Principles of Microeconomics 2e - W. W. Norton & Company

Principles of Microeconomics 2e - W. W. Norton & Company

3 The Market at Work: Supply and Demand Previously Scarcity refers to the limited nature of societys resources. The production possibilities frontier (PPF) is an illustration of the goods and services an economy is capable of producing. Trade is mutually beneficial for both parties involved.

Big Questions 1. What are the fundamentals of markets? 2. What determines demand? 3. What determines supply? 4. How do supply and demand interact to create equilibrium? Heres a question for you What factors affect the price of gasoline? Fundamentals of Markets 1 Firms

Consumers Exchange happens Supply or demand factors can change the market price Fundamentals of Markets 2 Market Doesnt have to be a physical place

Fundamentals of Markets 3 Market economy Producers and consumers are motivated by self-interest. The _____________ of the market guides resources to their highest valued uses. Competitive Markets Characteristics of a competitive market:

Imperfect Markets What is an imperfect market? What is market power? What is a monopoly? Demand1 Quantity demanded Law of demand All else equal, there is an inverse relationship between price and quantity demanded

Demand2 What is a demand schedule? What is a demand curve? Demand Schedule Ryans Demand Schedule for Salmon Price of Salmon Pounds of Salmon (per pound) Demanded $20.00 $17.50 $15.00 $12.50

$10.00 $ 7.50 $ 5.00 $ 2.50 $ 0.00 0 1 2 3 4 5 6 7 8

Demand Curve Market Demand1 What is market demand? Market Demand2 Price of Salmon Empt y Cell Ryans Demand

Empty Cell Melissas Demand Empt y Cell Market Demand $20.00 Empt

y Cell 0 Empty Cell 0 Empt y Cell 0 $17.50

Empt y Cell 1 Empty Cell 0 Empt y Cell 1

$15.00 Empt y Cell 2 Empty Cell 1 Empt y Cell

3 $12.50 Empt y Cell 3 Empty Cell 1

Empt y Cell 4 $10.00 Empt y Cell 4 Empty Cell

2 Empt y Cell 6 $ 7.50 Empt y Cell 5 Empty

Cell 2 Empt y Cell 7 $ 5.00 Empt y Cell 6

Empty Cell 3 Empt y Cell 9 $ 2.50 Empt y Cell

7 Empty Cell 3 Empt y Cell 10 $ 0.00

Empt y Cell 8 Empty Cell 4 Empt y Cell 12

Changes in Quantity Demanded versus Changes in Demand Change in quantity demanded Movement along a demand curve Caused by a change in __________________ Change in demand Shift of the demand curve Entire demand curve will shift to the left or right Caused by changes in __________________ Practice What You Know

1 Practice What You Know 2 Changes in Demand Factors that Shift Demand1 1. Changes in income Normal good

Inferior good Factors that Shift Demand2 2. Price of related goods Complements

Substitutes Prices of Related Goods Event: Price of peanut butter increases Factors that Shift Demand3 3. Changes in Tastes and Preferences A good may become more fashionable or may go out of style A good may come into or go out of season Factors that Shift Demand4

4. Price expectations 5. Number of buyers Taxes Practice What You Know 3 Practice What You Know 4 Practice What You Know 5 Practice What You Know

6 Practice What You Know 7 Practice What You Know 8 The following three questions are considering the market for the same good: PEPSI We are considering: Change in quantity demanded (movement)

Change in demand (shift) Practice What You Know 8.1 1. Assume you like Pepsi and your income increases. A. B. C. D. The demand for Pepsi increases. The demand for Pepsi decreases. The quantity demanded of Pepsi increases.

The quantity demanded of Pepsi decreases. Practice What You Know 8.2 2. Assume the price of Pepsi decreases. A. B. C. D. The demand for Pepsi increases. The demand for Pepsi decreases. The quantity demanded of Pepsi increases. The quantity demanded of Pepsi decreases.

Practice What You Know 8.3 3. Assume the price of Coke decreases. A. B. C. D. The demand for Pepsi increases. The demand for Pepsi decreases. The quantity demanded of Pepsi increases. The quantity demanded of Pepsi decreases.

