4
c h a p t e r
Demand, Supply, and
Market Equilibrium
4.1
Markets
4.2
Demand
4.3
Shifts in the Demand Curve
4.4
Supply
4.5
Shifts in the Supply Curve
4.6
Market Equilibrium Price and
Quantity
UPI/Brian Kersey/Landov
f o u r
The National Football League posted attendance of roughly 74,000
for Super Bowl XLIV in Miami. Just weeks before the game, however, tickets were selling on secondary ticket exchange sites such as StubHub and
TicketMaster for anywhere from $1,200 to $3,500—well above face value.
What does this tell us about the prices that fans are willing to pay and the
number of tickets they are willing to buy? Why does the NFL set its ticket
prices so low? Do scalpers “rip off” innocent buyers? A further look at supply and demand will help us answer these and many other questions.
W
R
I
G
H
T
,
S
H
E
R
R
Y
2
7
9
3
B
U
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
99
chapter 4 Demand, Supply, and Market Equilibrium
was hinting at the importance of supply and demand, he was right on target. Supply and
demand is without a doubt the most powerful tool in the economist’s toolbox. It can help
explain much of what goes on in the world and help predict what will happen tomorrow.
In this chapter, we will learn about the law of demand and the law of supply and the factors
that can change supply and demand.
We then bring market supply and market demand together to determine equilibrium price
and quantity. We also learn how markets with many buyers and sellers adjust to temporary
shortages and surpluses.
© Flying Colours
Ltd/Jupiterimages
According to Thomas Carlyle, a nineteenth-century philosopher, “Teach
a parrot the term ‘supply and demand’ and you’ve got an economist.”
Unfortunately, economics is more complicated than that. However, if Carlyle
Do markets have to be
physical places?
market
the process of buyers and
sellers exchanging goods
and services
4.1
Markets
W
R Why is it so difficult to define a market?
I
Defining a Market
G
Although we usually think of a market as a H
place where some sort of
exchange occurs, a market is not really a place at all. A market is the proT
cess of buyers and sellers exchanging goods and services. Supermarkets,
,
the New York Stock Exchange, drug stores, roadside
stands, garage sales,
Internet stores, and restaurants are all markets.
Every market is different. That is, the conditions under which the
S can vary. These differexchange between buyers and sellers takes place
ences make it difficult to precisely define a market.
H After all, an incredible variety of exchange arrangements exist in the real world—organized
E
securities markets, wholesale auction markets, foreign exchange markets,
The stock market involves many buyers
R
real estate markets, labor markets, and so forth.
and sellers; and profit statements and stock
are readily available. New informaGoods being priced and traded in various ways
R at various locations by prices
tion
is
quickly understood by buyers and
various kinds of buyers and sellers further compound the problem of definsellers and is incorporated into the price of
Y
ing a market. For some goods, such as housing, markets are numerous but the stock. When people expect a company
limited to a geographic area. Homes in Santa Barbara, California, for exam- to do better in the future, the price of the
ple (about 100 miles from downtown Los Angeles), do not compete directly stock rises; when people expect the com2
with homes in Los Angeles. Why? Because people who work in Los Angeles pany to do poorly in the future, the price of
7 distance. Even within cit- the stock falls.
will generally look for homes within commuting
ies, separate markets for homes are differentiated
9 by amenities such as more
living space, newer construction, larger lots, and better schools.
In a similar manner, markets are numerous3
but geographically limited for a good such as
cement. Because transportation costs are so high
B relative to the selling price, the good is not economic
shipped any substantial distance, and buyers are usually in contact only with local producers. content
standards
U
Price and output are thus determined in a number of small markets. In other markets, such as Prices send signals and
those for gold or automobiles, markets are global. The important point is not what a market provide incentives to b uyers
and sellers. When supply
looks like, but what it does—it facilitates trade.
ECS
Buyers and Sellers
The roles of buyers and sellers in markets are important. Buyers, as a group, determine the
demand side of the market. Buyers include the consumers who purchase the goods and
or demand changes, m
arket
prices adjust, affecting incentives. Understanding the
role of prices as s ignals and
incentives helps people anticipate market o
pportunities
and make better choices as
producers and consumers.
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
REUTERS/Peter Foley/Landov
What is a market?
100
PART 2 Supply and Demand
AP Photo/Paul Sakuma
services and the firms that buy inputs—labor, capital, and raw materials.
Sellers, as a group, determine the supply side of the market. Sellers include
the firms that produce and sell goods and services and the resource owners
who sell their inputs to firms—workers who “sell” their labor and resource
owners who sell raw materials and capital. The interaction of buyers and
sellers determines market prices and outputs—through the forces of supply
and demand.
