Economics Chapter 3: Supply and Demand PDF

Chapter Three Supply and Demand: Theory Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part....

Chapter Three Supply and Demand: Theory Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1  Icebreaker 1. The class will be broken up into pairs of students. 2. Each pair of students will discuss the question. − Think about a good that you have observed the price changed recently either higher or lower. What is the price change and why do you think the price changed? 3. Then one person from each pair will share a one sentence answer to the class. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2  Chapter Objectives By the end of this chapter, you should be able to: Describe the relationship between price and quantity demanded using the law of demand. Determine if a given scenario will cause a movement along or a shift of a good’s demand curve. Describe the relationship between price and quantity supplied using the law of supply. Determine if a given scenario will cause a movement along or a shift of a good’s supply curve. Explain how price changes eliminate a surplus or shortage. Explain why the equilibrium quantity in a market maximizes total surplus in that market. Determine the equilibrium price and quantity using the supply and demand model. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3  What is Demand? Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4  Demand Market: Any place people come together to trade Demand: The willingness and ability of buyers to purchase different quantities of a good at different prices during a specific period Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5  Law of Demand Law of Demand: As the price of a good rises, the quantity demanded of the good falls, and as the price of a good falls, the quantity demanded of the good rises, ceteris paribus −P increases, Qd decreases or P decreases, Qd increases, ceteris paribus Four Ways to Represent the Law of Demand − Words − Symbols − Demand Schedule − Demand Curve Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6  Demand Curve Demand Schedule: The numerical tabulation of the quantity demanded of a good at different prices. A demand schedule is the numerical representation of the law of demand. Demand Curve: The graphical representation of the law of demand. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7  Why Does Quantity Demanded Go Down as Price Goes Up? Law of Diminishing Marginal Utility: Over a given period, the marginal (or additional) utility or satisfaction gained by consuming equal successive units of a good will decline as the amount consumed increases. Why? − People substitute lower priced goods for higher priced goods. − Because of the law of diminishing marginal utility. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8 Individual Demand Curve and Market Demand Curve There is a difference between these two demand curves: − An individual demand curve represents the price-quantity combinations of a particular good for a single buyer. − A market demand curve represents the price-quantity combinations of a good for all buyers; the curve is derived by “adding up” individual demand curves. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9  Change in Quantity Demanded versus a Change in Demand Change in demand = Shift in demand curve − Increase in demand = Rightward shift in the demand curve − Decrease in demand = Leftward shift in the demand curve Change in quantity demanded = a movement from one point to another point on the same demand curve that is caused by a change in the price of the good. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10  Factors that Cause the Demand Curve Shift: Income and Preferences Income − Normal Good: A good for which demand rises (falls) as income rises (falls) − Inferior Good: A good for which demand falls (rises) as income rises (falls) − Neutral Good: A good for which demand does not change as income rises or falls Preferences Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11  Factors that Cause the Demand Curve Shift: Prices of Related Goods Prices of Related Goods − Substitutes: Two goods that satisfy similar needs or desires. − Complements: Two goods that are used jointly in consumption. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12  Factors that Cause the Demand Curve Shift: Number of Buyers and Expectations Number of Buyers Expectations of Future Price Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13 Demand Movement Factors and Shift Factors Factors that bring movement along curves − Price Factors that can shift demand curves − Income − Preferences − Prices of Related Goods − Number of Buyers − Expectations of Future Price Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14  Knowledge Check 1a Which of the following would lead to movement up along a given demand curve for carrots? A. A decrease in the price of carrots B. An increase in the price of carrots​ C. An increase in the price of a substitute for carrots D. A decrease in the price of a substitute for carrots Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15  Knowledge Check 1b If the buyers of lumber expect that the price of lumber six months from now will be substantially higher than it is today, then the result would be _____ of the current demand curve for lumber. A. a rightward shift B. a leftward shift​ C. no shift D. shifting along the demand curve Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16  Knowledge Check 1c For an inferior good, when buyers’ income rises, then the result would be _____ of the current demand curve. A. a rightward shift B. a leftward shift​ C. no shift D. shifting along the demand curve Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17  Supply Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18  Law of Supply Supply: The willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific period. Law of Supply: As the price of a good rises, the quantity supplied of the good rises, and as the price of a good falls, the quantity supplied of the good falls, ceteris paribus. −P increases, Qs increases or P decreases, Qs decreases, ceteris paribus Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19  Supply Curve (Upward-Sloping) Supply Curve: The graphical representation of the law of supply. Most supply curves are upward sloping − Fundamental reason is law of diminishing marginal returns, discussed in a later chapter. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20  Change in Quantity Supplied versus a Change in Supply Change in supply = Shift in supply curve − Increase in supply = Rightward shift in the supply curve − Decrease in supply = Leftward shift in the supply curve Change in quantity supplied = a movement from one point to another point on the same supply curve that is caused by a change in the price of the good. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21  Factors that Cause the Supply Curve Shift Prices of Relevant Resources Technology Prices of Other Goods Number of Sellers Expectations of Future Price Taxes and Subsidies Government Restrictions Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22  Supply Movement Factors and Shift Factors Factors that bring movement along curves − Price Factors that can shift supply curves − Prices of Relevant Resources − Technology − Prices of Other Goods − Number of Sellers − Expectations of Future Price − Taxes and Subsidies − Government Restrictions Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23  Knowledge Check 2a Which of the following illustrates the law of supply? A. Company ABC increases the quantity supplied of its product as the price of that product rises. B. Company ABC decreases the quantity supplied of its product as the price of that product rises. C. An individual buys more of product ABC as the price of that product falls. D. An individual buys less of product ABC as the price of that product falls. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24  Knowledge Check 2b If more firms begin producing bicycles, the ____ curve for bicycles would shift ____. A. supply; leftward B. supply; rightward C. demand; leftward D. demand; rightward Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25  Knowledge Check 2c If the government were to make licensure requirements for automobile repair shops stricter, the result would be a ____ shift of the ____ curve for automobile repair. A. rightward; demand B. leftward; demand C. rightward; supply D. leftward; supply Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26 The Market: Putting Supply and Demand Together Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27  An Auction Model Surplus (Excess Supply): A condition in which the quantity supplied is greater than the quantity demanded. Surpluses occur only at prices above the equilibrium price. Shortage (Excess Demand): A condition in which the quantity demanded is greater than the quantity supplied. Shortages occur only at prices below the equilibrium price. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28  Moving to Equilibrium Equilibrium: Equilibrium means “at rest.” Equilibrium in a market is the price- quantity combination from which buyers or sellers do not tend to move away. − Graphically, equilibrium is the intersection point of the supply and demand curves. − Price falls when there is a surplus and rises when there is a shortage. Equilibrium Quantity: The quantity that corresponds to the equilibrium price. The quantity at which the amount of the good that buyers are willing and able to buy equals the amount that sellers are willing and able to sell, and both equal the amount actually bought and sold. Equilibrium Price (Market-Clearing Price): The price at which Qd=Qs Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29  Consumers’ and Producers’ Surplus Consumers’ Surplus (CS): The difference between the maximum price a buyer is willing and able to pay for a good or service and the price actually paid. (CS = Maximum buying price - Price paid) Producers’ (Sellers’) Surplus (PS): The difference between the price sellers receive for a good and the minimum or lowest price for which they would have sold the good. (PS = Price received - Minimum selling price) Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30  Total Surplus Total Surplus (TS): The sum of consumers’ surplus and producers’ surplus. Total Surplus = Consumers’ Surplus + Producers’ Surplus Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31  Equilibrium Price and Quantity Changes 1. Decide the Factor 2. Shift the Curve(s) 3. Find New Equilibrium Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32 Graphing Equilibrium Price and Quantity Changes Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33  Knowledge Check 3a If the price paid and received is $4, the maximum buying price is $20, and the minimum selling price is $2, then consumers’ surplus is equal to ____ dollars and producers’ surplus is ____ dollars. A. $18; $2 B. $22; $24 C. $16; $2 D. $2; $18 Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34  Knowledge Check 3b If the quantity demanded of a good is greater than the quantity supplied of that good, then the price of the good ____ the equilibrium price. A. is greater than B. is less than C. is equal to D. could be either greater than or less than Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35  Knowledge Check 3c If supply decreases by more than demand increases, then A. equilibrium price and quantity will rise. B. equilibrium price and quantity will fall. C. equilibrium quantity rises and equilibrium price falls. D. equilibrium price rises and equilibrium quantity falls. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 36  Chapter Summary Now that the lesson has ended, you should have learned how to : Describe the relationship between price and quantity demanded using the law of demand. Determine if a given scenario will cause a movement along or a shift of a good’s demand curve. Describe the relationship between price and quantity supplied using the law of supply. Determine if a given scenario will cause a movement along or a shift of a good’s supply curve. Explain how price changes eliminate a surplus or shortage. Explain why the equilibrium quantity in a market maximizes total surplus in that market. Determine the equilibrium price and quantity using the supply and demand model. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 37