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33CHAPTE
R
DYNAMIC POWERPOINT™ SLIDES BY SOLINA LINDAHL
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Supply and DemandSupply and DemandCOPYRIGHT 2012 WORTH PUBLISHERS
CHAPTER OUTLINE
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To Try it! To Try it! questionsquestions
Some good blogs and other sites to get the juices flowing:
Food for Food for Thought….Thought….
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BACK TO
Demand
What made him buy it?
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Demand
Demand represents the behavior of buyers.
A Demand Curve A Demand Curve shows the quantity demanded at different prices.
The Quantity DemandedQuantity Demanded: the : the quantity that buyers are willing (and able) to purchase at a particular price.
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Law of Demand
Price and Quantity Demanded are negatively related
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The Demand Curve
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The Demand Curve for Oil
Price of Oil per Barrel
Quantity of Oil (MBD)
$55
5
$5
50
$20
25
Demand
PriceQuantity Demanded
$55 5
$20 25
$5 50
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Reading Demand Curves
Demand curves can be read in two ways:
Horizontally: How much buyers are willing and able to purchase at a certain price.Vertically: The highest price buyers are willing to pay for a certain quantity.
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Intuition of the Demand Curve
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When the price is high, oil will only be used in the high value products. If the price falls, oil will also be used in lower value products.
$120
20
$20
120
Demand
Higher Valued Uses of Oil
Lower Valued Uses of Oil
Price of Oil per Barrel
Quantity of Oil (MBD)
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Consumer Surplus
Consumer SurplusConsumer Surplus is the consumer’s gain from exchange,
the difference between the highest price a consumer will pay at a given quantity and the actual market price.
Total consumer surplus Total consumer surplus is the sum of consumer surplus of all buyers.
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Try it!Try it!
Your roommate just bought an iPad for $600. She would have been willing to pay $1,000 for a machine that could make her life so much more worthwhile. How much consumer surplus does your roommate enjoy from the iPad?a)$600b)$400c)$1600d)$1400 To next To next
Try it! Try it!
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Consumer Surplus
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Total Consumer Surplus at a Price of $20
½(80-20)x90 = $2,700
Area of TriangleHeight
Base
½(Base x Height)
80
20
90
Joe’s Consumer Surplus
The President’s Consumer Surplus
Demand
Price of Oil per Barrel
Quantity of Oil (MBD)
Consumer Surplus is the Area beneath the Demand Curve and above the Price
Try it!Try it!
If the price is $2010, what is the consumer surplus?a)$3,588,000b)$1,794,000c)$6,000,000d)$3,000,000
To next To next Try it! Try it!
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What Shifts the Demand Curve?
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An “increase in demand” An “increase in demand” means that consumers buy more at every price level, (or consumers are willing to pay more for each quantity.)
On the graph: the demand curve shifts outwards, up, and to the right.
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What Shifts the Demand Curve?A “decrease in demand” decrease in demand” means that consumers buy less at every price level, (or they reduce the price they’re willing to pay for a given quantity.)
On the graph: the demand curve shifts inwards, down, and to the left.
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A Decrease in Demand
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$50
80
Old Demand Curve
$25
70
Less Quantity Demanded at the Same Price
Lower Willingness to Pay for the Same Quantity
Price per Unit
Quantity
New Demand Curve
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An Increase in Demand
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$50
80
Old Demand Curve
$25
70
Price per Unit
Quantity
New Demand Curve
Greater Quantity Demanded at the Same Price
Greater Willingness to Pay for the Same Quantity
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Demand Shifters
Important Demand Shifters:1.Income2.Population3.Price of Substitutes4.Price of Complements5.Expectations6.Tastes
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Important Demand Shifters:
Income
1.The effect of changes in income on demand depends on the nature of the good in question.A Normal GoodNormal Good: : demand increases when income increases (and vice versa).An Inferior GoodInferior Good: : demand decreases when income increases (and vice versa)
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Try it!Try it!
When the price of petroleum goes up, the demand for natural gas ______, the demand for coal ______, and the demand for solar power ______.a)increases; increases; increasesb)increases; increases; decreasesc)decreases; decreases; increasesd)decreases; decreases; decreasesTo next To next
Try it! Try it!
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Important Demand Shifters:
Population
2.As the population of an economy changes, the # of buyers of a particular good also changes, (thereby changing its demand.)What happens to the demand for diapers in Russia as birth rates drop?
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Important Demand Shifters:
Price of Substitutes
3.Two goods are SubstitutesSubstitutes if a decrease in the price of one leads to a decrease in demand for the other (or vice versa).- What happens to the demand for
travel in Hawaii if the (perceived) safety cost of traveling to Mexico increases?
