Ragan: Microeconomics Chapter 3 PDF

Ragan: Microeconomics Seventeenth Canadian Edition Chapter 3 Demand, Supply and Price Copyright © 2023 Pearson Canada Inc. 3-1 Chapter Outline/Learning Objectives Section...

Ragan: Microeconomics Seventeenth Canadian Edition Chapter 3 Demand, Supply and Price Copyright © 2023 Pearson Canada Inc. 3-1 Chapter Outline/Learning Objectives Section Learning Objectives After studying this chapter, you will be able to 3.1 Demand 1. list the factors that determine the quantity demanded of a good. 2. distinguish between a shift of the demand curve and a movement along the demand curve. 3.2 Supply 3. list the factors that determine the quantity supplied of a good. 4. distinguish between a shift of the supply curve and a movement along the supply curve. 3.3 The Determination of 5. explain the forces that drive market price to Price equilibrium, and how equilibrium price is affected by changes in demand and supply. Copyright © 2023 Pearson Canada Inc. 3-2 3.1 Demand Quantity Demanded – The total amount that consumers desire to purchase in some time period is called the quantity demanded of a product. – Quantity bought (or exchanged) refers to actual purchases. – Quantity demanded is a flow, as opposed to a stock. Copyright © 2023 Pearson Canada Inc. 3-3 Quantity Demanded and Price A basic hypothesis is that – ceteris paribus – the price of a product and the quantity demanded are negatively related. Why? There are usually several products that can satisfy any given want or desire. A reduction in the price of a product means that the specific desire can now be satisfied more cheaply by buying more of that product. Copyright © 2023 Pearson Canada Inc. 3-4 Demand Schedules and Demand Curves (1 of 3) Figure 3-1 The Demand for Apples Copyright © 2023 Pearson Canada Inc. 3-5 Demand Schedules and Demand Curves (2 of 3) A change in variables other than price will shift the demand curve to a new position. – Consumer’s income – Prices of other goods – Consumers’ preferences – Population – Significant changes in weather Copyright © 2023 Pearson Canada Inc. 3-6 Demand Schedules and Demand Curves (3 of 3) Figure 3-2 An Increase in the Demand for Apples Copyright © 2023 Pearson Canada Inc. 3-7 Figure 3-3 Shifts in the Demand Curve A rightward shift indicates an increase in demand. A leftward shift indicates a decrease in demand. Copyright © 2023 Pearson Canada Inc. 3-8 Figure 3-4 Shifts of and Movements Along the Demand Curve A change in demand is a change in quantity demanded at every price – a shift of the entire curve. A change in quantity demanded refers to a movement from one point on a demand curve to another point – a movement along the demand curve. Copyright © 2023 Pearson Canada Inc. 3-9 3.2 Supply Quantity Supplied – The amount of a product that firms desire to sell in some time period is called the quantity supplied of that product. – Quantity supplied is the amount that firms are willing to offer for sale and not necessarily the quantity actually sold. – Quantity supplied is a flow as opposed to a stock. Copyright © 2023 Pearson Canada Inc. 3 - 10 Quantity Supplied and Price A basic hypothesis is that—ceteris paribus—the price of the product and the quantity supplied are positively related. Why? Producers are interested in making profits. If the price of a particular product rises, then the production and sale of this product is more profitable. Copyright © 2023 Pearson Canada Inc. 3 - 11 Supply Schedules and Supply Curves (1 of 3) Figure 3-5 The Supply of Apples Copyright © 2023 Pearson Canada Inc. 3 - 12 Supply Schedules and Supply Curves (2 of 3) A change in any variable other than price will shift the supply curve to a new position. – Prices of inputs – Technology – Government taxes or subsidies – Prices of other products – Significant changes in weather – Number of suppliers Copyright © 2023 Pearson Canada Inc. 3 - 13 Supply Schedule and Supply Curve (3-3) Figure 3-6 An Increase in the Supply of Apples Copyright © 2023 Pearson Canada Inc. 3 - 14 Shifts of and Movements Along the Supply Curve A change in supply is a change in quantity supplied at every price – a shift of the entire curve. A change in quantity supplied refers to a movement from one point on a supply curve to another point – a movement along the supply curve. Copyright © 2023 Pearson Canada Inc. 3 - 15 Applying Economic Concepts 3-1 Demand and Supply Shocks Created by the COVID-19 Pandemic – Due to lockdowns the demand for certain goods and services declined, while it increased in other areas. – Various restrictions also affected supply of goods and services in some industries. – To provide income relief for the millions of Canadians whose regular incomes had suddenly disappeared, the government increased its spending financed by borrowing. – When governments borrow, they issue new bonds (IOUs). Copyright © 2023 Pearson Canada Inc. 3 - 16 3.3 The Determination of Price The Concept of a Market – A market may be defined as any situation in which buyers and sellers negotiate the transaction of some goods or services. – Markets may differ in the degree of competition among various buyers and sellers. – In a perfectly competitive market buyers and sellers are price takers. Copyright © 2023 Pearson Canada Inc. 3 - 17 Market Equilibrium At the equilibrium price ($60), quantity demanded is equal to quantity demanded (65000 bushels). At any price above $60, there is excess supply and thus Figure 3-7 The Equilibrium Price of Apples downward pressure on price. At any price below $60, there is excess demand and thus upward pressure on price. Market “clears” at equilibrium. Copyright © 2023 Pearson Canada Inc. 3 - 18 Changes in Market Equilibrium The four possible curve shifts: – An increase in demand causes an increase in both the equilibrium price and equilibrium quantity. – A decrease in demand causes a decrease in both equilibrium price and equilibrium quantity. – An increase in supply causes a decrease in the equilibrium price and an increase in the equilibrium quantity. – A decrease in supply causes an increase in the equilibrium price and a decrease in the equilibrium quantity. Copyright © 2023 Pearson Canada Inc. 3 - 19 Changes in Market Equilibrium (2 of 2) Figure 3-8 Shifts in Demand and Supply Curves Copyright © 2023 Pearson Canada Inc. 3 - 20 Relative Prices and Inflation The absolute price of a product is the amount of money that must be spent to acquire one unit of that product. A relative price is the price of one good in terms of another. Demand and supply curves are drawn in terms of relative prices rather than absolute prices. Copyright © 2023 Pearson Canada Inc. 3 - 21 Word of Caution The theory of demand and supply can be used to explain changes in supply and demand in many markets. But the model has important limitations and cannot be usefully applied to the markets for a number of consumer products. To understand why, see Applying Economics Concepts 3-2. Copyright © 2023 Pearson Canada Inc. 3 - 22 Applying Economic Concepts 3-2 Why Apples but Not iPhones? Three conditions must be satisfied for price determination in a market to be well described by the demand-and-supply model: 1. Large number of consumers; each one small relative to the size of the market. 2. Large number of producers; each one small relative to the size of the market. 3. Producers must be selling ‘homogeneous’ versions of the product. Copyright © 2023 Pearson Canada Inc. 3 - 23