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Mankiw
1
Demand
The quantity demanded of any good is the
amount of the good that buyers are willing and able
to purchase.
Desire to purchase
Ability to purchase
Willingness to purchase
Law of demand: the claim that the quantity
demanded of a good falls when the price of the
good rises or vice-versa, other things being equal.
Inverse relationship between price & demand.
Qd = f(P)
Qd=a-bP 2
The Demand Schedule
Price Quantity
Demand schedule: of of apples
A table that shows the apple($) demanded
relationship between the 1.00 14
price of a good and the 2.00 12
quantity demanded. 3.00 10
Example: 4.00 8
Helen’s demand for apples. 5.00 6
6.00 4
Notice that Helen’s
preferences obey the
Law of Demand.
3
Helen’s (Individual) Demand Schedule &
Curve
Price of Price Quantity
apples of of apples
apples demanded
$6.00
1.00 14
$5.00
2.00 12
$4.00 3.00 10
$3.00 4.00 8
5.00 6
$2.00
6.00 4
$1.00
$0.00 Quantity
0 5 10 15 of apples
4
Market Demand versus Individual Demand
The quantity demanded in the market is the sum of
the quantities demanded by all buyers at each price.
Suppose Helen and Ken are the only two buyers in
the apple market. (Qd = quantity demanded)
Price Helen’s Qd Ken’s Qd Market Qd
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
The Market Demand Curve for Apples
Qd
P P
(Market)
$6.00
1.00 21
$5.00 2.00 18
$4.00 3.00 15
$3.00 4.00 12
5.00 9
$2.00
6.00 6
$1.00
$0.00 Q
0 5 10 15 20 25
6
Exception to Law of Demand
Necessities of life
Luxuries
Conspicuous consumption (demonstration
effect) = people buy more of a costlier
commodity to impress others i.e. Veblen effect
In case of scarcity
Inferior goods
7
Determinants of Demand
(Shift Factors)
The demand curve shows how price affects quantity
demanded, other things being equal.
These “other things” are things that determine
buyers’ demand for a good, other than the good’s
price. They are:
Number of buyers
Income
prices of related goods
Tastes
expectations
Changes in them shift the D curve…
8
Shift in Demand Curve
Factor 1: # of buyers
An increase in the number of buyers causes
an increase in quantity demanded at each price,
which shifts the demand curve to the right.
9
P Suppose the number
$6.00 of buyers increases.
Then, at each price,
$5.00
quantity demanded
$4.00 will increase
$3.00 (by 5 in this example).
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25 30
10
Factor 2: income
Demand for a normal good is positively related to income.
• An increase in income causes increase
in quantity demanded at each price, shifting the D curve to the
right.
P1
Price
D2
D1
Quantity
Q2 Q1 11
Factor 3: prices of related goods
13
Factor 4: tastes, preferences & fashion
14
Factor 5: expectations
Expectations affect consumers’ today’s buying
decisions.
Examples:
• If people expect their income to rise, their
demand for meals at expensive restaurants
may increase now.
• If the economy turns bad and people worry
about their future job security, demand for new
autos may fall now.
15
Summary: Variables That Affect Demand
17
ACTIVE LEARNING:
A. price of iPods falls
Q1 Q2 Quantity of
music downloads
18
ACTIVE LEARNING:
B. price of music downloads falls
Price of
music
down- The D curve
loads does not shift.
P1 Move down along
curve to a point with
P2 lower P, higher Q.
D1
Q1 Q2 Quantity of
music downloads
19
ACTIVE LEARNING:
C. price of CDs falls
D2 D1
Q2 Q1 Quantity of
music downloads
20
Supply
Supply comes from the behavior of sellers.
The quantity supplied of any good is the
amount that sellers are willing and able to sell.
Law of supply: the claim that the quantity
supplied of a good rises when the price of the
good rises, other things equal
Qs=f (P)
Qs = a+bp
Price & quantity supplied are positively related
21
The Supply Schedule
Price Quantity
Supply schedule:
of of apples
A table that shows the apples supplied
relationship between the
$0.00 0
price of a good and the
1.00 3
quantity supplied.