In the next few chapters, we focus on how supply and demand work in
a competitive market. A competitive market is one in which a number of
buyers and sellers are offering similar products, and no single buyer or
eBay is an Internet auction company that brings
seller can influence the market price. That is, buyers and sellers have little
together millions of buyers and sellers from all
market power. Because many markets contain a high degree of competitiveover the world. The gains from these mutually
ness, the lessons of supply and demand can be applied to many different
beneficial exchanges are large. Craigslist also
types of problems.
uses the power of the Internet to connect many
buyers and sellers in local markets.
The supply and demand model is particularly useful in markets like
agriculture, finance, labor, construction, services, wholesale, and retail.
In short, a model is only as good as it explains and predicts. The model
competitive market
a market where the many
of supply and demand is veryW
good at predicting changes in prices and quantities in many
buyers and sellers have
markets
large
and
small.
R
little market power—each
buyer’s or seller’s effect on
market price is negligible
SECTION QUIZ
1. Which of the following is a market?
I
G
H
T
,
a. a garage sale
b. a restaurant
S
H
d. an eBay auction
E
e. all of the above
R
2. In a competitive market,
a. there are a number of buyers and sellers.
R
b. no single buyer or seller can appreciably affect the market price.
Y
c. the New York Stock Exchange
c. sellers offer similar products.
d. all of the above are true.
2
7 between buyers and sellers occurs make it difficult to
a. Differences in the conditions under which the exchange
precisely define a market.
9
b. All markets are effectively global in scope.
3
c. All markets are effectively local in scope.
B
d. Both (a) and (b) are true.
4. Buyers determine the ____________ side of the market;Usellers determine the ____________ side of the market.
3. Which of the following is true?
a. demand; demand
b. demand; supply
c. supply; demand
d. supply; supply
(continued)
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
101
chapter 4 Demand, Supply, and Market Equilibrium
S E C T I O N Q U I Z (Cont.)
5. When transportation costs are high relative to a good’s selling price,
a. markets tend to be more local.
b. markets tend to be more global.
c. markets do not exist.
d. it makes no difference in how local or global markets are.
1. Why is it difficult to define a market precisely?
2. Why do you get your produce at a supermarket rather than directly from farmers?
3. Why do the prices people pay for similar items at garage sales vary more than for similar items in a department
store?
Answers: 1. e
2. d
3. a
4. b
5. a.
What is the law of demand?
What is an individual demand curve?
W
R
I
G
H
T
,
4.2
Demand
What is a market demand curve?
The Law of Demand
S
H
Sometimes observed behavior is so pervasive it is called a law—the law of demand, for
E quantity of a good or service demanded
example. According to the law of demand, the
varies inversely (
negatively) with its price, R
ceteris paribus. More directly, the law of
demand says that, other things being equal, when the price (P) of a good or service falls,
R
the quantity demanded (QD) increases. Conversely, if the price of a good or service rises,
Y
the quantity demanded decreases.
P ↑ ⇒ QD ↓ and P ↓ ⇒ QD ↑
2
7
Why Is There a Negative Relationship
between
9
3
Price and the Quantity Demanded?
B
The law of demand describes a negative (inverse) relationship between price and quantity
U
demanded. When price goes up, the quantity demanded
goes down, and vice versa. But why
is this so? There are several reasons. Observed behavior tells us that consumers will buy
more goods and services at lower prices than at higher prices. Businesses would not put items
on sale if they did not think they could sell more at lower prices—that is, at a lower price,
there is a greater quantity demanded.
Another reason for the negative relationship is what economists call diminishing
marginal utility. In a given time period, a buyer will receive less satisfaction from each
successive unit of a good c onsumed. For example, a second ice cream cone will yield less
satisfaction than the first, a third will yield less satisfaction than the second, and so on.
ECS
economic
content
standards
Higher prices for a good or
service provide the incentives
for buyers to purchase less.
Lower prices for goods or
services provide incentives
to purchase more of the
good or service.
law of demand
the quantity of a good or
service demanded varies
inversely (negatively) with
its price, ceteris paribus
diminishing marginal
utility
the concept that in a given
time period, an individual
will receive less satisfaction
from each successive unit of
a good consumed
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
102
PART 2 Supply and Demand
COURTESY OF ROBERT L. SEXTON
It follows from diminishing marginal utility that if people derive decreasing
amounts of satisfaction from s uccessive units, consumers will buy additional
units only if the price is reduced.
Finally, there are the substitution and income effects of a price change.
For example, if the price of pizza increases, the quantity of pizza demanded
will fall because some consumers might switch from of pizza to hamburgers, tacos, burritos, submarine sandwiches or other foods that substitute
for pizza. This is called the substitution effect of a price change. In addition, an increase in the price of pizza will reduce the quantity of pizza
demanded because it reduces a buyer’s purchasing power. Purchasing power
is the quantity of goods a consumer can buy with a fixed income. So when
the price of pizza rises, the decreased purchasing power of the consumer’s
income will usually lead the consumer to buy less pizza. Alternatively, when
the price of a pizza falls, the increased purchasing power of the consumer’s
income will usually lead the consumer to buy a greater quantity of pizza.
