Principles Of Economics Chapter 4 PDF

Chapter 4 The Market...

Chapter 4 The Market Forces of Supply and Demand Interactive PowerPoint Slides by: V. Andreea Chiritescu TENTH EDITION Eastern Illinois University Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1  IN THIS CHAPTER What factors affect buyers’ demand for goods? What factors affect sellers’ supply of goods? How buyers and sellers behave and interact? How supply and demand determine prices? How do changes in the factors that affect demand or supply affect the market price and quantity of a good? How prices allocate scarce resources? Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2  Markets and Competition Market – A group of buyers and sellers of a particular good or service – The buyers Determine the demand for the product – The sellers Determine the supply of the product Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3  Markets and Competition Competitive market – Many buyers and many sellers, each has a negligible impact on market price Perfectly competitive market – The goods are all exactly the same – Price takers: so many buyers and sellers that no one can affect the market price – At the market price, buyers can buy all they want, and sellers can sell all they want Mankiw, Principles of Economics, 10th Edition. © 2024 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 Quantity demanded – Amount of a good that buyers are willing and able to purchase Law of demand – Other things being equal – The quantity demanded of a good falls when the price of the good rises – The quantity demanded of a good rises when the price of the good falls Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5  Demand Schedule and Demand Curve Demand schedule: − A table that shows the relationship between the price of a good and the quantity demanded Demand curve − A graph of the relationship between the price of a good and the quantity demanded Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6 EXAMPLE 1A: Sofia’s demand for muffins Sofia’s demand Price Quantity schedule for muffins of of muffins muffins demanded $0.00 16 − Notice that Sofia’s 1.00 14 preferences obey 2.00 12 the law of demand. 3.00 10 4.00 8 5.00 6 6.00 4 Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7 EXAMPLE 1B: Sofia’s D schedule and D curve Price of Price Quantity Muffins DSofia of of muffins $6.00 muffins demanded $5.00 $0.00 16 1.00 14 $4.00 2.00 12 A decrease $3.00 in price… 3.00 10 $2.00 4.00 8 5.00 6 $1.00 6.00 4 $0.00 Quantity of 0 5 10 15 Muffins … increases the quantity of muffins demanded. Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8  Market Demand Market demand – Sum of all individual demands for a good or service Market demand curve: sum the individual demand curves horizontally – To find the total quantity demanded at any price, we add the individual quantities demanded (on the horizontal axis) Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9 EXAMPLE 1C: Market vs. individual demand Suppose Sofia and Diego are the only two buyers in the market for muffins. (Qd = quantity demanded) Price Sofia’s Qd Diego’s Qd Market Qd $0.00 16 + 8 = 24 1.00 14 + 7 = 21 2.00 12 + 6 = 18 3.00 10 + 5 = 15 4.00 8 + 4 = 12 5.00 6 + 3 = 9 6.00 4 + 2 = 6 Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 EXAMPLE 1D: Market demand curve for muffins P DMarket Qd $6.00 P (Market) $5.00 $0.00 24 A movement along 1.00 21 $4.00 the demand curve An increase in 2.00 18 $3.00 price… 3.00 15 $2.00 4.00 12 $1.00 5.00 9 $0.00 6.00 6 Q 0 5 10 15 20 25 … decreases the quantity of muffins demanded. Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11  Shifts in the Demand Curve – 1 The demand curve – Shows how price affects quantity demanded, other things being equal These “other things” are non-price determinants of demand – Things that determine buyers’ demand for a good, other than the good’s price Changes in them shift the D curve Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12  Shifts in the Demand Curve – 2 Shifts in the demand curve are caused by changes in: – Number of buyers – Income – Prices of related goods – Tastes – Expectations Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13  Changes in Number of Buyers Increase in number of buyers – Increases the quantity demanded at each price – Shifts the demand curve to the right Decrease in number of buyers – Decreases the quantity demanded at each price – Shifts the demand curve to the left Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14 EXAMPLE 1E: Demand curve shifts P D1 D2 Suppose the number of buyers increases. $6.00 Then, at each P, Qd $5.00 will increase (by 5 in $4.00 this