2.00 6
Example: 3.00 9
Starbucks’ supply of apples. 4.00 12
5.00 15
Notice that Starbucks’
6.00 18
supply schedule obeys the
Law of Supply.
22
Starbucks’ Supply Schedule & Curve
Price Quantity
P of of apples
$6.00 apples supplied
$5.00
$0.00 0
$4.00
1.00 3
$3.00 2.00 6
$2.00 3.00 9
4.00 12
$1.00
5.00 15
$0.00 Q 6.00 18
0 5 10 15
23
Market Supply versus Individual Supply
The quantity supplied in the market is the sum of
the quantities supplied by all sellers at each price.
Suppose Starbucks and Jitters are the only two
sellers in this market. (Qs = quantity supplied)
Price Starbucks Jitters 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
The Market Supply Curve
QS
P
(Market)
P
$6.00 $0.00 0
1.00 5
$5.00
2.00 10
$4.00 3.00 15
$3.00 4.00 20
$2.00 5.00 25
6.00 30
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
25
Exceptions to the Law of Supply
Labour Market
Rare Collection
Recession
26
Determinants of Supply
(Shift Factors)
The supply curve shows how price affects
quantity supplied, other things being equal.
These “other things” are non-price determinants
of supply. They are:
input prices
technology
# of sellers
expectations
Changes in them shift the S curve…
27
Shift in Supply Curve
Factor 1: input prices
Examples of input prices:
wages, prices of raw materials.
A fall in input prices makes production
more profitable at each output price,
so firms supply a larger quantity at each price,
and the S curve shifts to the right.
28
Supply Curve Shifters: input prices
P Suppose the
$6.00 price of milk falls.
$5.00
At each price,
$4.00 the quantity of
$3.00 Lattes supplied
will increase
$2.00 (by 5 in this
$1.00 example).
$0.00 Q
0 5 10 15 20 25 30 35
29
Factor 2: technology
Technology determines how much inputs are
required to produce a unit of output.
A cost-saving technological improvement has
same effect as a fall in input prices,
shifts the S curve to the right.
30
Factor 3: # of sellers
31
Factor 4: expectations
32
Summary: Variables That Affect Supply
33
A C T I V E L E A R N I N G 2:
Supply curve
Draw a supply curve for tax
return preparation software.
What happens to it in each
of the following scenarios?
Price of
tax return The S curve
S1
software
does not shift.
P1 Move down
along the curve
P2 to a lower P
and lower Q.
Q2 Q1 Quantity of tax
return software
35
A C T I V E L E A R N I N G 2:
B. fall in cost of producing the software
Price of
tax return
S1
The S curve
software S2
shifts to the
right:
P1
at each price,
Q increases.
Q1 Q2 Quantity of tax
return software
36
A C T I V E L E A R N I N G 2:
C. professional preparers raise their price
Price of
tax return
S1 This shifts the
software
demand curve for
tax preparation
software, not the
supply curve.
Quantity of tax
return software
37
Equilibrium in the Market
P
$6.00 D S Equilibrium:
P has reached
$5.00
the level where
$4.00 quantity supplied
$3.00 equals
quantity demanded
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
38
Equilibrium price:
The price that equates quantity supplied
with quantity demanded
P
$6.00 D S
P Q D
QS
$5.00 $0 24 0
$4.00 1 21 5
$3.00 2 18 10
3 15 15
$2.00
4 12 20
$1.00
5 9 25
$0.00 Q 6 6 30
0 5 10 15 20 25 30 35
39
Equilibrium quantity:
The quantity supplied and quantity demanded
at the equilibrium price
P
$6.00 D S
P QD
QS
$5.00 $0 24 0
$4.00 1 21 5
$3.00 2 18 10
3 15 15
$2.00
4 12 20
$1.00
5 9 25
$0.00 Q 6 6 30
0 5 10 15 20 25 30 35
40
Disequilibrium : case 1-Surplus
when quantity supplied is greater than
quantity demanded
P
$6.00 D Surplus S Example:
If P = $5,
$5.00
then
$4.00 QD = 9 apples
$3.00 and
$2.00
QS = 25 apples
resulting in a surplus
$1.00
of 16 apples
$0.00 Q
0 5 10 15 20 25 30 35
41
Surplus:
when quantity supplied is greater than
quantity demanded
P
$6.00 D Surplus S Facing a surplus,
sellers try to increase
$5.00 sales by cutting the price.