This is called the income effect of a price change.
Economists conducted an experiment with rats to see how they
would respond to changing prices
of different drinks (changing the
number of times a rat had to press
a bar). Rats responded by choosing
more of the beverage with a lower
price, showing they were willing to
substitute when the price changed.
That is, even rats seem to behave
rationally—responding to incentives
and opportunities to make themselves better off.
individual demand
schedule
a schedule that shows the
relationship between price
and quantity demanded
W
IndividualR Demand
I
An Individual Demand Schedule
G
The individual demand schedule shows the relationship between the price
Hthe quantity demanded. For example, suppose Elizabeth
of the good and
enjoys drinkingTcoffee. How many pounds of coffee would Elizabeth be
willing and able to buy at various prices during the year? At a price of $3
, buys 15 pounds of coffee over the course of a year. If
a pound, Elizabeth
the price is higher, at $4 per pound, she might buy only 10 pounds; if it
is lower, say $1 per pound, she might buy 25 pounds of coffee during the
S
year. Elizabeth’s demand for coffee for the year is summarized in the demand schedule
in Exhibit 1. Elizabeth mightHnot be consciously aware of the amounts that she would
purchase at prices other thanEthe prevailing one, but that does not alter the fact that she
has a schedule in the sense that she would have bought various other amounts had other
R
prices prevailed. It must be emphasized
that the schedule is a list of alternative possibilities. At any one time, only one
R of the prices will prevail, and thus a certain quantity will
be purchased.
Y
individual demand curve
An Individual Demand Curve
By plotting the different prices 2
and corresponding quantities demanded in Elizabeth’s demand
schedule in Exhibit 1 and then7connecting them, we can create the individual demand curve
for Elizabeth shown in Exhibit 2. From the curve, we can see that when the price is higher, the
9quantity demanded is lower, and when the price is lower, the
3quantity demanded is higher. The demand curve shows how
Elizabeth’s Demand Schedule
Bthe quantity of the good demanded changes as its price varies.
for Coffee
a graphical representation
that shows the inverse
relationship between price
and quantity demanded
section 4.2
exhibit 1
© Cengage Learning 2013
Price of Coffee
(per pound)
Quantity of Coffee
Demanded
(pounds per year)
$5
5
4
10
3
15
2
20
1
25
U
What Is a Market Demand Curve?
Although we introduced the concept of the demand curve
in terms of the individual, economists usually speak of the
demand curve in terms of large groups of people—a whole
nation, a community, or a trading area. That is, to analyze
how the market works, we will need to use market demand.
As you know, every individual has his or her demand curve
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
103
chapter 4 Demand, Supply, and Market Equilibrium
section 4.2
exhibit 3
R
R
Creating a Market Demand Curve
Y
a. Creating a Market Demand Schedule for Coffee
Quantity of Coffee Demanded (pounds per year)
1
$4
20
1
$3
25
1
b. Creating a Market Demand Curve for Coffee
Peter
$5
4
1
3
2
DHOMER
1
0
5 10 15 20 25
Quantity of Coffee
(pounds per year)
Price (per pound)
Price (per pound)
© Cengage Learning 2013
$5
4
3
2
Rest of
Quahog
5
Market
Demand
1
2,970
5
3,000
1
4,960
5
5,000
Market Demand
Rest of Quahog
$5
1
DMARGE
1
0
1
5 10 15 20 25
Quantity of Coffee
(pounds per year)
$5
4
5
3
2
DS
1
0
2,970
4,960
Quantity of Coffee
(pounds per year)
Price (per pound)
Peter
2
7 Lois
9 10
15
3
BLois
U
Price (per pound)
Price
(per pound)
4
3
DM
2
1
0
3,000
5,000
Quantity of Coffee
(pounds per year)
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
© Cengage Learning 2013
Price of Coffee
(per month)
for every product. The horizontal summing of the demand curves of many individuals is
market demand curve
called the market demand curve.
the horizontal summation of
Suppose the consumer group is composed of Peter, Lois, and the rest of their small comindividual demand curves
munity, Quahog, and that the product is still coffee. The effect of price on the quantity of coffee
demanded by Lois, Peter, and the rest of Quahog is given in the demand schedule and demand
curves shown in Exhibit 3. At $4 per pound, Peter would be willing and able to buy 20 pounds
of coffee per year, Lois would be willing and able to buy
10 pounds, and the rest of Quahog would be willing and able
section 4.2
Elizabeth’s Demand Curve
to buy 2,970 pounds. At $3 per pound, Peter would be willexhibit 2
for Coffee
ing and able to buy 25 pounds of coffee per year, Lois would
be willing and able to buy 15 pounds, and the rest of Quahog
would be willing and able to buy 4,960 pounds. The market
$5
Elizabeth’s Demand
demand curve is simply the (horizontal) sum of the quantities
Curve
4
Peter, Lois, and the rest of Quahog demand at each price. That
is, at $4, the quantity demanded in the market would be 3,000
3
pounds of coffee (20 + 10 + 2,970 = 3,000), and at $3, the
quantity demanded in the market would be 5,000 pounds of
2
W
coffee (25 + 15 + 4,960 = 5,000).
