Principles of Microeconomics Chapter 2 PDF

Principles of Microeconomics SAYRE // MORRIS // GHAYAD Eleventh Edition CHAPTER 2 Demand and Supply: an Introduction Prepared by Ifeanyi Uzoka, Sheridan Coll...

Principles of Microeconomics SAYRE // MORRIS // GHAYAD Eleventh Edition CHAPTER 2 Demand and Supply: an Introduction Prepared by Ifeanyi Uzoka, Sheridan College © 2024 McGraw Hill  Chapter 2 Demand and Supply: An Introduction Learning Objectives: 1. Explain the concept of demand 2. Explain the concept of supply 3. Explain the term market 4. Explain the concept of (price and quantity) equilibrium. © 2024 McGraw Hill 2-2  Chapter 2 Demand and Supply: An Introduction Learning Objectives: 5. Demonstrate the causes and effects of a change in demand 6. Demonstrate the causes and effects of a change in supply 7. Explain why demand and supply determine price and quantity traded, and not the reverse © 2024 McGraw Hill 2-3  LO1: Demand © 2024 McGraw Hill 2-4  Demand Demand – The quantities that consumers are willing and able to buy per period of time at various prices – Price is the most important determinant © 2024 McGraw Hill 2-5  Demand Demand – Important points – involves both the desire and the ability of consumers to purchase – assumes that other things are held constant (ceteris paribus) – refers to a range of prices – measures quantities over time © 2024 McGraw Hill 2-6  Demand Demand Schedule – A table showing the various quantities demanded per period of time at different prices Demand Curve – A graphic representation of a demand schedule © 2024 McGraw Hill 2-7  Demand Schedule Table 2.1 Individual Demand Quantity Demanded Price per Case (number of cases per month) $17 7 18 6 19 5 20 4 21 3 22 2 © 2024 McGraw Hill 2-8  Demand Curve Quantit Price Price y $17 7 $19 18 6 $18 $17 19 5 20 4 21 3 22 2 1 2 3 4 5 6 7 Quantity © 2024 McGraw Hill 2-9  Demand Curve Price $19 $18 $17 Demand curve 1 2 3 4 5 6 7 Quantity © 2024 McGraw Hill 2-10  Demand Curve Changes in Price quantity demanded - As $19 B price increases, $18 quantity $17 A demanded decreases. Movement is along the existing demand line (curve). 1 2 3 4 5 6 7 Quantity © 2024 McGraw Hill 2-11  Why the Demand Curve Slopes Downward Income effect – The effect of a price change on real income, and therefore on quantity demanded – Real income is measured in terms of the goods and services it will buy – Real income will increase if prices fall © 2024 McGraw Hill 2-12  Why the Demand Curve Slopes Downward Substitution effect – The substitution of one product for another as a result of a change in their relative prices © 2024 McGraw Hill 2-13  Market Demand Market Demand – The total demand for a product or service by all consumers © 2024 McGraw Hill 2-14  Market Demand Schedule Table 2.2 Deriving the Market Demand Quantity demanded (cases/month) Market $/case Tomiko Abdi Jan demand $18 6 +4 +9 = 19 $19 5 +4 +7 = 16 $20 4 +4 +6 = 14 $21 3 +3 +3 =9 $22 2 +3 +1 =6 © 2024 McGraw Hill 2-15  Market Demand ScheduleMarket demand P 22 is the horizontal summation of 21 the demands of 20 all individual demands. 19 18 DJAN DTOMIKO DMARKET DABD I 0 2 4 6 8 10 12 14 16 18 20 Q © 2024 McGraw Hill 2-16 Test Your Understanding The table shows the weekly demand for soy milk by three people in a very small market. Calculate the market demand at each price. Quantity demanded by: Price Al Bo Cal Market $4.00 1 0 0 3.50 1 1 0 3.00 1 1 1 2.50 2 1 1 2.00 2 2 1 © 2024 McGraw Hill 2-17 Test Your Understanding The table shows the weekly demand for soy milk by three people in a very small market. Calculate the market demand at each price. Quantity demanded by: Price Al Bo Cal Market $4.00 1 0 0 =1 3.50 1 1 0 =2 3.00 1 1 1 =3 2.50 2 1 1 =4 2.00 2 2 1 =5 © 2024 McGraw Hill 2-18  LO2:Supply © 2024 McGraw Hill 2-19  Supply Supply – The quantities that producers are willing and able to supply per period of time at various prices © 2024 McGraw Hill 2-20  Supply Supply Schedule – A table showing the various quantities supplied per period of time at different prices Supply Curve – A graphic representation of the supply © 2024 McGraw Hill 2-21  Supply Schedule Table 2.3 The Supply Schedule for Flic, the Energy Bar Manufacturer Quantity Supplied Price per Case (number of cases per month) $18 2 19 3 20 4 21 5 22 6 © 2024 McGraw Hill 2-22  Supply Curve Price Quantit Price y $20 $18 2 $19 $18 19 3 20 4 21 5 20 6 1 2 3 4 5 6 7 Quantity © 2024 McGraw Hill 2-23  Supply Curve Price $20 $19 $18 Supply curve 1 2 3 4 5 6 7 Quantity © 2024 McGraw Hill 2-24  Supply Curve Price Change in quantity supplied $20 - As price $19 increases, B quantity supplied $18 A (Qs) increases. Movement is along the existing supply line (curve). 