supplied at different prices. The Quantity Supplied is the quantity that producers are willing and able to sell at a particular price. 30 BACK TO
Law of Supply What do you think happens to the quantity of human organs donated in Israel when the government issues a point system that rewards donors? The Law of Supply: there is a direct relationship between price and quantity supplied. When price rises, all else equal, quantity supplied rises and vice versa 31 BACK TO
The Supply Curve Price of Oil per Barrel The Supply Curve for Oil $55 Price $55 50 $20 30 $5 $20 Quantity Supplied 10 $5 10 32 30 50 Quantity of Oil (MBD) BACK TO
Reading Supply Curves Supply curves can be read in two ways: Horizontally: How much suppliers are willing and able to sell at a certain price. Vertically: The minimum price for which suppliers are willing to sell a certain quantity. 33 BACK TO
Supply Curves Why is the supply curve upward sloping? The cost of producing a good is not equal across all suppliers. At a low price, a good is produced and sold only by the lowest cost suppliers. At a high price, a good is also produced and sold by higher cost suppliers. 34 BACK TO
The Supply Curve for Oil Price of Oil per Barrel The Supply Curve for Oil Supply $60 Oil Shale Profitable Here $40 Higher Cost Oil Low Cost Oil $20 20 35 40 60 80 Quantity of Oil 100 (MBD) BACK TO
Furthermore… Does sex have a “price? ” See this blog post for a discussion about changes in supply and demand for sex. 36 BACK TO
Producer Surplus is the producer’s gain from exchange the difference between the market price and the minimum price at which producers would be willing to sell a certain quantity. Total producer surplus is the sum of the producer surplus of each seller. Graphically, total producer surplus is measured by the area above the supply curve and below the price. 37 BACK TO
Producer Surplus is the Area Above the Supply Curve and Below the Price of Oil per Barrel $60 Supply Curve $40 $20 Total Producer Surplus at a Price of $40 20 38 40 60 80 Quantity of Oil (MBD) BACK TO
Try it! Using the following diagram, calculate total producer surplus if the price of oil is $50 per barrel. a) 0 b) $45 c) $1, 350 d) $2, 700 To next Try it!
Change in Supply Price of Oil per Barrel $50 Old Supply Greater Quantity Supplied at the Same Price New Supply $10 Lower Costs Increase Supply Willing to Sell Same Quantity at Lower Prices 20 40 80 Quantity of Oil (MBD) BACK TO
Change in Supply New Supply Price of Oil per Barrel Smaller Quantity Supplied at the Same Price Old Supply $10 Higher Price Needed to Sell Same Quantity Higher Costs Decrease Supply 20 41 80 Quantity of Oil (MBD) BACK TO
Supply Shifters Important Supply Shifters 1. Technological Innovations 2. Input Prices 3. Taxes and Subsidies 4. Expectations 5. Entry or Exit of Producers 6. Changes in Opportunity Costs 42 BACK TO
Important Supply Shifters: Technological Innovations 1. A technological innovation makes sellers willing to offer more at a given price, or sell a their quantity at a lower price. A technological innovation lowers costs and increases supply. 43 BACK TO
Production Technology Supply will increase for products when technology improves Examples: Computers, gaming systems, laser hair removal, flat screen TVs. 44 BACK TO
Important Supply Shifters: Input Prices 2. A decrease in the price of an input (all else equal) increases profits and encourages more supply (and vice versa) What will happen to the amount of new businesses if the government reduces the fees and red tape associated with new business licenses? What happens if the fees rise? 45 BACK TO
Important Supply Shifters: Taxes and Subsidies 3. A tax on output reduces profit and makes sellers less willing to supply at a given price, unless they can effectively raise the price without losing any sales. (for now, assume they cannot) A tax on output raises costs and decreases supply. Graph the effect on supply of a new cigarette tax in your notes. 46 BACK TO
Important Supply Shifters: Taxes and Subsidies A subsidy on production makes sellers willing to supply a greater quantity at a given price, or the subsidy allows producers to sell a given quantity at a lower price. A subsidy on production lowers costs and increases supply. Graph the effect on supply of a new subsidy to fast food producers aimed at helping them market and sell overseas. 47 BACK TO
Taxes and Subsidies Taxes and subsidies affect profits and therefore supply. A 10% yacht tax reduced the supply of yachts 53% in the early 1990 s. 48 BACK TO
Cotton Supply When the U. S. decreases its cotton subsidies, U. S. cotton supply decreases 49 BACK TO
Important Supply Shifters: Taxes and Subsidies With a $10 Tax Suppliers Require a $10 Higher Price to Sell the Same Quantity Price of Oil per Barrel Supply With $10 Tax $10 $10 $50 Supply Without Tax $40 50 60 Quantity of Oil (MBD) BACK TO
Important Supply Shifters: Expectations 4. The expectation of a higher price for a good in the future decreases current supply of the good – if they can store the good- (and vice versa). Sellers will adjust their current offerings in anticipation of the direction of future prices in order to obtain the highest possible price. 51 BACK TO
Future Expectations A change in producers’ expectations about profitability will affect supply curves Windmill production increases as producers expect sales and profitability to increase. 52 BACK TO
Important Supply Shifters: Expectations Can Shift the Supply Curve Price per Unit Supply Today with Expectation of Future Price Increase Supply Today Into Storage Quantity 53 BACK TO
Important Supply Shifters: Entry or Exit of Producers 5. As producers enter and exit the market, the overall supply changes. Entry implies more sellers in the market increasing supply. Exit implies fewer sellers in the market decreasing supply. What will happen to the supply for Marijuana in California if the drug is legalized for general use? 54 BACK TO
Number of Producers As more producers enter a market, supply increases (and vice versa) As more firms enter the solar installation market, the number of solar installations available for sale increases 55 BACK TO
Important Supply Shifters: Entry or Exit of Producers Entry Increases Supply Price Domestic Supply Greater Quantity Supplied at the Same Price Domestic Supply Plus Canadian Imports Lower Price for the Same Quantity Supplied 56 Quantity BACK TO
Important Supply Shifters: Changes in Opportunity Costs 6. Inputs used in production have opportunity costs. Sellers will choose to use those inputs where the profit is the highest Sellers will supply less of a good if the price of an alternate good using the same inputs rises (and vice versa). Sellers always chase the highest profit goods. 57 BACK TO
Changes in Opportunity Costs Producers have the ability to produce other goods An increase in the profitability of small cars will decrease the supply of SUVs 58 BACK TO 3 - 58
Important Supply Shifters: Changes in Opportunity Costs Higher (Opportunity) Costs Reduce Supply- Rising Wheat Prices Reduce Soybean Supply Price per Unit Higher Price Required to Sell the Same Quantity $7 Supply with High Opportunity Costs Supply with Low Opportunity Costs $5 2, 000 59 Smaller Quantity Supplied at the Same Price Quantity of Soybeans (Millions 2, 800 of Bushels) BACK TO
What Shifts the Supply Curve? A “change in quantity supplied” is NOT the same as a “change in supply. ” “Quantity supplied” changes only when the price of a good changes. It is a movement along a fixed supply curve. “Supply” changes only when a non-price factor changes. It is a shift in the entire supply curve. A “change in Quantity Supplied” 60 A “change in Supply” BACK TO
Try it! Market Price of Marijuana Explain using the concepts of supply, demand, and transport costs (including in this case smuggling costs) the pattern of prices you see here
Try it! The market price of the product is $20 per unit. Calculate the dollar amount of consumer surplus being earned in this market. a) $120, 000 b) $60, 000 c) $100, 000 d) $80, 000 BACK TO
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