1
In Exhibit 4, we offer a more complete setRof prices and
quantities from the market demand for coffee during the year.
I
Remember, the market demand curve shows the amounts
0
5
10 15 20 25
G and able to
that all the buyers in the market would be willing
Quantity of Coffee
(pounds per year)
buy at various prices. For example, when the price
H of coffee
is $2 per pound, consumers in the market collectively would
The dots represent various quantities of coffee
T At $1 per
be willing and able to buy 8,000 pounds per year.
that Elizabeth would be willing and able to
pound, the amount c ollectively demanded would
buy at different prices in a given period.
, be 12,000
The demand curve shows how the quantity
pounds per year. The market demand curve is the negative
demanded varies inversely with the price of the
(inverse) relationship between price and the total quantity
good when we hold everything else constant—
S affect how
demanded, while holding all other factors that
ceteris paribus. Because of this inverse relamuch consumers are able and willing to pay constant,
ceteris
H
tionship between price and quantity demanded,
paribus. For the most part, we are interested in how the marthe demand curve is downward sloping.
E curves.
ket works, so we will primarily use market demand
104
PART 2 Supply and Demand
section 4.2
exhibit 4
A Market Demand Curve
a. Market Demand Schedule for Coffee
$5
Quantity Demanded
(pounds per year)
$5
4
3
2
1
Price (per pound)
Price
(per pound)
b. Market Demand Curve for Coffee
1,000
3,000
5,000
8,000
12,000
4
Market
Demand Curve
3
2
1
0
1
3
5
8
12
© Cengage Learning 2013
Quantity of Coffee
(thousands of pounds per year)
W
R
I
G
H
T
,
The market demand curve shows the amounts that all the buyers in the market would be willing and able to
buy at various prices. We find the market demand curve by adding horizontally the individual demand curves.
For example, when the price of coffee is $2 per pound, consumers in the market collectively would be willing
and able to buy 8,000 pounds per year. At $1 per pound, the amount collectively demanded would be 12,000
pounds per year.
SECTION QUIZ
1. If the demand for milk is downward sloping, then an increase in the price of milk will result in a(n)
a. increase in the demand for milk.
b. decrease in the demand for milk.
c. increase in the quantity of milk demanded.
d. decrease in the quantity of milk demanded.
e. decrease in the supply of milk.
2. Which of the following is true?
S
H
E
R
R
Y
a. The law of demand states that when the price of a good falls (rises), the quantity demanded rises (falls), ceteris
paribus.
2
7
c. The market demand curve shows the amount of a good that all buyers in the market would be willing and able to
buy at various prices.
9
d. All of the above are true.
3
Which of the following is true?
B
a. The relationship between price and quantity demanded is inverse or negative.
U of individual demand curves.
b. The market demand curve is the vertical summation
b. An individual demand curve is a graphical representation of the relationship between the price and the quantity
demanded.
3.
c. A change in a good’s price causes a movement along its demand curve.
d. All of the above are true.
e. Answers (a) and (c) are true.
(continued)
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
105
chapter 4 Demand, Supply, and Market Equilibrium
S E C T I O N Q U I Z (Cont.)
1. What is an inverse relationship?
2. How do lower prices change buyers’ incentives?
3. How do higher prices change buyers’ incentives?
4. What is an individual demand schedule?
5. What is the difference between an individual demand curve and a market demand curve?
6. Why does the amount of dating on campus tend to decline just before and during final exams?
Answers: 1. d
2. d
3. e.
W
Shifts in Rthe Demand Curve
What is the difference between a change in
demand and a change in quantity demanded?
What are the determinants of demand?
What are substitutes and complements?
What are normal and inferior goods?
I
G
H
T
,
4.3
How does the number of buyers affect the
demand curve?
How do changes in taste affect the demand
curve?
How do changing expectations affect the
demand curve?
