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Microeconomics Chapter 3
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2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick OBrien, 2e.
Fernando & Yvonn Quijano
Prepared by:
Chapter
3
Where Prices Come From:
The Interaction of Demandand Supply
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App le and the Demand
for iPods
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?
Learning Objectives
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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.
Where Prices Come From : The Interact ion o f
Demand and Supply
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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 theproduct demanded.
Market demand The demand by all the consumers of a
given good or service.
The Demand Side of th e Market
Demand Schedules and Demand Curves
Learning Objective 3.1
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The Demand Side of th e Market
Learning Objective 3.1
FIGURE 3-1
A Demand Schedule
and Demand Curve
Demand Schedules and Demand Curves
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The Demand Side of th e Market
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 theprice of a product rises, the quantity
demanded of the product will decrease.
Learning Objective 3.1
The Law of Demand
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The Demand Side of th e Market
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 othergoods that are substitutes.
Income effect The change in the quantity
demanded of a good that results from theeffect of a change in the goods price on
consumers purchasing power.
Learning Objective 3.1
What Explains the Law of Demand?
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The Demand Side of th e Market
Ceteris paribus(all else equal) The
requirement that when analyzing the
relationship between two variablessuchas 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.
Learning Objective 3.1
Holding Everything Else Constant:The Ceteris Paribus Condition
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The Demand Side of th e Market
Learning Objective 3.1
FIGURE 3-2
Shifting the
Demand Curve
Holding Everything Else Constant:The Ceteris Paribus Condition
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The Demand Side of th e Market
Learning Objective 3.1
Normal good A good for which the
demand increases as income rises and
decreases as income falls.
Inferior good A good for which thedemand increases as income falls and
decreases as income rises.
Variables That Shift Market Demand
Income
Many variables other than price can influence
market demand.
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The Demand Side of th e Market
Learning Objective 3.1
Substitutes Goods and services that
can be used for the same purpose.
Complements Goods and services that
are used together.
Variables That Shift Market Demand
Price of related goods
Consumers can be influenced by an
advertising campaign for a product.
Tastes
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The Demand Side of th e Market
Learning Objective 3.1
Demographics The characteristics
of a population with respect to age,race, and gender.
Populat ion and d emographics
Expected Futu re Prices
Consumers choose not only whichproducts to buy but also when to buythem.
Variables That Shift Market Demand
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The Demand Side of th e Market
Learning Objective 3.1
Variables That Shift Market DemandTABLE 3-1
Variables That Shift Market Demand Curves
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The Demand Side of th e Market
Learning Objective 3.1
Variables That Shift Market DemandTABLE 3-1
Variables That Shift Market Demand Curves (continued)
i Obj i 3 1
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Why Supermarkets Need to Understand
Subst i tutes and Complements
Makingthe
Connect ion
Learning Objective 3.1
COFFEE
FROZEN
PIZZA
HOT
DOGS
ICE
CREAM
POTATO
CHIPS
REGULAR
CEREAL
SPAGHETTI
SAUCE YOGURT
Varieties in Five
Chicago Supermarkets 391 337 128 421 285 242 194 288
Varieties Introduced
in a 2-Year Period 113 109 47 129 93 114 70 107
Varieties Removed
in a 2-Year Period 135 86 32 118 77 75 36 51
y L i Obj ti 3 1
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Companies Respond to a Growing
Hispanic Populat ion
You can download Spanish music
from iTunes. Apple is one of many
companies responding to a growing
Hispanic population.
Makingthe
Connect ion
Learning Objective 3.1
As the demand for goods
purchased by Hispanic householdsincreases, more can be sold at
every price. Not surprisingly,
companies have responded by
devoting more resources to serving
this demographic group.
y L i Obj ti 3 1
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The Demand Side of th e Market
Learning Objective 3.1
FIGURE 3-3
A Change in Demand
versus a Change in the
Quantity Demanded
A Change in Demand versus a Change in Quantity Demanded
y L i Obj ti 3 1
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Apple Forecasts the Demand for iPhones
and other Consum er Electronics
Will Apples iPhone match the
success of its iPod?
Makingthe
Connect ion
Learning Objective 3.1
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.
y L i Obj ti 3 2
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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.
The Supply Side of the Market
Learning Objective 3.2
Supply Schedules and Supply Curves
Quantity supplied The amount of a good or service
that a firm is willing and able to supply at a given
price.
y Learning Objecti e 3 2
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The Supply Side of the Market
Learning Objective 3.2
Supply Schedules and Supply CurvesFIGURE 3-4
Supply Schedule and
Supply Curve
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The Supply Side of the Market
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.