$4.00 This causes
$3.00 QD to rise and QS to fall…
$2.00 …which reduces the
surplus.
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
42
Surplus:
when quantity supplied is greater than
quantity demanded
P
$6.00 D Surplus S Facing a surplus,
sellers try to increase
$5.00 sales by cutting the price.
$4.00 Falling prices cause
$3.00 QD to rise and QS to fall.
$2.00 Prices continue to fall until
market reaches equilibrium.
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
43
Case 2 - Shortage:
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Example:
If P = $1,
$5.00
then
$4.00 QD = 21 apples
$3.00 and
QS = 5 apples
$2.00
resulting in a
$1.00 shortage of 16 apples
$0.00 Shortage Q
0 5 10 15 20 25 30 35
44
Shortage:
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Facing a shortage,
sellers raise the price,
$5.00
causing QD to fall
$4.00 and QS to rise,
$3.00 …which reduces the
shortage.
$2.00
$1.00
Shortage
$0.00 Q
0 5 10 15 20 25 30 35
45
Shortage:
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Facing a shortage,
sellers raise the price,
$5.00
causing QD to fall
$4.00 and QS to rise.
$3.00 Prices continue to rise
$2.00
until market reaches
equilibrium.
$1.00
Shortage
$0.00 Q
0 5 10 15 20 25 30 35
46
Effect of Shift in Demand & Supply on Eq’m
47
EXAMPLE: The Market for Hybrid Car
P
price of
hybrid cars S1
P1
D1
Q
Q1
Ex: Toyota Prius, Honda Insight, plus hybrid
versions of the Ford Escape, Honda Accord,
quantity of
Toyota Highlander, Lexus RX400h SUV hybrid cars
48
EXAMPLE 1: A Change in Demand
EVENT TO BE
ANALYZED: P
Increase in price of gas. S1
STEP 1: P2
D curve shifts
because
STEP 2: price of gas P1
affects demand for
D shifts right
hybrids.
because
STEP 3: high gas
S curve
price doeshybrids
makes not D1 D2
The shift
shift, causes
because an
price
more attractive Q
increase
of gas in price
does not cars. Q1 Q 2
relative to other
and quantity
affect cost of of
hybrid cars.
producing hybrids.
49
EXAMPLE 2: A Change in Supply
EVENT: New technology
reduces cost of P
producing hybrid cars. S1 S2
STEP 1:
S curve shifts
because event affects P
STEP 2: 1
cost of production.
S shifts right P2
D curve does not
because
STEP 3: event
shift, because
reduces cost, D1
production
The shift causestechnology
makes production Q
is not to
price one fallof the Q1 Q 2
more profitable at
factors that affect
and quantity to rise.
any given price.
demand.
50
EXAMPLE 3: A Change in Both Supply
EVENTS:
and Demand
price of gas rises AND P
new technology reduces S1 S2
production costs
STEP 1: P2
Both curves shift.
P1
STEP 2:
Both shift to the right.
STEP 3: D1 D2
Q rises, but effect Q
on P is ambiguous: Q1 Q2
If demand increases more
than supply, P rises.
51
EXAMPLE 3: A Change in Both Supply
and Demand
P
S1 S2
STEP 3, cont…..
P1
But if supply
increases more P2
than demand,
D1 D2
P falls.
Q
Q1 Q2
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