TheMarketForcesofSupplyandDemand,Economics,PRINCIPLESOF,N.GregoryMankiw,4,Inthischapter,lookfortheanswerstothesequestions:,Whatfactorsaffectbuyersdemandforgoods?Whatfactorsaffectsellerssupplyofgoods?Howdosupplyanddemanddeterminethepriceofagoodandthequantitysold?Howdochangesinthefactorsthataffectdemandorsupplyaffectthemarketpriceandquantityofagood?Howdomarketsallocateresources?,1,.,2,MarketsandCompetition,Amarketisagroupofbuyersandsellersofaparticularproduct.Acompetitivemarketisonewithmanybuyersandsellers,eachhasanegligibleeffectonprice.Inaperfectlycompetitivemarket:AllgoodsexactlythesameBuyers&sellerssonumerousthatnoonecanaffectmarketpriceeachisa“pricetaker”Inthischapter,weassumemarketsareperfectlycompetitive.,0,.,3,Demand,Thequantitydemandedofanygoodistheamountofthegoodthatbuyersarewillingandabletopurchase.Lawofdemand:theclaimthatthequantitydemandedofagoodfallswhenthepriceofthegoodrises,otherthingsequal,0,.,4,TheDemandSchedule,Demandschedule:atablethatshowstherelationshipbetweenthepriceofagoodandthequantitydemandedExample:Helensdemandforlattes.,NoticethatHelenspreferencesobeytheLawofDemand.,0,.,5,HelensDemandSchedule&Curve,0,MarketDemandversusIndividualDemand,Thequantitydemandedinthemarketisthesumofthequantitiesdemandedbyallbuyersateachprice.SupposeHelenandKenaretheonlytwobuyersintheLattemarket.(Qd=quantitydemanded),MarketQd,0,6,.,7,P,Q,TheMarketDemandCurveforLattes,0,.,8,DemandCurveShifters,Thedemandcurveshowshowpriceaffectsquantitydemanded,otherthingsbeingequal.These“otherthings”arenon-pricedeterminantsofdemand(i.e.,thingsthatdeterminebuyersdemandforagood,otherthanthegoodsprice).ChangesinthemshifttheDcurve,0,.,9,DemandCurveShifters:#ofBuyers,Increasein#ofbuyersincreasesquantitydemandedateachprice,shiftsDcurvetotheright.,0,.,10,Supposethenumberofbuyersincreases.Then,ateachP,Qdwillincrease(by5inthisexample).,0,DemandCurveShifters:#ofBuyers,.,11,Demandforanormalgoodispositivelyrelatedtoincome.Increaseinincomecausesincreaseinquantitydemandedateachprice,shiftsDcurvetotheright.(Demandforaninferiorgoodisnegativelyrelatedtoincome.AnincreaseinincomeshiftsDcurvesforinferiorgoodstotheleft.),DemandCurveShifters:Income,0,.,12,Twogoodsaresubstitutesifanincreaseinthepriceofonecausesanincreaseindemandfortheother.Example:pizzaandhamburgers.Anincreaseinthepriceofpizzaincreasesdemandforhamburgers,shiftinghamburgerdemandcurvetotheright.Otherexamples:CokeandPepsi,laptopsanddesktopcomputers,CDsandmusicdownloads,DemandCurveShifters:PricesofRelatedGoods,0,.,13,Twogoodsarecomplementsifanincreaseinthepriceofonecausesafallindemandfortheother.Example:computersandsoftware.Ifpriceofcomputersrises,peoplebuyfewercomputers,andthereforelesssoftware.Softwaredemandcurveshiftsleft.Otherexamples:collegetuitionandtextbooks,bagelsandcreamcheese,eggsandbacon,DemandCurveShifters:PricesofRelatedGoods,0,.,14,AnythingthatcausesashiftintastestowardagoodwillincreasedemandforthatgoodandshiftitsDcurvetotheright.Example:TheAtkinsdietbecamepopularinthe90s,causedanincreaseindemandforeggs,shiftedtheeggdemandcurvetotheright.,DemandCurveShifters:Tastes,0,.,15,Expectationsaffectconsumersbuyingdecisions.Examples:Ifpeopleexpecttheirincomestorise,theirdemandformealsatexpensiverestaurantsmayincreasenow.Iftheeconomysoursandpeopleworryabouttheirfuturejobsecurity,demandfornewautosmayfallnow.,DemandCurveShifters:Expectations,0,.,16,Summary:VariablesThatInfluenceBuyers,VariableAchangeinthisvariable,PricecausesamovementalongtheDcurve#ofbuyersshiftstheDcurveIncomeshiftstheDcurvePriceofrelatedgoodsshiftstheDcurveTastesshiftstheDcurveExpectationsshiftstheDcurve,0,A.ThepriceofiPodsfallsB.ThepriceofmusicdownloadsfallsC.ThepriceofCDsfalls,ACTIVELEARNING1DemandCurve,17,Drawademandcurveformusicdownloads.Whathappenstoitineachofthefollowingscenarios?Why?,.,18,Supply,Thequantitysuppliedofanygoodistheamountthatsellersarewillingandabletosell.Lawofsupply:theclaimthatthequantitysuppliedofagoodriseswhenthepriceofthegoodrises,otherthingsequal,0,.,19,TheSupplySchedule,Supplyschedule:Atablethatshowstherelationshipbetweenthepriceofagoodandthequantitysupplied.Example:Starbuckssupplyoflattes.,NoticethatStarbuckssupplyscheduleobeystheLawofSupply.,0,.,20,StarbucksSupplySchedule&Curve,P,Q,0,MarketSupplyversusIndividualSupply,Thequantitysuppliedinthemarketisthesumofthequantitiessuppliedbyallsellersateachprice.SupposeStarbucksandJittersaretheonlytwosellersinthismarket.(Qs=quantitysupplied),MarketQs,0,21,.,22,TheMarketSupplyCurve,0,.,23,SupplyCurveShifters,Thesupplycurveshowshowpriceaffectsquantitysupplied,otherthingsbeingequal.These“otherthings”arenon-pricedeterminantsofsupply.ChangesinthemshifttheScurve,0,.,24,SupplyCurveShifters:InputPrices,Examplesofinputprices:wages,pricesofrawmaterials.Afallininputpricesmakesproductionmoreprofitableateachoutputprice,sofirmssupplyalargerquantityateachprice,andtheScurveshiftstotheright.,0,.,25,Supposethepriceofmilkfalls.Ateachprice,thequantityofLattessuppliedwillincrease(by5inthisexample).,SupplyCurveShifters:InputPrices,0,.,26,SupplyCurveShifters:Technology,Technologydetermineshowmuchinputsarerequiredtoproduceaunitofoutput.Acost-savingtechnologicalimprovementhasthesameeffectasafallininputprices,shiftsScurvetotheright.,0,.,27,SupplyCurveShifters:#ofSellers,Anincreaseinthenumberofsellersincreasesthequantitysuppliedateachprice,shiftsScurvetotheright.,0,.,28,SupplyCurveShifters:Expectations,Example:EventsintheMiddleEastleadtoexpectationsofhigheroilprices.Inresponse,ownersofTexasoilfieldsreducesupplynow,savesomeinventorytoselllateratthehigherprice.Scurveshiftsleft.Ingeneral,sellersmayadjustsupply*whentheirexpectationsoffuturepriceschange.(*Ifgoodnotperishable),0,.,29,Summary:VariablesthatInfluenceSellers,VariableAchangeinthisvariable,PricecausesamovementalongtheScurveInputPricesshiftstheScurveTechnologyshiftstheScurve#ofSellersshiftstheScurveExpectationsshiftstheScurve,0,ACTIVELEARNING2SupplyCurve,30,Drawasupplycurvefortaxreturnpreparationsoftware.Whathappenstoitineachofthefollowingscenarios?,A.Retailerscutthepriceofthesoftware.B.Atechnologicaladvanceallowsthesoftwaretobeproducedatlowercost.C.Professionaltaxreturnpreparersraisethepriceoftheservicestheyprovide.,.,31,SupplyandDemandTogether,Equilibrium:Phasreachedthelevelwherequantitysuppliedequalsquantitydemanded,0,.,32,Equilibriumprice:,thepricethatequatesquantitysuppliedwithquantitydemanded,0,.,33,Equilibriumquantity:,thequantitysuppliedandquantitydemandedattheequilibriumprice,0,.,34,Surplus(a.k.a.excesssupply):,whenquantitysuppliedisgreaterthanquantitydemanded,Surplus,Example:IfP=$5,thenQD=9lattes,andQS=25lattes,resultinginasurplusof16lattes,0,.,35,Surplus(a.k.a.excesssupply):,whenquantitysuppliedisgreaterthanquantitydemanded,Facingasurplus,sellerstrytoincreasesalesbycuttingprice.,ThiscausesQDtorise,whichreducesthesurplus.,andQStofall,0,.,36,Surplus(a.k.a.excesssupply):,whenquantitysuppliedisgreaterthanquantitydemanded,Facingasurplus,sellerstrytoincreasesalesbycuttingprice.,ThiscausesQDtoriseandQStofall.,Surplus,Pricescontinuetofalluntilmarketreachesequilibrium.,0,.,37,Shortage(a.k.a.excessdemand):,whenquantitydemandedisgreaterthanquantitysupplied,Example:IfP=$1,thenQD=21lattes,andQS=5lattes,resultinginashortageof16lattes,Shortage,0,.,38,Shortage(a.k.a.excessdemand):,whenquantitydemandedisgreaterthanquantitysupplied,Facingashortage,sellersraisetheprice,causingQDtofall,whichreducestheshortage.,andQStorise,0,.,39,Shortage(a.k.a.excessdemand):,whenquantitydemandedisgreaterthanquantitysupplied,Facingashortage,sellersraisetheprice,causingQDtofall,andQStorise.,Shortage,Pricescontinuetoriseuntilmarketreachesequilibrium.,0,.,40,ThreeStepstoAnalyzingChangesinEqm,Todeterminetheeffectsofanyevent,1.DecidewhethereventshiftsScurve,Dcurve,orboth.2.Decideinwhichdirectioncurveshifts.3.Usesupply-demanddiagramtoseehowtheshiftchangeseqmPandQ.,.,41,EXAMPLE:TheMarketforHybridCars,.,42,STEP1:Dcurveshiftsbecausepriceofgasaffectsdemandforhybrids.Scurvedoesnotshift,becausepriceofgasdoesnotaffectcostofproducinghybrids.,STEP2:Dshiftsrightbecausehighgaspricemakeshybridsmoreattractiverelativetoothercars.,EXAMPLE1:AShiftinDemand,EVENTTOBEANALYZED:Increaseinpriceofgas.,STEP3:Theshiftcausesanincreaseinpriceandquantityofhybridcars.,.,43,EXAMPLE1:AShiftinDemand,P2,Q2,Notice:WhenPrises,producerssupplyalargerquantityofhybrids,eventhoughtheScurvehasnotshifted.,Alwaysbecarefultodistinguishb/washiftinacurveandamovementalongthecurve.,TermsforShiftvs.MovementAlongCurve,Changeinsupply:ashiftintheScurveoccurswhenanon-pricedeterminantofsupplychanges(liketechnologyorcosts)Changeinthequantitysupplied:amovementalongafixedScurveoccurswhenPchangesChangeindemand:ashiftintheDcurveoccurswhenanon-pricedeterminantofdemandchanges(likeincomeor#ofbuyers)Changeinthequantitydemanded:amovementalongafixedDcurveoccurswhenPchanges,44,.,45,STEP1:Scurveshiftsbecauseeventaffectscostofproduction.Dcurvedoesnotshift,becauseproductiontechnologyisnotoneofthefactorsthataffectdemand.,STEP2:Sshiftsrightbecauseeventreducescost,makesproductionmoreprofitableatanygivenprice.,EXAMPLE2:AShiftinSupply,EVENT:Newtechnologyreducescostofproducinghybridcars.,STEP3:Theshiftcausespricetofallandquantitytorise.,.,46,EXAMPLE3:AShiftinBothSupplyandDemand,EVENTS:priceofgasrisesANDnewtechnologyreducesproductioncosts,STEP1:Bothcurvesshift.,STEP2:Bothshifttotheright.,STEP3:Qrises,buteffectonPisambiguous:Ifdemandincreasesmorethansupply,Prises.,.,47,EXAMPLE3:AShiftinBothSupplyandDemand,STEP3,cont.,EVENTS:priceofgasrisesANDnewtechnologyreducesproductioncosts,Butifsupplyincreasesmorethandemand,Pfalls.,ACTIVELEARNING3Shiftsinsupplyanddemand,48,Usethethree-stepmethodtoanalyzetheeffectsofeacheventontheequilibriumpriceandquantityofmusicdownloads.EventA:AfallinthepriceofCDsEventB:Sellersofmusicdownloadsnegotiateareductionintheroyaltiestheymustpayforeachsongtheysell.EventC:EventsAandBbothoccur.,.,49,CONCLUSION:HowPricesAllocateResources,OneoftheTenPrinciplesfromChapter1:Marketsareusuallyagoodwaytoorganizeeconomicactivity.,Inmarketeconomies,pricesadjusttobalancesupplyanddemand.Theseequilibriumpricesarethesignalsthatguideeconomicdecisionsandtherebyallocatescarceresources.,CHAPTERSUMMARY,Acompetitivemarkethasmanybuyersandsellers,eachofwhomhaslittleornoinfluenceonthemarketprice.Economistsusethesupplyanddemandmodeltoanalyzecompetitivemarkets.Thedownward-slopingdemandcu