example). $3.00 The demand curve shifts to the right $2.00 $1.00 $0.00 Q 0 5 10 15 20 25 30 Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15  Changes in Income Normal good, other things being equal – An increase in income leads to an increase in demand – Shifts the demand curve to the right Inferior good, other things being equal – An increase in income leads to a decrease in demand – Shifts the demand curve to the left Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16  Changes in Prices of Related Goods – 1 Two goods are substitutes, if – An increase in the price of one leads to an increase in the demand for the other Example: pizza and hamburgers – An increase in the price of pizza increases demand for hamburgers, shifting hamburger demand curve to the right Other examples: – Coke and Pepsi, laptops and tablets, movie streaming and movie theater Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17  Changes in Prices of Related Goods – 2 Two goods are complements, if – An increase in the price of one leads to a decrease in the demand for the other Example: smartphones and apps – If price of smartphones rises, people buy fewer smartphones, and therefore fewer apps; App demand curve shifts to the left Other examples: – College tuition and textbooks, bagels and cream cheese, milk and cookies Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18  Changes in Tastes Tastes – Anything that causes a shift in tastes toward a good will increase demand for that good and shift its demand curve to the right – Example: Advertising convinces consumers that drinking 3 glasses of orange juice a day will help lower cholesterol: demand for orange juice increases Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19  Expectations about the Future People expect an increase in income – The current demand increases People expect higher prices – The current demand increases Example: – If people expect their incomes to rise (because they got a promotion at work), their demand for meals at expensive restaurants may increase now Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20  Shift vs. Movement Along Curve Change in demand: – A shift in the demand curve – Occurs when a non-price determinant of demand changes (like income or number of buyers) Change in the quantity demanded: – A movement along a fixed demand curve – Occurs when the price changes Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21  Summary: variables that influence buyers Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22 Active Learning 1: The demand curve, D Draw the demand curve for orange juice, D1, and choose a point A (P1, Q1) on the demand curve. What happens in each of the following scenarios? Why? A. The price of apple juice increases B. The price of orange juice falls C. Consumers’ income falls (and orange juice is a normal good) Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23  Active Learning 1A: Price of apple juice increases Orange juice and apple Price of juice are substitutes. orange juice – A higher price of apple juice prompts consumers to buy more P1 orange juice (at P1) A – The demand for orange juice increases (shifts to D1 D2 the right) Q1 Q2 Quantity of orange juice Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24  Active Learning 1B: The price of orange juice falls Move down along Price of orange the demand curve juice to a point with lower P, higher Q. A P1 The D curve does B P2 not shift. D1 Q1 Q2 Quantity of orange juice Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25 Active Learning 1C: Consumers’ income falls Orange juice is a Price of normal good. orange juice A lower income prompts consumers to buy less A orange juice (at P1). P1 The demand for orange juice decreases (Demand curve shifts to D2 D1 the left) Q2 Q1 Quantity of orange juice Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26  Supply Quantity supplied – Amount of a good – Sellers are willing and able to sell Law of supply – Other things being equal – The quantity supplied of a good rises when the price of the good rises – The quantity supplied of a good falls when the price of the good falls Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27  Supply Schedule and Supply Curve Supply schedule: − A table that shows the relationship between the price of a good and the quantity supplied Supply curve − A graph of the relationship between the price of a good and the quantity supplied Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28 EXAMPLE 2A: Starbucks’ supply of muffins Starbucks’ supply schedule Price Quantity of of muffins of muffins muffins supplied $0.00 0 − Notice that Starbucks’ 1.00 3 supply schedule