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Important Demand Shifters:
Price of Complements
4.Two goods are ComplementsComplements if a decrease in the price of one good leads to an increase in the demand for the other (or vice versa).What happens to the demand for
Sport Utility Vehicles when gasoline gets more expensive?
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Price of Complements
Consumers often have to buy goods together.An increase in price of gasoline will decrease the demand for SUVs
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Important Demand Shifters:
Expectations
5. The expectation of a higher (lower) price for a good in the future increases (decreases) current demand for the good.Consumers will adjust their current spending in anticipation of the direction of future prices in order to obtain the lowest possible price.
If prices for Xbox 360 consoles are expected to drop right before Christmas, what will happen to sales during November?
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Important Demand Shifters:
Tastes
6.Tastes and preferences are subjective and will vary among consumers.
Seasonal changes or fads have predictable effects on demand. What happens to demand for boots in October? To carbohydrates during the Atkins diet fad? Or to Acai berries after newly perceived health benefits?
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What Shifts the Demand Curve?
A “change in quantity demanded” is NOT the same as a “change in demand.”
“Quantity demanded” changes only when the price of a good changes.
It is a movement along a fixed demand curve.
“Demand” changes only when a non-price factor (demand shifter) changes.
It is a shift in the entire demand curve.A “change in Quantity Demanded”
A “change in Quantity Demanded”
A “change in Demand”A “change in Demand”
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Try it!Try it!
When the price of a good increases the quantity demanded ______. When the price of a good decreases the quantity demanded ______. a)rises; risesb)rises; fallsc)falls; risesd)falls; falls
To next To next Try it! Try it!
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Supply
What made this oil field happen?
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BACK TO
Supply
Supply represents the behavior of sellers.A Supply CurveSupply Curve shows the quantity supplied at different prices.
The Quantity SuppliedQuantity Supplied is the quantity that producers are willing and able to sell at a particular price.
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BACK TO
Law of Supply
What do you think happens to the quantity of human organs donated in Israel when the government issues a point system that rewards donors? The Law of SupplyLaw of Supply: : there is a direct relationship between price and quantity supplied.
When price rises, all else equal, quantity supplied rises and vice versa
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BACK TO
The Supply Curve
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Quantity of Oil (MBD)
Price of Oil per Barrel
Supply Curve for Oil
503010
$5
$20
$55
The Supply Curve for Oil
BACK TO
Reading Supply Curves
Supply curves can be read in two ways:
Horizontally: How much suppliers are willing and able to sell at a certain price.Vertically: The minimum price for which suppliers are willing to sell a certain quantity.
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BACK TO
Supply Curves
Why is the supply curve upward sloping?
The cost of producing a good is not equal across all suppliers.
At a low price, a good is produced and sold only by the lowest cost suppliers.At a high price, a good is
also produced and sold by higher cost suppliers.
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The Supply Curve for Oil
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Supply
Quantity of Oil (MBD)
Price of Oil per Barrel
604020
$60
$40
$20
80 100
Oil Shale Profitable Here
Low Cost OilHigher Cost Oil
The Supply Curve for Oil
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Furthermore…
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Does sex have a “price?” See thisthis blog post for a discussion about changes in supply and demand for sex.
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Producer Surplus
Producer SurplusProducer Surplus is the producer’s gain from exchange
the difference between the market price and the minimum price at which producers would be willing to sell a certain quantity.
Total producer surplus Total producer surplus is the sum of the producer surplus of each seller.Graphically, total producer surplus is measured by the area above the supply curve and below the price.
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Producer Surplus
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$40
$20
$60
60
40
Supply Curve
20
80
Total Producer Surplus at a Price of $40 Quantity of Oil
(MBD)
Price of Oil per Barrel
Producer Surplus is the Area Above the Supply Curve and Below the Price
Try it!Try it!
Using the following diagram, calculate total producer surplus if the price of oil is $50 per barrel. a)0b)$45c)$1,350d)$2,700
To next To next Try it! Try it!
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Change in Supply
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Old Supply
$50
20
Lower Costs Increase Supply
Quantity of Oil (MBD)
Price of Oil per Barrel
New Supply
$10
80
Greater Quantity Supplied at the Same Price
Willing to Sell Same Quantity at Lower Prices
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Change in Supply
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Old Supply
20
Higher Costs Decrease Supply
Quantity of Oil (MBD)
Price of Oil per Barrel
New Supply
$10
80
Smaller Quantity Supplied at the Same Price
Higher Price Needed to Sell Same Quantity
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Supply Shifters
Important Supply Shifters1.Technological Innovations2.Input Prices3.Taxes and Subsidies4.Expectations5.Entry or Exit of Producers6.Changes in Opportunity
Costs42
BACK TO
Important Supply Shifters:
Technological Innovations1. A technological innovation makes
sellers willing to offer more at a given price, or sell a their quantity at a lower price.A technological innovation lowers costs and increases supply.
