Lecture Principles of Microeconomics: Chapter 2 - James D. Miller

Chapter 2

Introducing
Supply and Demand

McGraw­Hill/Irwin

Copyright © 2009 by The McGraw­Hill Companies, Inc. All Rights Reserved.


A Tale of a Desert…
When water is free of charge:
• Miners consume lots of water.
• Government is the only supplier of water.
When price of water is high:
• Miners conserve and use less water.
• Private sellers find new ways to sell more
water.
2-2


Learning Objectives
•
•
•
•
•
•

What is demand?
What is law of demand?

What factors change demand?
What is supply?
What is law of supply?
What factors change supply?

2-3


Demand
Demand
= How much consumers buy at various
prices

2-4


Quantity Demanded vs. Demand
• Quantity demanded
= The number of units consumers purchase
at a specific price over a specific time
period.
• Demand
= The entire relationship between price and
quantity demanded over a specific time
period.
2-5


Demand for Apples
Price

$.05

Quantity
Demanded
30,000

Demand curve

$P
.30
.25

$.10

24,000

.20

$.15

18,000

.10

.15

.05

$.20

12,000

D

.00
0

$.25

6,000

10

20

30

40

Quantity of Apples in thousand
2-6


Law of Demand
• Consumers buy less of a good as its price
increases and more of a good as its price
decreases.
• As price increases, quantity demanded
falls and as price decreases, quantity
demanded rises.

2-7


Demand Curve
• Demand Curve
= A graph that shows
demand relationship.
• Negative relationship
between price and
quantity demanded.
• Slope of demand
curve is negative.
• Downward sloping
demand curve.

$P
.30
.25
.20
.15
.10
.05

D

.00
0

10

20

30

40

Quantity of Apples in thousand
2-8


Market Demand
Market demand = the sum total of individual
quantities demanded at each price.
Price

Bill’s
Jane’s
Sophia’s Market
demand demand demand demand

$.05
$.10
$.15
$.25
$.30

20
16
12

8
5

10
8
4
1
0

5
4
3
1
0

35
28
19
10
5
2-9


Change in Quantity Demanded
vs. Change in Demand
Ceteris paribus:
• Change in price
causes change in
quantity demanded.
• Movement along the

same demand curve.

$P
30
25

Lose
80%

20
15
10
5

D1

0
0

10

20

30

40

50

Quantity of caps in thousand

2-10


Change in Quantity Demanded
vs. Change in Demand
•

•
•

•

Ceteris paribus:
Change in something
other than price causes
change in demand.
Shift of the entire demand
curve.
Increase in demand,
demand curve shifts to
the right.
Decrease in demand,
demand curve shifts to
the left.

$P
Win world
series

30

25

Lose
80%

20
15
10

D2

5

D1

0
0

10

20

30

40

50

Quantity of caps in thousand
2-11

Behind Demand Curve: Substitutes
• Substitutes compete with
each other to satisfy
similar needs.
• Increase in price of Coke
with no change in price of
Pepsi.
• Increase in price of a
good causes increase in
demand for its substitute.
• What will happen if price
of Coke falls to $0.30 with
no change in price of
Pepsi?

$P
Coke
=$1.00
Coke
=$.50
.73
D2
D1

0
0

10,000

25,000

Quantity demanded of Pepsi
2-12


Behind Demand Curve: Complements
• Complements used
together to satisfy wants.
• Increase in price of
hamburgers with no
change in price of
ketchup.
• Increase in price of a
good causes decrease in
demand for its
complement.
• What will happen if price
of burgers falls with no
change in price of
ketchup?

$P
High
price of
burgers

Low price
of burgers

D1
D2
Quantity demanded of ketchup

2-13


Behind Demand Curve: Income
• Normal goods
= Goods consumers
buy more with higher
income.
• When income
increases, there is
increase in demand
for normal goods.
• Demand curve shifts
to the right

$P
Low
income

Higher
income

D2
D1
Quantity demanded of sports car

2-14


Demand for Inferior Goods
• Inferior goods
= Goods consumers
buy less of with
higher income.
• When income
increases, there is
decrease in demand
for inferior goods.
• Demand curve shifts
to the left

$P
Higher
income

Low
income

D1
D2
Quantity demanded of pleather

2-15

Behind Demand Curve: Expectations
• What would you do if you heard that you might get a
much better deal in the near future for the product you
are planning to buy now?
• Osborne effect
• Expectations about better deal (lower price, better
quality…) in the near future cause decrease in current
demand.
= Leftward shift in the demand curve
• What would happen to demand for a product when its
price is expected to increase in the near future?
2-16


Behind Demand Curve: Other Things
Tastes and Fashions
•
Demand increases for products
considered to be fashionable.
Advertising
•
Induces consumers to buy more,
increasing the demand.

2-17


Do You Know?
• What is the Law of Demand?
As price increases, quantity demanded falls and

as price decreases, quantity demanded rises.
• When do you move along a demand curve and
when do you move to an entirely new demand
curve?
A change in price = movement along the curve.
A change in a factor other than price = shift of the
curve.
2-18


Do You Know?
• How does an increase in the price of a good’s
substitute affect the demand for the original good?
= Increase in demand for the original good.
• How does an increase in income affect the
demand for an inferior good?
= Decrease in demand for the inferior good.

2-19


Supply
Supply
= The quantity firms produce at various
prices.

2-20


Quantity Supplied vs. Supply

• Quantity supplied
= The number of units producers want to produce
at a specific price over a specific time period.
• Supply
= The entire relationship between price and
quantity supplied over a specific time period.

2-21


Supply in Competitive Markets
Competitive markets:
• Markets in which individual buyers and sellers
cannot set prices.
• Firms’ primary motive is profit.
• The higher the price, the greater the profit from
production.

2-22


Law of Supply
• Firms produce less of a good as its price
falls and more of a good as its price
increases.
• As price increases, quantity supplied rises
and as price decreases, quantity supplied
falls.

2-23

Supply Curve
Supply Curve
= A graph that shows
supply relationship.
• Positive relationship
between price and
quantity supplied.
• Slope of supply curve
is positive.
• Upward sloping
supply curve .

$P
S
.50

.25

0
0

15,000

50,000

Quantity supplied of Apples
2-24

Market Supply
Market supply = the sum total of individual firms’ supply
at each price.

Price

Firm A’s Firm B’s Firm C’s Market
Supply Supply Supply Supply

$.05
$.10
$.15
$.25
$.30

0
0
1
3
5

0
5
8
10
20

0
0

0
5
30

0
5
9
18
55
2-25