Steven Landsburg University of Rochester Chapter 1 Supply, Demand, and Equilibrium © 2011 Cengage...

Steven LandsburgUniversity of Rochester

Chapter 1

Supply, Demand, and Equilibrium

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for

classroom use.

Price Theory

KEYWORDSChapter 1

Landsburg, Price Theory, 8th edition

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Words to Know

• demand• demand curve• econometrics• economic incidence• equilibrium point• excise tax• fall in demand• fall in supply• law of demand• law of supply• legal incidence• price to demanders

• price to suppliers• quantity demanded• quantity supplied• rise in demand• rise in supply• sales tax• satisfied• supply



Introduction

• Telling is not learning.– discover supply and demand

• Economic consequences– poor weather conditions– substitute goods and services– taxation



Introduction

• Interplay of supply and demand• Supply and demand analysis

– Consumers– Producers– Responsiveness of prices and quantities to

variety of changes in economic environment



DEMANDSection 1.1



Law of Demand

• When price of a good goes up, people buy less of good

• Downward sloping demand curve



Demand

• Demand– A family of numbers that lists the quantity

demanded corresponding to each possible price

– Refers to the curve itself





Quantity Demanded

• Quantity Demanded– Amount of a good consume at a given price– Change in price means a change in quantity

demanded• Movement along the demand curve



Demand Curve

• Graph illustrating demand– Price on the vertical axis– Quantity demanded on the horizontal axis

• Representation of the demand schedule



Changes in Demand

• Price change does not lead to change in demand

• Purchasing rule changes lead to demand changes– Entire curve shifts



Shifting Demand

• Fall in Demand– Decision made by demanders to a buy a

smaller quantity at each given price– Leftward shift of demand curve

• Rise in Demand– Decision made by demanders to a buy a

larger quantity at each given price– Rightward shift of demand curve





Sales Tax Example

• Impose tax on consumers– Paid directly to the government

• Less desirable to buy the taxed good or service at every given price

• Demand shifts left and downward





Market Demand

• Quantity associated with a given price is the total number of that good or service that the group members would demand

• Slopes downward (similar to the individual demand curve)



Shape of the Demand Curve

• Steeply-sloped demand curve– Small change in price leads to small change

in quantity demanded• Flat demand curve

– Small change in price leads to large change in the quantity demanded

• Important to producer of good or service



Econometrics

• Statistical techniques used by economist to resolve questions about slopes of various demand curves

• Based on direct observations in marketplace– Ex. Demand for murder– Ex. Demand for reckless driving

• Wide scope of economics– Allows for other investigations as well



SUPPLYSection 1.2



Law of Supply

• When the price of a good goes up, the quantity supplied goes up

• Leads to a upward sloping supply curve



Supply

• Supply– Family of numbers giving the quantities supplied at

each price– Changes in anything other than price changes supply

• Shifts entire curve



Quantity Supplied

• Quantity Supplied– Amount of a good that suppliers will provide at a given

price– Changes if the price changes

• Movement along the curve



Changes in Supply

• Rise in Supply– Increase in quantities that supplier will provide

at each price– Rightward shift of supply

• Fall in Supply– Decrease in quantities that supplier will

provide at each price– Leftward shift of supply





Excise Tax Example

• Impose a tax on producers– Paid directly to the government

• Less desirable to produce the taxed good or service at every given price

• Supply shifts left and upward





EQUILIBRIUMSection 1.3



Equilibrium

• Actual price determined by interaction between demanders and suppliers– Demanders cannot purchase more than

suppliers willing to sell them– Suppliers cannot sell more than demanders

willing to buy



Equilibrium Point

• Point where supply and demand curves intersect– Price where quantity demanded equals

quantity supplied• Demanders and suppliers satisfied

– Able to behave as one wants to, taking market prices as given





Changes in the Equilibrium Point

• Never look at price and quantity• Look at effect change has on demand

curve and supply curve• Common mistakes arise as look at

equilibrium– Supply, demand, and equilibrium misused at

times– Check validity of information





Effect of Sales Tax

• Sales tax of x¢ per item causes equilibrium price to fall by some amount less than x¢ per item

• Price to suppliers not same as price to demanders (price plus sales tax)



Effect of Excise Tax

• Excise tax of x¢ per item causes the equilibrium price to rise by some amount less than x¢ per item

• Price to suppliers (price minus excise tax) not same as price to demanders



Comparing Two Taxes

• Economic Incidence – the division of a tax burden according to who actually pays the tax

• Legal Incidence – the division of a tax burden according to who is required under the law to pay the tax

• The economic incidence of a tax independent of its legal incidence

• Ex. Social Security tax





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