A Change in Demand versus
S a Change in
H
Quantity Demanded
E and quantity demanded is so important
Understanding the relationship between price
that economists make a clear distinction between
R it and the various other factors that
can influence consumer behavior. A change in a good’s own price is said to lead to a
R
change in quantity demanded. That is, it “moves you along” a given demand curve. The
Y happens to the quantity demanded when
demand curve is the answer to the question: “What
the price of the good changes?” The demand curve is drawn under the assumption that all
other things are held constant, except the price of the good. However, economists know that
2 of a good that people buy. The other variprice is not the only thing that affects the quantity
ables that influence the demand curve are called
7 determinants of demand, and a change in
these other factors shifts the entire demand curve. These determinants of demand are called
9
demand shifters and they lead to shifts in the demand curve.
3
B
Shifts in Demand (“PYNTE”)
U
change in quantity
demanded
a change in a good’s own
price leads to a change
in quantity demanded, a
movement along a given
demand curve
shifts in the
demand curve
A change in one of the
variables, other than the
price of the good itself, that
affects the willingness of
consumers to buy.
As illustrated in Exhibit 1, any event that increases the quantity demanded at every price
shifts the demand curve to the right. Any event that decreases the quantity demanded at
every price, shifts the demand curve to the left.
There are a number of variables that can shift the demand curve but here are some of
the most important. It might be helpful to remember the old English spelling of the word
pint—PYNTE. This acronym can help you remember the five principle factors that shift the
demand curve for a good or service.
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
106
PART 2 Supply and Demand
section 4.3
exhibit 1
Demand Shifts
Price
Decrease
in
Demand
Increase
in
Demand
D3
D1
D2
0
© Cengage Learning 2013
Quantity
An increase in demand shifts the demand
curve to the right, leading to an increase in
quantity demanded at any given price. A
decrease in demand shifts the demand curve
to the left, leading to a decrease in quantity
demanded at any given price.
Does a movement along
the demand curve illustrate
a change in demand or
a change in quantity
demanded?
substitutes
two good are substitutes if
an increase (decrease) in
the price of one good causes
the demand curve for
another good to shift to the
right (left)
Changes
Changes
Changes
Changes
Changes
in the Prices of Related Goods and Services (P)
in Income (Y)
in the Number of Buyers (N)
in Tastes (T)
in Expectations (E)
Changes in the Prices of Related
Goods and Services (P)
In deciding how much of a good or service to buy, consumers
are influenced by the price of that good or service, a relationship summarized in the law of demand. However, sometimes
consumers are also influenced by the prices of related goods
and services—substitutes and complements.
W
Substitutes
R
Substitutes are generally goods for which one could be used
I in place of the other. To many, substitutes would include
muffins and bagels, Crest and
G Colgate toothpaste, domestic and foreign cars, movie
tickets and video rentals, jackets and sweaters, Exxon and Shell gasoline, and Nikes and
H
Reeboks.
Two goods are substitutesT
if an increase (a decrease) in the price of one good makes consumers more (less) willing to buy
, another good. So two goods are substitutes if an increase
(decrease) in the price of one good causes the demand curve for another good to shift to the
right (left).
S
Complements
H
However, there are times when
Ethe price of a good may fall (rise), and it makes consumers
more (less) willing to buy another good. If this relationship holds, the pair are complement
Rthat “go together,” often consumed and used simultaneously,
goods. Complements are goods
such as skis and bindings, peanut
R butter and jelly, hot dogs and buns, digital music players and downloadable music, and printers and ink cartridges. For example, if the price of
Y
motorcycles falls, the quantity of motorcycles demanded will rise—a movement down along
the demand curve for motorcycles. As more people buy motorcycles, they will demand more
motorcycle helmets—the demand
2 curve for motorcycle helmets shifts to the right. In short,
7
9
Substitute Goods
what you’ve learned
3
B more of one reduces purchases of the other. In
U Exhibit 2(a), we see that as the price of Coca-Cola
Can you describe the change we would expect
Q
to see in the demand curve for Pepsi if the relative
price for Coca-Cola increased significantly?
A
If the price of one good increases and, as a
result, an individual buys more of another good, the
two related goods are substitutes. That is,
buying
increases—a movement up along the demand curve
for Coca-Cola, from point A to point B. The price
increase for Coca-Cola causes a reduction in the
quantity demanded of Coca-Cola. If the two goods
are substitutes, the higher price for Coca-Cola will
cause an increase in the demand for Pepsi (a rightward shift), as seen in Exhibit 2(b).
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107
chapter 4 Demand, Supply, and Market Equilibrium
section 4.3
Substititute Goods
B
P2
A
P1
0
b. Market for Pepsi
Price of Pepsi
© Cengage Learning 2013
Price of Coca-Cola
a. Market for Coca-Cola
Demand
0
Q1
Q2
Quantity of Coca-Cola
D1
D2
Quantity of Pepsi
two goods are complements, if an increase (decrease)
in the price of one good shifts the
W
demand curve for another good to the left (right).
