Post on 12-Jan-2016
MODERN PRINCIPLES OF ECONOMICSThird Edition
Supply and Demand
Chapter 3
Outline
The Demand Curve for Oil Consumer Surplus What Shifts the Demand Curve? The Supply Curve for Oil Producer Surplus What Shifts the Supply Curve?
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Definition
Demand Curve:
A function that shows the quantity demanded at different prices.
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Quantity Demanded:
The quantity that buyers are willing and able to buy at a particular price.
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Demand
Demand for Oil
Price Quantity Demanded
$55 5
$20 25
$5 50
• This table shows demand for oil - the quantities demanded at different prices.
• The data can be used to construct a demand curve.
Demand
QuantityDemanded
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Demand Curve
Price of oilper barrelPrice of oilper barrel
Quantity of oil (MBD)
Price Quantity Demanded
$55 5
$20 25
$5 50
Reading a Demand Curve
A Demand Curve Can Be Read:
Horizontally: At a given price, how much are people willing to buy?
Vertically: What are people willing to pay for a given quantity?
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Reading a Demand Curve
HORIZONTAL: At $20 per barrel, buyers are willing to buy 25m barrels of oil per day.
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Reading a Demand Curve
VERTICAL: The maximum price that buyers are willing to pay to purchase 25m barrels per day is $20 per barrel.
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Self-Check
What quantity is demanded at $15?
a. 10.
b. 50.
c. 75.
Answer: b. 50
$15
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Self-Check
At what price would 100 be demanded?
a. $5.
b. $1.
c. $10.
Answer: a. $5
$5
Law of Demand
A demand curve is negatively sloped. The lower the price, the greater the quantity
demanded. Demand summarizes how consumers choose to
use a good, given their preferences and the possibilities for substitution.
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Law of Demand
For example, when the price of oil is high, consumers will use it only in its most valuable uses (e.g., gasoline and jet fuel).
As the price falls, consumers will also use oil in its less valued uses (heating and rubber duckies).
Consumers will buy more oil at lower prices than at higher prices.
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Definition
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Consumer Surplus:
The consumer’s gain from exchange, or the difference between the maximum price a consumer is willing to pay for a certain quantity and the market price.
Definition
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Total Consumer Surplus:
The area beneath the demand curve and above the price.
Consumer Surplus:
The consumer’s gain from exchange, or the difference between the maximum price a consumer is willing to pay for a certain quantity and the market price.
Consumer Surplus
15Total consumer surplus with a linear demand curve
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Self-Check
What is total consumer surplus if market price is $10?
a. $500.
b. $700.
c. $1400.
Answer: b. $700 70
70 x ($30-$10) 2
Shifting the Demand Curve
An increase in demand shifts the demand curve to the right.• At the same price, people are willing to buy
more.• At the same quantity, people are willing to pay
a higher price.
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Shifting the Demand Curve
Quantity of Oil(MBD)
Price of oil/barrel
Old Demand
0 70 140
$50
$25New Demand
Willing to pay a higher price for same quantity.
Willing to buy more at the same price.
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An Increase in Demand
Shifting the Demand Curve
Decrease in demand – shifts the demand curve to the left.• At the same price, people are willing to buy
less.• At the same quantity, people are willing to pay
a lower price.
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Shifting the Demand Curve
Old Demand
0 74
$25
$50
New Demand
Willing to buy less at the same price.
Willing to pay a lower price for the same quantity
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20
Price of oil/barrel
Quantity of Oil(MBD)
A Decrease in Demand
Demand Shifters
Factors That Shift Demand:
1. Income
2. Population
3. Price of substitutes
4. Price of complements
5. Expectations
6. Tastes
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Demand Shifters
1. Income
When people get richer, they buy more stuff. When an increase in income increases the
demand for a good, it is a normal good. Most goods are normal goods. When an increase in income decreases the
demand for a good, it is an inferior good.
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Self-Check
If iPads are a normal good, when incomes increase, the demand curve for iPads will:
a. Shift to the right.
b. Shift to the left.
c. Not change.
Answer: a Higher incomes increase demand for a normal good, shifting the demand curve to the right.
Demand Shifters
2. Population
An increase in population will increase demand generally.
A shift in subpopulations will change the demand for specific goods and services.
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Demand Shifters
3. Prices of Substitutes
A substitute is a good that can be consumed instead of another good.
A decrease in the price of a substitute will decrease demand for the other good.
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Self-Check
If orange juice and apple juice are substitutes, an increase in the price of orange juice will:
a. Increase demand for apple juice.
b. Decrease demand for apple juice.
c. Not affect demand for apple juice.
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Self-Check
Answer: a – increase demand for apple juice.
A higher price for orange juice will cause some people to substitute the now lower-priced apple juice. This increases the demand for apple juice.
If orange juice and apple juice are substitutes, an increase in the price of orange juice will:
Demand Shifters
4. Prices of Complements
Complements are things that go well together. A drop in the price of a complement increases
demand for the complementary good.
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Demand Shifters
5. Expectations
The expectation of a reduction in future supply increases the demand today.
