Chapter 3 (macro)

Chapter 3: The Supply and Demand Model

• Key Questions Addressed:

  • Why did the price of ventilators rise during COVID-19?

  • What causes gasoline prices to fluctuate?

  • Why do prices for computers fall over time?

  • Why are roses more expensive on Valentine’s Day?

• Understanding this model aids in market comprehension in daily life.

Demand

• Definition: A relationship between price and the quantity demanded.

• Key Terms:

  • Price: The amount of money required to obtain a good.

  • Quantity Demanded: The amount consumers are willing to buy at a given price in a specific timeframe.

  • Demand Schedule: A table showing price and quantity demanded for a good.

Table 3.1: Demand Schedule for Bicycles (Millions of Bicycles Per Year)

The Demand Curve

• Definition: A graph representing the relationship between price and quantity demanded.

• Law of Demand: Quantity demanded decreases as price rises; thus, the demand curve slopes downward.

Figure 3.2: The Demand Curve

• Visual representation of the downward-sloping relationship.

Shifts in Demand

• Demand curves can shift due to:

  • Consumers’ preferences

  • Information

  • Income levels

  • Number of consumers

  • Future price expectations

  • Prices of related goods (substitutes and complements)

Figure 3.3: A Shift in the Demand Curve

• Shows how demand shifts in response to changes.

Consumers’ Preferences

• Changes in tastes can alter the quantity purchased.

• Example: Increased demand for fair trade or organic products.

Consumers’ Information

• New information can change demand even without price change.

• Examples:

  • Diesel demands dropped after Volkswagen emissions scandal.

  • Demand for spinach fell post-E.coli outbreak.

Consumers’ Incomes

• Normal Goods: Demand rises as income increases (e.g., clothing, jewelry).

• Inferior Goods: Demand falls as income increases

  • Example: instant noodles are a staple in a college student’s life. After, these college students leave college and start working and earn a salary, many will begin eating microwaveable meals or at resturants and causing the demand for instant noodles to fall as income rises.

Number of Consumers in Market

• An increase in consumers generally raises demand; a decrease lowers demand.

• Example: Growth in the U.S. teenage population boosted related product demands.

Consumers’ Expectations of Future Prices

• Expectation of higher future prices increases current demand; lower expectations decrease current demand.

Prices of Closely Related Goods

• Substitutes: Goods that can replace each other (e.g., Coke vs. Pepsi).

• Complements: Goods used together (e.g., gasoline for SUVs).

Figure 3.4: Shifts vs. Movements Along the Demand Curve

• Distinguishes between shifts of demand and movements along the curve.

Supply

• Definition: A relationship between price and quantity supplied.

• Key Terms:

  • Quantity Supplied: The amount sellers are willing to sell at a given price.

  • Supply Schedule: Table representing the supply curve.

Table 3.2: Supply Schedule for Bicycles (Millions of Bicycles Per Year)

The Supply Curve

• Definition: A graph showing the price vs. quantity supplied.

• Law of Supply: Quantity supplied increases as price rises; thus, the supply curve slopes upward.

  • Positively related

Shifts in Supply

• Influenced by:

  • Technology: anything that changes the amount a firm can produce with a given amount of inputs to production

  • Weather conditions: can affect how much of certain types of goods can be produced with given inputs like droughts

  • Price of inputs: if the price of inputs used in production like raw materials, labor, and capital) increases, then it becomes more costly to produce goods, and firms will produce less at any given price

  • Number of firms in the market: if the number of firms increases, then more goods will be produced at each time (supply increases and the supply curve shifts to the right)

  • Future price expectations: if firms expect the price of the good they produce to rise in the future, then they will hold off selling at least part of their production until the price rises

  • Government involvement (taxes, subsidies, regulations): they can change the firms’ costs of production and their ability to produce goods, further affecting their supply

Movements Along vs. Shifts of the Supply Curve

• Movement involves price changes affecting quantity supplied. Shifts are attributed to factors other than price.

Finding the Market Price

• Equilibrium Price: Where quantity sold equals quantity demanded.

• Market Equilibrium: A Condition where price equals equilibrium price and traded quantity equals equilibrium quantity.

Shortage and Surplus

• Shortage: Occurs when the quantity demanded exceeds the quantity supplied at a price below equilibrium.

• Surplus: Occurs when quantity supplied exceeds quantity demanded at a price above equilibrium.

Table 3.3: Finding the Market Equilibrium Price

Effects of Shifts in Demand and Supply Curves

• An increase in demand leads to higher equilibrium price and quantity.

• A decrease in demand decreases both.

• An increase in supply lowers equilibrium price but increases quantity.

• A decrease in supply raises prices and lowers quantity.

Summary

• Demand: Negative relationship; displayed by a downward-sloping curve.

• Supply: Positive relationship; displayed by an upward-sloping curve.

• Supply and demand model aids in analyzing price changes and market behaviors.