obeys 2.00 6 the law of supply 3.00 9 4.00 12 5.00 15 6.00 18 Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29  EXAMPLE 2B: Starbucks’ S schedule and S curve P SStarbucks Price Quantity of of muffins $6.00 muffins supplied $5.00 $0.00 0 $4.00 1.00 3 2.00 6 $3.00 3.00 9 $2.00 4.00 12 $1.00 5.00 15 $0.00 6.00 18 Q 0 5 10 15 Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30  Market Supply vs. Individual Supply Market supply – Sum of the supplies of all sellers of a good or service Market supply curve: sum of individual supply curves horizontally – To find the total quantity supplied at any price, we add the individual quantities (on the horizontal axis) Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31 EXAMPLE 2C: Market vs. individual supply Suppose Starbucks and Peet’s Coffee are the only two sellers in this market. (Qs = quantity supplied) Price Qs Starbucks Qs Peet’s Market Qs $0.00 0 + 0 = 0 1.00 3 + 2 = 5 2.00 6 + 4 = 10 3.00 9 + 6 = 15 4.00 12 + 8 = 20 5.00 15 + 10 = 25 6.00 18 + 12 = 30 Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32 EXAMPLE 2D: Market supply curve of muffins P SMarket QS P $6.00 (Market) $5.00 $0.00 0 An 1.00 5 $4.00 increase in price… A movement along 2.00 10 $3.00 the supply curve 3.00 15 $2.00 4.00 20 $1.00 5.00 25 $0.00 6.00 30 0 5 10 15 20 25 30 35 Q … increases the quantity of muffins supplied. Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33  Shifts in the Supply Curve – 1 The supply curve – Shows how price affects quantity supplied, other things being equal These “other things” are non-price determinants of supply – Things that determine producers’ supply for a good, other than the good’s price Changes in them shift the S curve Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34  Shifts in the Supply Curve – 2 Shifts in the supply curve are caused by changes in: – Input prices – Technology – Number of sellers – Expectations about the future Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35  Changes in Input Prices Examples of input prices – Wages, ingredients, prices of raw materials A fall in input prices – Makes production more profitable at each output price (reduces production costs) – Firms supply a larger quantity at each price: the supply curve shifts to the right – Supply is negatively related to prices of inputs Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 36 EXAMPLE 2E: Changes in input prices P of Suppose the price of flour falls. muffins $6.00 At each price, the $5.00 quantity of muffins $4.00 supplied will $3.00 increase (by 5 in S1 this example). $2.00 S2 The supply curve $1.00 shifts to the right $0.00 Q of 0 5 10 15 20 25 30 35 muffins Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 37  Changes in Technology Technology – Determines how much inputs are required to produce a unit of output A cost-saving technological improvement – Has the same effect as a fall in input prices (decrease in production costs) – Shifts the supply curve to the right Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 38 website, in whole or in part.  Changes in Number of Sellers An increase in the number of sellers – Increases the quantity supplied at each price – Shifts the supply curve to the right A decrease in the number of sellers – Decreases the quantity supplied at each price – Shifts the supply curve to the left Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 39  Expectations about Future Example: Events in the Middle East led to expectations of higher oil prices – Owners of Texas oil fields reduce supply now, save some inventory to sell later at the higher price – The supply curve shifts left Sellers may adjust supply* when their expectations of future prices change (*If good not perishable) Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 40  Shift vs. Movement Along the Supply Change in supply: – A shift in the supply curve – Occurs when a non-price determinant of supply changes (like technology or costs) Change in the quantity supplied: – A movement along a fixed supply curve – Occurs when the price changes Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 41  Summary: variables that influence sellers Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 42 Active Learning 2: The supply curve Draw a supply curve for apple juice, S1, and choose a point A (P1, Q1) on the supply curve. What happens to it in each of the following scenarios? Why? A. Grocery stores cut the price of apple juice. B. A technological advance allows apple juice to be produced at lower cost. C. Grocery stores cut the price of orange juice. Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 43  Active Learning 2A: Decrease in P of apple juice Price of Move down along the apple S1 supply curve to a lower P juice and lower Q. P1 A S curve does not shift. P2 B Q2 Q1 Quantity of apple juice Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 44 Active Learning 2B: Technological advance Price of Better technology apple reduces production S1 S2 juice costs A At each price, QS P1 increases. The supply curve shifts to the right Q1 Q2 Quantity of apple juice Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 45  Active Learning 2C: Decrease in P of orange juice Trick question! Apple Price of apple juice and orange juice S1 juice are substitutes (a demand shifter) P1 A This shifts the demand curve for apple juice, not the supply curve. Q1 Quantity of apple juice Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 46  Supply and demand together – 1 Equilibrium: Market for Muffins P Price has reached D $6.00 S the level where quantity supplied $5.00 equals quantity $4.00 Equilibrium demanded $3.00 $2.00 Equilibrium Price $1.00 $0.00 Q 0 5 10 15 20 25 30 35 Equilibrium Quantity Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 47  Supply and demand together – 2 Equilibrium price: price where QS = QD = equilibrium Q P D S $6.00 P QD QS $5.00 $0 24 0 $4.00 1 21 5 2 18 10 $3.00 3 15 15 $2.00 4 12 20 $1.00 5 9 25 $0.00 6 6 30 Q 0 5 10 15 20 25 30 35 Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 48  Markets not in equilibrium: surplus – 1 Market for Muffins Surplus (excess supply): P D the quantity supplied is S $6.00 Surplus greater than the quantity demanded $5.00 If P = $5, $4.00 then QD = 9 muffins $3.00 and QS = 25 muffins, $2.00 Resulting in a surplus $1.00 of 25 – 9 = 16 muffins $0.00 Q 0 5 10 15 20 25 30 35 Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 49  Markets not in equilibrium: surplus – 2 Facing a surplus, sellers try Market for Muffins to increase sales by cutting P the price: D S $6.00 Surplus This causes QD to rise (move downward along $5.00 D curve) and QS to fall (move $4.00 downward along S $3.00 curve)… …which reduces the $2.00 surplus. $1.00 And so on… until market reaches $0.00 equilibrium. Q 0 5 10 15 20 25 30 35 Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 50  Markets not in equilibrium: shortage – 1 Market for Muffins Shortage (excess P demand): the quantity D S demanded is greater than $6.00 the quantity supplied $5.00 $4.00 If P = $1, then QS = 5 muffins $3.00 and QD = 21 muffins $2.00 Resulting in a shortage $1.00 of 21 – 5 = 16 muffins $0.00 Shortage Q 0 5 10 15 20 25 30 35 Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 51  Markets not in equilibrium: shortage – 2 Market for Muffins Facing a shortage, P sellers raise the price, D S Causing QD to fall $6.00 (move upward along $5.00 D curve) and QS to rise (move $4.00 upward along S $3.00 curve), …which reduces the $2.00 shortage. $1.00 Shortage And so on… until $0.00 market reaches Q equilibrium 0 5 10 15 20 25 30 35 Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 52  The Law of Supply and Demand The law of supply and demand: – The price of any good adjusts to bring the quantity supplied and the quantity demanded of that good into balance. Once the market reaches equilibrium – There is no further upward or downward pressure on the price. Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 53  Supply and Demand Together Three steps to analyzing changes in equilibrium: 1. Decide whether the event shifts the supply curve, the demand curve, or, in some cases, both curves 2. Decide whether the curve(s) shifts to the right or to the left 3. Use the supply-and-demand diagram Compare the initial and the new equilibrium Effects on equilibrium price and quantity Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 54 website, in whole or in part. EXAMPLE 3: The market for muffins P price of S1 muffins Market P1 equilibrium D1 Q Q1 quantity of muffins Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 55 EXAMPLE 3A: A shift in demand EVENT A: Increase in the price of doughnuts. The market for muffins STEP 1: D curve shifts P muffins and doughnuts S1 are substitutes. P2 STEP 2: D shifts right Consumers will buy P1 fewer expensive doughnuts and switch to muffins. D1 D2 STEP 3: Increase in price Q and quantity of muffins. Q1 Q 2 Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 56 EXAMPLE 3B: A shift in supply EVENT B: New technology of producing muffins. The market for muffins STEP 1: S curve shifts P S1 S2 because new technology reduces production costs STEP 2: S shifts right P1 because lower production cost makes P2 production more profitable at any given price. D1 Q1 Q2 Q STEP 3: Decrease in price and increase