6. Tastes
Changes in tastes caused by fads, fashions, and advertising can all increase or decrease demand.
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Supply Curve
Price of oil per barrel
Quantity of oil (MBD)
Price Quantity Supplied
$55 50
$20 30
$5 10
Reading a Supply Curve
A Supply Curve Can Be Read:
Horizontally: At a given price, how much are suppliers willing to sell?
Vertically: To produce a given quantity, what price must sellers be paid?
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Definition
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Supply Curve:
A function that shows the quantity supplied at different prices.
Quantity Supplied:
The quantity that sellers are willing and able to sell at a particular price.
Law of Supply
As the price of oil rises, it becomes profitable to extract from more costly sources.
As the price rises, the quantity supplied increases. 33
Top photo: Dan Lamont/Corbis Bottom: Bettmann/Corbis
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Self-Check
At what price will producers be willing to supply 50 units?
a. $10.
b. $20.
c. $30.
Answer: a - $10
Definition
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Producer Surplus:
The producer’s gain from exchange, or the difference between the market price and the minimum price at which a producer would be willing to sell a particular quantity.
Definition
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Total Producer Surplus:
The area above the supply curve and below the price.
Producer Surplus
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Shifting the Supply Curve
Increase in Supply - shifts the supply curve to the right.• At the same price producers are willing to
sell more.• At the same quantity, producers are willing
to accept a lower price
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Shifting the Supply Curve
Quantity of Oil(MBD)
Old supply
Increase in supply
0
40
$60
8060
New supply
Greater quantity supplied at the
same price Willing to accept a lower price for
the same quantity
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Price of oil/barrel
Shifting the Supply Curve
Decrease in supply – shifts the supply curve to the left.• At the same price sellers will offer less.• At the same quantity, sellers demand a
higher price.
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Shifting the Supply Curve
Quantity of Oil(MBD)
Old supply
Decrease in supply
$50
20 60
New supply
Smaller quantity supplied at the same price
Higher price required for the same quantity
$28
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Price of oil/barrel
Supply Shifters
Factors That Shift Supply:
1. Technological innovations and changes in the price of inputs
2. Taxes and subsidies
3. Expectations
4. Entry or exit of producers
5. Changes in opportunity costs
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Supply Shifters
1. Technological Innovations
Improvements in technology can reduce costs, thus increasing supply.
A reduction in input prices also reduces costs and thus has a similar effect.
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Supply Shifters
2. Taxes and Subsidies
A tax on output has the same effect as an increase in costs.
A subsidy is the reverse of a tax. 44
Supply Shifters
3. Expectations
Suppliers who expect prices to increase will store goods for future sale and sell less today.
The expectation of a future price increase therefore decreases current supply.
Supply curve shifts to the left.
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Supply Shifters
4. Entry or Exit of Producers
The entry of new producers increases supply, shifting the curve down and to the right.
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Supply Shifters
5. Changes in Opportunity Costs
An increase in opportunity costs shifts the supply curve up and to the left.
If the price of wheat increases, the opportunity cost of growing soybeans increases.
Some farmers will shift away from producing soybeans and start producing wheat.
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Supply Shifters
5. Changes in Opportunity Costs
The supply curve for soybeans will shift up and to the left.
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Self-Check
Suppose a new technology reduces the time it takes to assemble a car. How would this affect the supply of cars?
a. Shift supply to the right.
b. Shift supply to the left.
c. It would have no effect on supply.
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Self-Check
Suppose a new technology reduces the time it takes to assemble a car. How would this affect the supply of cars?
Answer: a – producers would be able to supply more cars at the current price, shifting the supply curve to the right.
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Takeaway
A demand curve shows how customers respond to higher prices by buying less, and to lower prices by buying more.
A supply curve shows how producers respond to higher prices by producing more, and to lower prices by producing less.
The difference between market price and the maximum a consumer is willing to pay is the consumer’s gain from exchange or consumer surplus.
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Takeaway
The difference between market price and the minimum price which a producer is willing to accept is the producer’s gain from exchange, or producer surplus.
An increase in demand means that buyers want a greater quantity at the same price or, equivalently, they are willing to pay a higher price for the same quantity.
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Takeaway
An increase in supply means that sellers are willing to sell a greater quantity at the same price or, equivalently, they are willing to sell a given quantity at a lower price.
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Sources
"Coffee with Cream and Sugar (6703560771)" by TheCulinaryGeek from Chicago, USA - Coffee with Cream and SugarUploaded by the wub. Licensed under CC BY 2.0 via Wikimedia Commons - http://commons.wikimedia.org/wiki/File:Coffee_with_Cream_and_Sugar_(6703560771).jpg#mediaviewer/File:Coffee_with_Cream_and_Sugar_(6703560771).jpg
"Oh Henry bar". Via Wikimedia Commons - http://commons.wikimedia.org/wiki/File:Oh_Henry_bar.jpg#mediaviewer/File:Oh_Henry_bar.jpg
"Kinderchocolate" by Thegreenj - Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons - http://commons.wikimedia.org/wiki/File:Kinderchocolate.jpg#mediaviewer/File:Kinderchocolate.jpg