1 2 3 4 5 6 7 Quantity © 2024 McGraw Hill 2-25  Why the Supply Curve Slopes Upward Suppliers are motivated by profit Higher price means more profit and therefore suppliers will be willing to produce more of the product Costs rise as more is produced, so higher prices are required to supply more © 2024 McGraw Hill 2-26  Market Supply Curve Market Supply – Total supply from all producers of a product – Horizontal summation of each individual producer’s supply curve Assumptions: – Producers are all making a similar product – Consumers have© 2024no preference McGraw Hill as to 2-27  Market Supply Schedule Table 2.4 Deriving the Market Supply NUMBER OF CASES PER MONTH PRICE Flic Quantity Quantity Supplied of Market Quantity PER Supplied Other Manufacturers Supplied CASE $18 2 6 8 19 3 9 12 20 4 12 16 21 5 15 20 22 6 18 24 © 2024 McGraw Hill 2-28 Market Supply Curve P SBOBBIE + SOTHER = SMARKET 22 21 20 19 Market supply is the total 18 quantity of all producers at each price. 0 2 4 6 8 10 12 14 16 18 20 Q © 2024 McGraw Hill 2-29  LO:3 The Market © 2024 McGraw Hill 2-30  Market Market – A mechanism that allows buyers and sellers to exchange products or services © 2024 McGraw Hill 2-31  LO4: Market Equilibrium © 2024McGraw Hill 2-32  Market Equilibrium Equilibrium – Occurs where quantity demanded equals quantity supplied – There is neither a shortage nor a surplus QD = QS © 2024McGraw Hill 2-33  Market Equilibrium Surplus – The amount by which quantity supplied is greater than quantity demanded – Occurs at prices above equilibrium Shortage – The amount by which quantity supplied is less than quantity demanded – Occurs at prices below equilibrium 2-34 © 2024 McGraw Hill  Market Equilibrium Quantity supplied (cases/month) $/case Market Market Shortage/ Supply Demand Surplus $18 8 22 $19 12 18 $20 16 16 $21 20 9 $22 24 6 © 2024 McGraw Hill 2-35  Market Equilibrium Table 2.5 Market Supply and Demand NUMBER OF CASES PER MONTH PRICE Market Quantity Market Quantity Surplus PER Demanded Supplied (+)/Shortage (−) CASE $18 22 8 19 18 12 20 16 16 21 9 20 22 6 24 © 2024 McGraw Hill 2-36  Market Equilibrium Table 2.5 Market Supply and Demand NUMBER OF CASES PER MONTH PRICE Market Quantity Market Quantity Surplus PER Demanded Supplied (+)/Shortage (−) CASE $18 22 8 −14 19 18 12 −6 20 16 16 0 21 9 20 +11 22 6 24 +18 © 2024 McGraw Hill 2-37  Market Equilibrium P Supply The market is in $20 equilibrium when QS = QD Demand 16 Q © 2021 McGraw Hill 2-38  Shortage P Supply At a price lower than equilibrium, $20 QS < Q D there is a $18 shortage shorta ge Demand 8 16 22 Q (QS ) (Q Hill) © 2024 McGraw D 2-39  Surplus P Supply surplu At a price $22 s higher than equilibrium, $20 QS > QD there is a surplus Demand 6 16 24 Q (QD ) (QS ) © 2024 McGraw Hill 2-40 Test Your Understanding The table shows demand and supply for a product. Calculate the surplus or shortage at each price. Surplus/ Price Demand Supply Shortage $2.00 60 30 2.50 56 36 3.00 52 42 3.50 48 48 4.00 44 54 © 2024 McGraw Hill 2-41 Test Your Understanding The table shows demand and supply for a product. Calculate the surplus or shortage at each price. Surplus/ Price Demand Supply Shortage $2.00 60 30 - 2.50 56 36 30 - 3.00 52 42 20 - 3.50 48 48 10 equilibrium 0 4.00 44 54 + 10 © 2024 McGraw Hill 2-42  Market Adjustments When there is a Surplus: – Producers drop the price to sell excess stock – As price drops: quantity demanded increases quantity supplied falls – Market moves back to equilibrium price, quantity © 2024 McGraw Hill 2-43 Market Adjustment – Surplus P Supply surplu $22 s $20 Demand 6 16 24 Q (QD ) (QS ) © 2024 McGraw Hill 2-44 Market Adjustment - Surplus P Sellers drop Supply price to sell surplu excess $22 s Buyers buy more at lower $20 price Sellers supply less at lower price Back to equilibrium Demand 6 16 24 Q (QD ) © 2024 (QS ) McGraw Hill 2-45 