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Production Technology
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Important Supply Shifters:
Input Prices
2. A decrease in the price of an input (all else equal) increases profits and encourages more supply (and vice versa)What will happen to the amount of new businesses if the government reduces the fees and red tape associated with new business licenses? What happens if the fees rise?
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Important Supply Shifters:
Taxes and Subsidies
3. A tax on output reduces profit and makes sellers less willing to supply at a given price, unless they can effectively raise the price without losing any sales. (for now, assume they cannot)A tax on output raises costs and decreases supply.Graph the effect on supply of a new cigarette tax in your notes.
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Important Supply Shifters:
Taxes and Subsidies
A subsidy on production makes sellers willing to supply a greater quantity at a given price, or the subsidy allows producers to sell a given quantity at a lower price.A subsidy on production lowers costs and increases supply.Graph the effect on supply of a new subsidy to fast food producers aimed at helping them market and sell overseas.
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Taxes and Subsidies
Taxes and subsidies affect profits and therefore supply.
A 10% yacht tax reduced the supply of yachts 53% in the early 1990s.
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Cotton Supply
When the U.S. decreases its cotton subsidies, U.S. cotton supply decreases
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Important Supply Shifters:
Taxes and Subsidies
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$10
Supply With $10 Tax
$10
$1 0
$50
Supply Without Tax
$40
60
Quantity of Oil (MBD)
Price of Oil per Barrel
With a $10 Tax Suppliers Require a $10 Higher Price to Sell the Same Quantity
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Important Supply Shifters:
Expectations
4. The expectation of a higher price for a good in the future decreases current supply of the good – if they can store the good- (and vice versa).Sellers will adjust their current offerings in anticipation of the direction of future prices in order to obtain the highest possible price.
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Future Expectations
A change in producers’ expectations about profitability will affect supply curves
Windmill production increases as producers expect sales and profitability to increase.
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Important Supply Shifters:
Expectations
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Expectations Can Shift the Supply Curve
Quantity
Price per Unit
Supply Today
Supply Today with Expectation of Future Price Increase
Into Storage
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Important Supply Shifters:
Entry or Exit of Producers
5.As producers enter and exit the market, the overall supply changes.
Entry implies more sellers in the market increasing supply.Exit implies fewer sellers in the market decreasing supply.What will happen to the supply for Marijuana in California if the drug is legalized for general use?
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Number of Producers
As more producers enter a market, supply increases (and vice versa)
As more firms enter the solar installation market, the number of solar installations available for sale increases
As more firms enter the solar installation market, the number of solar installations available for sale increases
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Important Supply Shifters:
Entry or Exit of Producers
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Domestic Supply
Domestic Supply Plus Canadian Imports
Price
Quantity
Entry Increases Supply
Greater Quantity Supplied at the Same Price
Lower Price for the Same Quantity Supplied
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Important Supply Shifters:
Changes in Opportunity Costs
6. Inputs used in production have opportunity costs. Sellers will choose to use those inputs where the profit is the highest Sellers will supply less of a good if the price of an alternate good using the same inputs rises (and vice versa).
Sellers always chase the highest profit goods.
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Changes in Opportunity Costs
Producers have the ability to produce other goodsAn increase in the profitability of small cars will decrease the supply of SUVs
3- 5858
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Important Supply Shifters:
Changes in Opportunity Costs
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$5
Supply with Low Opportunity Costs
2,800
Higher (Opportunity) Costs Reduce Supply- Rising Wheat Prices Reduce Soybean Supply
Quantity of Soybeans (Millions of Bushels)
Price per Unit
2,000
$7
Supply with High Opportunity Costs
Smaller Quantity Supplied at the Same Price
Higher Price Required to Sell the Same Quantity
BACK TO
What Shifts the Supply Curve?
A “change in quantity supplied” is NOT the same as a “change in supply.”
“Quantity supplied” changes only when the price of a good changes.
It is a movement along a fixed supply curve.
“Supply” changes only when a non-price factor changes.
It is a shift in the entire supply curve.A “change in Quantity Supplied”A “change in Quantity Supplied” A “change
in Supply”A “change in Supply”
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Try it!Try it!
Explain using the concepts of supply, demand, and transport costs (including in this case smuggling costs) the pattern of prices you see here
Market Price of Marijuana
Try it!Try it!
The market price of the product is $20 per unit. Calculate the dollar amount of consumer surplus being earned in this market.a) $120,000 b) $60,000 c) $100,000 d) $80,000
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