in quantity Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 57 EXAMPLE 3C: A shift in both S and D – 1 EVENTS: Price of doughnuts rises AND new technology reduces production costs. The market for muffins STEP 1: Both curves shift. P S1 S2 STEP 2: Both shift to the right. P2 STEP 3: P1 Q rises but the effect on P is ambiguous: D2 D1 If demand increases more Q than supply, P rises. Q1 Q2 Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 58 EXAMPLE 3C: A Shift in Both S and D – 2 EVENTS: Price of doughnuts rises AND new technology reduces production costs The market for muffins P S1 S2 STEP 3: Q rises, but the effect P1 on P is ambiguous: P2 If supply increases more than D2 D1 demand, P falls. Q Q1 Q2 Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 59  How Prices Allocate Resources “Markets are usually a good way to organize economic activity” In market economies – Prices adjust to balance supply and demand These equilibrium prices – Are the signals that guide economic decisions and thereby allocate scarce resources Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 60 Active Learning 3: Shifts in supply and demand Use the three-step method to analyze the effects of each event on the equilibrium price and quantity of orange juice. Event A: A fall in the price of apple juice Event B: The price of oranges declines because of an abundant orange crop. Event C: Events A and B both occur simultaneously. Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 61 Active Learning 3A: A fall in price of apple juice STEPS: The market for orange juice 1. D curve shifts P S1 2. D curve shifts left P1 P2 3. P and Q both fall D2 D1 Q Q 2 Q1 Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 62 Active Learning 3B: Fall in the price of oranges STEPS: The market for orange juice P 1. S curve shifts S1 S2 P1 2. S curve shifts right P2 3. P falls, Q rises D1 Q Q1 Q2 Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 63 Active Learning 3C: Events A and B together STEPS: The market for orange juice 1. Both curves shift (see parts A & B) P S1 S3 2. D shifts left, S shifts S2 right P1 3. P falls. Effect on Q is ambiguous: P3 the fall in demand P2 reduces Q, D2 D1 the increase in supply increases Q. Q3 Q 1 Q2 Q Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 64 What happens to P and Q When S or D Shifts? Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 65  CHAPTER IN A NUTSHELL Economists use the model of supply and demand to analyze competitive markets. – Many buyers and sellers, all are price takers The demand curve for a good shows how the quantity demanded depends on the price – Law of demand: as the price of a good falls, the quantity demanded rises; the D curve slopes downward Other determinants of demand: income, prices of substitutes and complements, tastes, expectations, and number of buyers. – If one of these factors changes, the D curve shifts Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 66  CHAPTER IN A NUTSHELL The supply curve for a good shows how the quantity supplied depends on the price. – Law of supply: as the price of a good rises, the quantity supplied rises; the S curve slopes upward. Other determinants of supply: input prices, technology, expectations, and number of sellers. – If one of these factors changes, supply curve shifts. The intersection of the supply and demand curves represents the market equilibrium. – At the equilibrium price, quantity demanded = quantity supplied Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 67  CHAPTER IN A NUTSHELL The behavior of buyers and sellers naturally drives markets toward equilibrium. – When the market price is above the equilibrium price, there is a surplus of the good, which causes the market price to fall. – When the market price is below the equilibrium price, there is a shortage, which causes the market price to rise. Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 68  CHAPTER IN A NUTSHELL To analyze how any event influences the equilibrium price and quantity in a market, use a supply-and demand diagram and follow these three steps. 1. Decide if the event shifts the supply curve or the demand curve (or both). 2. Decide in which direction the curve(s) shifts. 3. Compare the new equilibrium with the initial one. Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 69  CHAPTER IN A NUTSHELL In market economies, prices are the signals that guide decisions and allocate scarce resources. – The price ensures that supply and demand are in balance. – The equilibrium price determines how much buyers choose to consume and how much sellers choose to produce. Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 70