R
I
Changes in Income (Y)
G
Why (Y)? The reason is because Macroeconomists use the letter (I) for investment, so
H income. Economists have observed that
Microeconomist often use the letter (Y) to denote
generally the consumption of goods and services
T is positively related to the income available
to consumers. Empirical studies support the notion that as individuals receive more income,
,
Q
A
If computers and printers are complements,
the decrease in the price of computers will lead to
Price of Computers
2
Complementary Goods 7
9
a. Market for Computers
3
B
P
A
U
1
B
P2
Demand
0
Q1
Q2
Quantity of Computers
more computers purchased (a movement down along
the demand curve from point A to point B) and an
increase in the demand for printers (a rightward
shift). Of course, the opposite is true, too—an increase
in the price of computers will lead to fewer people
purchasing computers (a movement up along the
demand curve for computers from point B to point A)
and a lower demand for printers (a leftward shift).
b. Market for Printers
Price of Printers
H
E
If the price of computers fell markedly, what do
R
you think would happen to the demand for printers?
R
Y
exhibit 3
two goods are complements
if an increase (decrease) in
the price of one good shifts
nother
the demand curve for a
good to the left (right)
Complementary
Goods
S
what you’ve learned
section 4.3
complements
0
D1
D2
Quantity of Printers
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
© Cengage Learning 2013
exhibit 2
108
PART 2 Supply and Demand
they tend to increase their purchases of most goods and services. Other things held equal,
rising income usually leads to an increase in the demand for goods (a rightward shift of the
demand curve), and decreasing income usually leads to a decrease in the demand for goods
(a leftward shift of the demand curve).
Normal and Inferior Goods
normal good
if income increases, the
demand for a good increases;
if income decreases, the
demand for a good decreases
inferior good
if income increases,
the demand for a good
decreases; if income
decreases, the demand for
a good increases
If demand for a good increases when incomes rise and decreases when incomes fall, the good
is called a normal good. Most goods are normal goods. Consumers will typically buy more
CDs, clothes, pizzas, and trips to the movies as their incomes rise. However, if demand for
a good decreases when incomes rise or if demand increases when incomes fall, the good is
called an inferior good. These goods include inexpensive cuts of meat, second-hand clothing, or retread tires, which customers generally buy only because they cannot afford more
expensive substitutes. As incomes rise, buyers shift to preferred substitutes and decrease their
demand for the inferior goods. Suppose most individuals prefer hamburger to beans, but
low-income families buy beans because they are less expensive. As incomes rise, many consumers may switch from buying beans to buying hamburgers. Hamburger may be inferior
too; as incomes rise still further, consumers may substitute steak or chicken for hamburger.
Wdoes not refer to the quality of the good in question but
The term inferior in this sense
shows that demand decreasesR
when income increases and demand increases when income
decreases. So beans are inferior not because they are low quality, but because you buy less
I
of them as income increases.
Or if people’s incomes riseG
and they increase their demand for movie tickets, we say that
movie tickets are a normal good.
H But if people’s incomes fall and they increase their demand
for bus rides, we say bus rides are an inferior good. Whether goods are normal or inferior,
T
,
what you’ve learned
Normal and Inferior Goods
S
H
Chester Field owns a high-quality furnitureE
shop. If a boom in the economy occurs (higher average income per person and fewer people unemployed),R
can Chester expect to sell more high-quality furniture?R
Y
Q
A
demand for high-quality furniture, as shown in
(a). However, if Chester sells unfinished, used, or
low-quality furniture, the demand for his products
might fall, as higher incomes allow customers to
buy furniture that is finished, new, or of higher
quality. Chester’s furniture would then be an inferior good, as shown in Exhibit 4(b).
Yes. Furniture is generally considered a
normal good, so a rise in income will increase the
D1
D2
0
Quantity of High-Quality Furniture
b. Rising Income and an Inferior Good
0
D2
D1
Quantity of Low-Quality Furniture
© Cengage Learning 2013
Price of Furniture
exhibit 4
2
7
Normal and Inferior Goods
9
a. Rising Income and a Normal Good 3
B
U
Price of Furniture
section 4.3
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
chapter 4 Demand, Supply, and Market Equilibrium
109
the point here is that income influences demand—usually positively, but sometimes negatively.
The demand for a good or service will vary with the size of
the potential consumer population. The demand for wheat,
for example, rises as population increases, because the added
population wants to consume wheat products, such as bread
or cereal. Marketing experts, who closely follow the patterns
of consumer behavior regarding a particular good or service,
are usually vitally concerned with the demographics of the
product—the vital statistics of the potential consumer population, including size, race, income, and age characteristics. For
W
example, market researchers for baby food companies
keep a
close watch on the birth rate.
R
iStockphoto.com/Pete Tripp
Changes in the Number
of Buyers (N)
In the midst of a recession, is it possible that many p
eople
will increase their demand for fast-food restaurants like
McDonald’s? It is not only possible, it actually happened! If
declining income causes demand for a good to rise, is it a
normal good or an inferior good?
ticularly noticeable in apparel. Skirt lengths, coat lapels, shoe styles, and tie sizes change
frequently.
