40706853 Microeconomics Hubbard O Brien Ch03

7/15/2019 40706853 Microeconomics Hubbard O Brien Ch03

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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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2 of 29 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick OBrien, 2e.

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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FIGURE 3-1

A Demand Schedule

and Demand Curve

Demand Schedules and Demand Curves


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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.


The Law of Demand


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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.


What Explains the Law of Demand?


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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.


Holding Everything Else Constant:The Ceteris Paribus Condition


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FIGURE 3-2

Shifting the

Demand Curve

Holding Everything Else Constant:The Ceteris Paribus Condition


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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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Substitutes Goods and services that

can be used for the same purpose.

Complements Goods and services that

are used together.


Price of related goods

Consumers can be influenced by an

advertising campaign for a product.

Tastes


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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.



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Variables That Shift Market DemandTABLE 3-1

Variables That Shift Market Demand Curves


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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


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


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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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


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


product supplied.

Supply curve A curve that shows the relationship


product supplied.

The Supply Side of the Market


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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Supply Schedules and Supply CurvesFIGURE 3-4

Supply Schedule and

Supply Curve

y Learning Objective 3 2


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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.


The Law of Supply



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FIGURE 3-5

Shifting the Supply Curve

The Law of Supply



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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



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TABLE 3-2

Variables That Shift Market Supply Curves



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TABLE 3-2

Variables That Shift Market Supply Curves (continued)




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FIGURE 3-6

A Change in Supply

versus a Change in the

Quantity Supplied

A Change in Supply versus a Change in Quantity Supplied

ly Learning Objective 3 3


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Market Equi l ibr ium: Putt ing Demand and Supply

Together

FIGURE 3-7

Market Equilibrium




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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.



Together



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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



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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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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.



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Solved Problem 3-3

Demand and Supply Both

Count: A Tale of Two Letters




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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




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The Fall ing Price of LCD TelevisionsMaking

the

Connect ion

ea g Objec e 3

ply Learning Objective 3.4


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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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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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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.



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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.



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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

ply


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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

ply


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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

Documents

40706853 Microeconomics Hubbard O Brien Ch03