Market Adjustment - Surplus P Supply $2 2 Back to $2 equilibri 0 um Demand 6 16 24 Q (QD ) (QS ) © 2024 McGraw Hill 2-46  Market Adjustment - Shortage When there is a Shortage: – Buyers bid up the price – As price rises: quantity demanded decreases quantity supplied increases – Market moves back to equilibrium price, quantity © 2024 McGraw Hill 2-47 Market Adjustment - Shortage P Supply $20 $18 shorta ge Demand 6 16 24 Q (QS ) (QD ) © 2024 McGraw Hill 2-48 Market Adjustment - Shortage P Suppl Bidding between ybuyers forces price up Sellers supply more at higher $20 price Quantity $18 shorta demanded drops ge at higher price Back to equilibrium Demand 6 16 24 Q (QS ) (QD ) © 2024 McGraw Hill 2-49 Market Adjustment - Shortage P Supply Back to $20 equilibri um Demand 6 16 24 Q © 2024 McGraw Hill 2-50  LO5: Change in Demand © 2024 McGraw Hill 2-51  Change in Demand P Change in Demand - Quantity demanded at each price changes, D1 when caused by a factor other than price. $20 Q 14 © 2024 McGraw Hill 2-52  Increase in Demand P Increase in Demand - More quantity is demanded at D1 D2 each price, when caused by a factor other than $20 price Q 14 20 © 2024 McGraw Hill 2-53 Determinants of Demand Determinants of Demand are factors that bring about a change in demand. These are: 1. Consumer preferences – If tastes change, demand changes © 2024 McGraw Hill 2-54 Determinants of Demand 2. Consumer incomes – Normal Products: consumers buy more when income rises, less when income falls – Inferior Products: consumers buy more when income falls, less when income rises © 2024 McGraw Hill 2-55 Determinants of Demand 3. Prices of Related Products: – Products are related if a change in the price of one product causes a change in demand for the other product. There are two types of related products: Substitutes Complements © 2024 McGraw Hill 2-56 Determinants of Demand 3. Prices of Related Products: – Substitutes - Similar products that can be substituted for each other. Increase in price of one product causes increased demand for the substitute – Complements - Tend to be bought together. Increase in price of one product © 2024 McGraw Hill 2-57 Determinants of Demand 4. Expectations of future prices, income, availability – If prices or incomes are expected to rise, consumers buy more now – If goods expected to be scarcer, more is bought now 5. Population size, or income and age distribution – Increases in population or or a change in the distribution of incomes cause increase in © 2024 McGraw Hill 2-58 Test Your Understanding Price Demand (D1) Demand (D2) $2.00 10 000 11 000 3.00 9 600 10 600 4.00 9 200 10 200 In the above market for pretzels: a) What might have happened to the price of a complementary product, like beer, to cause the demand for pretzels to change? b) What might have happened to the price of a substitute product, like nuts? © 2024 McGraw Hill 2-59 Test Your Understanding Price Demand (D1) Demand (D2) $2.00 10 000 11 000 3.00 9 600 10 600 4.00 9 200 10 200 In the above market for pretzels: a) What might have happened to the price of a complementary product, like beer, to cause the demand for pretzels to change? Price of beer fell b) What might have happened to the price of a substitute product,© like nuts? 2024 McGraw Hill Price of nuts rose 2-60 Adjustment to an Increase in Demand S When demand $22 increases, a shortage is $20 created and price rises shorta ge D1 D2 14 18 20 © 2024 McGraw Hill 2-61  Adjustment to a Decrease in Demand S surpl When us demand $20 decreases, a surplus is $18 created and price drops D3 D1 8 10 14 © 2021 McGraw Hill 2-62 © 2024 McGraw-Hill Test Your Understanding What effect will the following changes have upon (i) the demand for, (ii) the price, and (iii) the quantity traded of commercially brewed beer? a. A new medical report praising the healthy effects of drinking beer b. A decrease in the price of home-brewing kits c. A rapid increase in population growth d. Talk of a future strike of brewery workers © 2024 McGraw Hill 2-63 e. A possible future recession  Test Your Understanding What effect will the following changes have upon (i) the demand for, (ii) the price, and (iii) the quantity traded of commercially brewed beer? a. A new medical report praising the healthy effects of drinking