S
Changes in preferences naturally lead to changes
in demand. A person may grow tired
of one type of recreation or food and try another
type.
People may decide they want more
H
organic food; consequently, we will see more stores and restaurants catering to this change
E
in taste. Changes in occupation, number of dependents,
state
of health, and age also tend to alter preferences.
R The birth of
a baby might cause a family to spend less on recreation and
R
more on food and clothing. Illness increases the demand for
medicine and lessens purchases of other goods.YA cold winter
increases the demand for heating oil. Changes in customs and
traditions also affect preferences, and the development of new
2 other goods.
products draws consumer preferences away from
Compact discs replaced record albums, just as
7 DVD players
replaced VCRs. A change in information can also impact con9
sumers’ demand. For example, a breakout of E. coli or new
3product, such
information about a defective and/or dangerous
as a baby crib, can reduce demand.
B
U
Changes in Expectations (E)
Sometimes the demand for a good or service in a given period
will increase or decrease because consumers expect the good to
change in price or availability at some future date. If people expect
the future price to be higher, they will purchase more of the good
now before the price increase. If people expect the future price to
be lower, they will purchase less of the good now and wait for the
Body piercing and tattoos have risen in popularity in recent
years. The demand for these services has been pushed to
the right. According to the Pew Research Center 36 percent
of 18- to 25-year-olds have at least one tattoo.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
InnervisionArt/Shutterstock.com
I
G
Changes in Tastes (T)
H
The demand for a good or service may increase or decrease with changes in people’s tastes
T by advertising or promotion, by a news
or preferences. Changes in taste may be triggered
story, by the behavior of some popular public, figure, and so on. Changes in taste are par-
110
PART 2 Supply and Demand
price decrease. For example, if you expect the price of computers to fall soon, you may be less
willing to buy one today. Or, if you expect to earn additional income next month, you may be
more willing to dip into your current savings to buy something this month.
Changes in Demand versus Changes in Quantity
Demanded—Revisited
D1
D2
© Cengage Learning 2013
0
Price
Quantity
Price of complement falls
or price of substitute rises
D1
D2
Quantity
Increase in the number of
buyers in the market
D
2 D
7Quantity(normal good)
Income increases
9
3
B
U
1
0
Price
0
S
H
E
R
R
Y
Price
Possible Demand Shifters
Price
exhibit 5
Price
section 4.3
T
,
D1
0
D2
2
0
Quantity
Income increases (inferior good)
D1
D2
Quantity
Taste change in favor of the good
D1
Price
How is a change in demand
different than a change in
quantity demanded?
Economists put particular emphasis on the impact on consumer behavior of a change in the
price of a good. We are interested in distinguishing between consumer behavior related to the
price of a good itself (movements along a demand curve) and behavior related to changes in
other factors (shifts of the demand curve).
As indicated earlier, if the price of a good changes, it causes a change in quantity
demanded. If one of the other factors (determinants) influencing consumer behavior changes,
it results in a change in demand. The effects of some of the determinants that cause changes
in demand (shifters) are reviewed in Exhibit 5. For example, there are two different ways to
curb teenage smoking: raise the price of cigarettes (a reduction in the quantity of cigarettes
W for cigarettes (a leftward shift in the demand curve for
demanded) or decrease the demand
cigarettes). Both would reduceRthe amount of smoking. Specifically, to increase the price of
cigarettes, the government could impose a higher tax on manufacturers. Most of this would
I
be passed on to consumers in the form of higher prices (more on this in Chapter 6). Or to
G the government could adopt policies to discourage smokshift the demand curve leftward,
ing, such as advertising bans and
H increasing consumer awareness of the harmful side effects
of smoking—disease and death.
0
D2
Quantity
Future price increase expected
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
111
chapter 4 Demand, Supply, and Market Equilibrium
Changes in Demand versus Changes in
Quantity Demanded
A
In Exhibit 6, the movement from A to B
is called an increase in quantity demanded; the
W
movement from B to A is called a decrease
in
quantity demanded. Economists use the
R phrase
“increase or decrease in quantity demanded” to
I
describe movements along a given demand curve.
However, the change from A to C is G
called an
increase in demand, and the change fromH
C to A is
called a decrease in demand. The phrase “increase
T
or decrease in demand” is reserved for a shift in
the whole curve. So if an individual buys ,more pizzas because the price fell, we call it an increase
in quantity d
emanded. However, if she buys more
1.
section 4.3
Change in Demand versus
Change in Quantity Demanded
exhibit 6
A
$15
C
B
10
A
C Change
in demand
A
B Change
in quantity
demanded
D1
0
3
5
D2
8
Quantity of Pizzas
(per month)
S
H
E
R
SECTION QUIZ
R
Which of the following would be most likely to increase the demand for jelly?