Practice What You Know 9 Suppose the price of good X increases. In terms of demand, what is the result? A. The demand for X increases. B. The demand for X decreases. C. The quantity demanded of X increases. D. The quantity demanded of X decreases. Practice What You Know 10 Suppose goods X and Y are

substitutes for each other. If the price of good Y increases, what is the result in the market for good X? A. The demand for X increases. B. The demand for X decreases. C. The quantity demanded of X increases. D. The quantity demanded of X Class Activity: Think-PairShare You work at a restaurant/bar. Your boss comes to you, knowing you are studying economics, and asks for your opinion on the following question:

Which of the following would increase the demand for drinks the most? A. a reduction in the price of a complementary good such as an appetizer B. a reduction in the price of drinks C. both Think carefully about your answer for a minute. Pair up with a classmate and share your thoughts. Supply1 Quantity supplied Law of supply

All else equal, there is a direct relationship between price and quantity supplied Supply2 What is a supply schedule? What is the supply curve? Supply3 Pure Food Fishs Supply Schedule Price of Salmon Pounds of (per pound) Salmon Supplied $20.00 $17.50

$15.00 $12.50 $10.00 $ 7.50 $ 5.00 $ 2.50 $ 0.00 800 700 600 500 400 300 200

100 0 Market Supply1 What is market supply? Market Supply2 Price of Salmon Empty Cell Pure Food Fishs Supply

Empty Cell City Fishs Supply Empty Cell Market Supply $20.00

Empty Cell 800 Empty Cell 200 Empty Cell 1000

$17.50 Empty Cell 700 Empty Cell 175 Empty Cell

875 $15.00 Empty Cell 600 Empty Cell 150 Empty

Cell 750 $12.50 Empty Cell 500 Empty Cell 125

Empty Cell 625 $10.00 Empty Cell 400 Empty Cell

100 Empty Cell 500 $ 7.50 Empty Cell 300

Empty Cell 75 Empty Cell 375 $ 5.00 Empty Cell

200 Empty Cell 50 Empty Cell 250 $ 2.50 Empty

Cell 100 Empty Cell 25 Empty Cell 125 $ 0.00

Empty Cell 0 Empty Cell 0 Empty Cell 0

Changes in Quantity Supplied versus Changes in Supply Change in quantity supplied Movement along a supply curve Caused by a change in _________________ Change in supply Entire supply curve will shift to the left or right Caused by a change in _________________ Changes in Supply

Factors that Shift Supply 1 1. The cost of inputs Inputs 2. Changes in technology Technology Factors that Shift Supply 2 3. Taxes and subsidies Tax

Subsidy Reduces the cost of production Factors that Shift Supply 3 4. Number of sellers 5. Price expectations Practice What You Know 11 Assume the price of cheese decreases. What will happen in the pizza market?

The supply of pizza increases. A. The supply of pizza decreases. B. The quantity supplied of pizza increases. C. The quantity supplied of pizza decreases. Practice What You Know 12 Which of the following will cause the supply curve for oranges to shift to the left? The government begins subsidizing orange growers. A. A study is released showing oranges improve eyesight. B. An ice storm strikes Florida. C. A new orange juice commercial airs on TV.

Practice What You Know 13 Which of the following will most likely cause a decrease in the supply of most fruits and vegetables? A. an increase in demand for meat B. the introduction of an environmentally friendly pesticide C. a decrease in the price of corn and rice D. harsh punishments for farmers who hire undocumented workers Bringing Supply and Demand Together

How is the price of a good determined? Law of supply and demand Supply and Demand1 Equilibrium price The price that clears the market Equilibrium quantity

Shortages and Surpluses 1 Shortage When does a shortage occur? Price will rise over time toward equilibrium Why does price rise over time with a shortage? Shortages and Surpluses 2 Surplus When does a surplus occur? Price will fall over time toward equilibrium

Why does price fall over time with a surplus? Supply and Demand2 Practice What You Know 14 Suppose there is a shortage in the market for avocados. Assuming a competitive and unrestrained market, what happens over time? A. The price of avocados will fall, and the shortage will worsen. B. The price of avocados will rise, and the market will eventually reach equilibrium. C. The price of avocados will rise, and a large

surplus will be created. D. Producers will stop growing avocados. Graphs of Shifts1 Change Illustration Impact on Price and Quantity The demand curve shifts to the right. As a result: Demand increases

The supply curve shifts to the right. As a result: Supply increases Graphs of Shifts2 Change Illustration Impact on Price and Quantity The demand curve shifts to the left. As a result: Demand decreases

The supply curve shifts to the left. As a result: Supply decreases Conclusion If you take away just one thing from this course, it will probably be supply and demand Powerful tool for explaining market changes In competitive markets, supply and demand allow prices to adjust toward equilibrium This means there are no surpluses or shortages

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