beer D  P Q b. A decrease in the price of home-brewing kits D  P Q © 2024 McGraw Hill 2-64  Test Your Understanding What effect will the following changes have upon (i) the demand for, (ii) the price, and (iii) the quantity traded of commercially brewed beer? c. A rapid increase in population growth D  P Q d. Talk of a future strike of brewery workers D P Q e. A possible future recession D  P Q  © 2024 McGraw Hill 2-65  LO6: Change in Supply © 2024 McGraw Hill 2-66 Adjustment to an Increase in Supply S1 S2 Increase in $20 Supply - Quantity $18 supplied at each price increases, when D caused by a 14 16 20 factor other than price. © 2024 McGraw Hill 2-67 Adjustment to an Increase in Supply © 2024 McGraw Hill 2-68 Determinants a change in of Supply Determinants of Supply are factors that bring about a change in supply. These are: 1. Prices of Productive Resources If the price of a productive resource increases, firms will supply less © 2024 McGraw Hill 2-69 Determinants a change in of Supply 2. Government Taxes and Subsidies – If government taxes rise, firms will supply less – If subsidies rise, firms will supply more 3. Technology – An improvement in technology leads to a fall in the cost of production and an © 2024 McGraw Hill 2-70 Determinants a change in of Supply 4. Prices of Substitutes in Production – An increase in the price of one product will cause a drop in the supply of products that are substitutes in production 5. Future Expectation of Suppliers – Lower expected future prices will lead to an increase in supply © 2024 McGraw Hill 2-71 Determinants a change in of Supply 6. Number of Suppliers – A decrease in the number of suppliers will reduce market supply © 2024 McGraw Hill 2-72 Effects of an Increase in Supply S1 S2 $20 When supply increases, a $18 surplus is created and price falls D 14 16 20 © 2024 McGraw Hill 2-73 Effects of a Decrease In Supply S2 S1 $22 When supply $20 decreases, a shortage is created and price rises D 12 14 © 2024 McGraw Hill 2-74 Test Your Understanding Price Demand Supply 1 Supply 2 $4.00 140 60 4.25 130 70 4.50 120 80 4.75 110 90 5.00 100 100 5.25 90 110 5.50 80 120 a. What are equilibrium price and quantity? b. If the supply increases by 50% - what are the new equilibrium price and quantity? © 2024 McGraw Hill 2-75 Test Your Understanding Price Demand Supply 1 Supply 2 $4.00 140 60 4.25 130 70 4.50 120 80 4.75 110 90 5.00 100 100 5.25 90 110 5.50 80 120 a. What are equilibrium price and quantity? b. If the supply increases by 50% - what are the new equilibrium price and quantity? © 2024 McGraw Hill 2-76 Test Your Understanding Price Demand Supply 1 Supply 2 $4.00 140 60 90 4.25 130 70 105 4.50 120 80 120 4.75 110 90 135 5.00 100 100 150 5.25 90 110 165 5.50 80 120 180 a. What are equilibrium price and quantity? b. If the supply increases by 50% - what are the new equilibrium price and quantity? © 2024 McGraw Hill 2-77  Test Your Understanding What effect will the following have on the supply, price and quantity traded of wine? a) A poor harvest in the grape industry results in a big decrease in the supply of grapes S P Q b) The number of wineries increases S P © 2024 McGraw Hill 2-78  Test Your Understanding What effect will the following have on the supply, price and quantity traded of wine? d) A new fermentation method reduces the time needed for the wine to ferment S P Q e) The government introduces a subsidy for each bottle of wine produced domestically S P Q © 2024 McGraw Hill 2-79  LO7: Final Words © 2024 McGraw Hill 2-80  Final Words – Demand and supply determine price and quantity (not the reverse) causes a which causes A change in (shortage/ (P up/down?) (Q surplus?) up/down?) Demand  Shortage P Q Supply  Shortage P Q Demand  Surplus P Q Supply  Surplus P Q © 2024 McGraw Hill 2-81  Final Words Changes in the Quantity Demanded and Demand Changes in the Quantity Supplied and Supply © 2024 McGraw Hill 2-82  Chapter 2 Summary Key Concepts to Remember 1. The concept of demand 2. The concept of supply 3. The term “market” 4. The concept of equilibrium price and quantity 5. The determinants of demand and supply 6. The effects of a change in demand or a change in supply 7. Why demand and supply determine price and quantity, not the reverse © 2024 McGraw Hill 2-83