Learning Objective 3.2
The Law of Supply
y Learning Objective 3 2
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The Supply Side of the Market
Learning Objective 3.2
FIGURE 3-5
Shifting the Supply Curve
The Law of Supply
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The Supply Side of the Market
Learning Objective 3.2
Variables That Shift Supply
Prices of substitutes in production
Number of firms in the market
Expected future prices
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.
The following are the most important variables that shift supply:
Prices of inputs
Technological change
y Learning Objective 3 2
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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
TABLE 3-2
Variables That Shift Market Supply Curves (continued)
Variables That Shift Supply
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The Supply Side of the Market
Learning Objective 3.2
FIGURE 3-6
A Change in Supply
versus a Change in the
Quantity Supplied
A Change in Supply versus a Change in Quantity Supplied
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Market Equi l ibr ium: Putt ing Demand and Supply
Together
FIGURE 3-7
Market Equilibrium
Learning Objective 3.3
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Market equilibrium A situation
in which quantity demanded
equals quantity supplied.
Competitive market
equilibrium A market
equilibrium with many buyers
and many sellers.
Learning Objective 3.3
Market Equi l ibr ium: Putt ing Demand and Supply
Together
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Market Equi l ibr ium: Putt ing Demand and Supply
Together
Learning Objective 3.3
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.
How Markets Eliminate Surpluses and Shortages
ly Learning Objective 3 3
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Market Equi l ibr ium: Putt ing Demand and Supply
Together
Learning Objective 3.3
FIGURE 3-8
The Effect of
Surpluses and
Shortages on the
Market Price
How Markets Eliminate Surpluses and Shortages
ly Learning Objective 3.3
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Market Equi l ibr ium: Putt ing 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 theequilibrium 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.
ly Learning Objective 3.3
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Solved Problem 3-3
Demand and Supply Both
Count: A Tale of Two Letters
Learning Objective 3.3
ly Learning Objective 3.4
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The Effect of Demand and Supply Shi f ts on Equi l ibr ium
FIGURE 3-9
The Effect of an Increase
in Supply on Equilibrium
The Effect of Shifts in Supply on Equilibrium
Learning Objective 3.4
ly Learning Objective 3.4
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The Fall ing Price of LCD TelevisionsMaking
the
Connect ion
ea g Objec e 3
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The Effect of Demand and Supply Shi f ts on Equi l ibr ium
FIGURE 3-10
The Effect of an Increase
in Demand on Equilibrium
The Effect of Shifts in Demand on Equilibrium
g j
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The Effect of Demand and Supply Shi f ts on Equi l ibr ium
FIGURE 3-11
Shifts in Demand and
Supply over Time
The Effect of Shifts in Demand and Supply over Time
g j
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The Effect of Demand and Supply Shi f ts on Equi l ibr ium
TABLE 3-3
How Shifts in Demand and Supply Affect
Equilibrium Price (P) and Quantity (Q)
The Effect of Shifts in Demand and Supply over Time
g j
SUPPLY CURVE
UNCHANGED
SUPPLY CURVE
SHIFTS TO THE RIGHT
SUPPLY CURVE
SHIFTS TO THE LEFT
DEMAND CURVE
UNCHANGED
Q unchanged
Punchanged
Q increases
Pdecreases
Q decreases
Pincreases
DEMAND CURVE
SHIFTS TO THE RIGHT Q increases
Pincreases
Q increases
Pincreases or
decreases
Q increases or
decreases
Pincreases
DEMAND CURVE
SHIFTS TO THE LEFT
Q decreases
Pdecreases
Q increases or
decreases
Pdecreases
Q decreases
Pdecreases or
increases
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Solved Problem 3-4
High Demand and Low Prices
in the Lobster Market?
g j
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.
ply Learning Objective 3.4
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The Effect of Demand and Supply Shi f ts on Equi l ibr ium
Shifts in a Curve versus Movements along a Curve
g j
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 inequilibrium price, the change in price
does not cause a further shift in demand
or supply.
ply Learning Objective 3.4
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The Effect of Demand and Supply Shi f ts on Equi l ibr ium
Shifts in a Curve versus Movements along a Curve
Dont Let This Happen toYOU!Remember: A Change in a Goods Price Does Not
Cause the Demand or Supply Curve to Shift
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An Inside LOOK How Does the iPhone Help Apple and
AT&T?
Apple Coup: How Steve Jobs Played Hardball in iPhone Birth
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Ceteris paribus(all else equal)
Competitive market equilibrium
Complements
Demand curveDemand schedule
Demographics
Income effect
Inferior good
Law of demand
Law of supply
Market demand
Market equilibrium
Normal good
Perfectly competitive market
Quantity demanded
Quantity suppliedShortage
Substitutes
Substitution effect
Supply curve
Supply schedule
Surplus
Technological change
K e y T e r m s
Recommended