Y
a. an increase in the price of peanut butter, which is often used with jelly
b. an increase in income; jelly is a normal good
2
d. medical research that finds that daily consumption
of jelly makes people live 10 years less, on average
7
Which of the following would not cause a change
in
the
demand for cheese?
9
a. an increase in the price of crackers, which are consumed with cheese
3
b. an increase in the income of cheese consumers
B
c. an increase in the population of cheese lovers
d. an increase in the price of cheese
U
c. a decrease in the price of jelly
2.
3. Whenever the price of Good A decreases, the demand for Good B increases. Goods A and B appear to be
a. complements.
b. substitutes.
c. inferior goods.
d. normal goods.
e. inverse goods.
(continued)
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
© Cengage Learning 2013
Q
How would you use a graph to demonstrate
the two following scenarios? (1) Someone buys
more pizzas because the price of pizzas has fallen;
and (2) a student buys more pizzas because she
just received a 20 percent raise at work, giving her
additional income.
izzas even at the current price, say $15, we say it
p
is an increase in demand. In this case, the increase
in income was responsible for the increase in
demand, because she chose to spend some of her
new income on pizzas.
Price of Pizzas
what you’ve learned
112
PART 2 Supply and Demand
S E C T I O N Q U I Z (Cont.)
4. Whenever the price of Good A increases, the demand for Good B increases as well. Goods A and B
appear to be
a. complements.
b. substitutes.
c. inferior goods.
d. normal goods.
e. inverse goods.
5. The difference between a change in quantity demanded and a change in demand is that a change in
a. quantity demanded is caused by a change in a good’s own price, while a change in demand is caused by a change
in some other variable, such as income, tastes, or expectations.
b. demand is caused by a change in a good’s own price, while a change in quantity demanded is caused by a change
in some other variable, such as income, tastes, or expectations.
c. quantity demanded is a change in the amount people actually buy, while a change in demand is a change in the
amount they want to buy.
6.
W
d. This is a trick question. A change in demand and aR
change in quantity demanded are the same thing.
has greatly reduced the number of cocoa bean plants
Suppose CNN announces that bad weather in Central America
I
and for this reason the price of chocolate is expected to rise soon. As a result,
G
a. the current market demand for chocolate will decrease.
H
b. the current market demand for chocolate will increase.
T
c. the current quantity demanded for chocolate will decrease.
d. no change will occur in the current market for chocolate.
,
7. If incomes are rising, in the market for an inferior good,
a. demand will rise.
S
H
c. supply will rise.
E
d. supply will fall.
R
1. What is the difference between a change in demand and
R a change in quantity demanded?
2. If the price of zucchini increases, causing the demand for yellow squash to rise, what do we call the relationship
Y
between zucchini and yellow squash?
b. demand will fall.
3. If incomes rise and, as a result, demand for jet skis increases, how do we describe that good?
2
5. Would a change in the price of ice cream cause a change
7 in the demand for ice cream? Why or why not?
6. Would a change in the price of ice cream likely cause9
a change in the demand for frozen yogurt,
a substitute?
3
7. If plane travel is a normal good and bus travel is an inferior good, what will happen to the demand curves for plane
and bus travel if people’s incomes increase?
B
U
4. How do expectations about the future influence the demand curve?
Answers: 1. b
2. d
3. a
4. b
5. a 6. b
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
7. b
113
chapter 4 Demand, Supply, and Market Equilibrium
4.4
Supply
What is the law of supply?
What is a market supply curve?
What is an individual supply curve?
In a market, the answer to the fundamental question, “What
do we produce, and in what quantities?” depends on the
interaction of both buyers and sellers. Demand is only half the
story. The willingness and ability of sellers to provide goods
are equally important factors that must be weighed by decision makers in all societies. As with demand, the price of the
good is an important factor. And just as with demand, factors
other than the price of the good are also important
W to sellers,
such as the cost of inputs or advances in technology. While
R
behavior will vary among individual sellers, economists
expect
that, other things being equal, the quantity supplied
will vary
I
directly with the price of the good, a relationship called the
G
law of supply. According to the law of supply, the higher the
price of the good (P), the greater the quantityHsupplied (QS),
and the lower the price of the good, the smaller
T the quantity
supplied, ceteris paribus.
Natalia Bratslavsky/Shutterstock.com
The Law of Supply
To get more oil, drillers must sometimes drill deeper or
go into unexplored areas, and they still may come up dry.
If it costs more to increase oil production, then oil prices
would have to rise for producers to increase their
output—the quantity supplied.
,
P ↑ ⇒ QS ↑ and P ↓ ⇒ QS ↓
The relationship described by the law of supplySis a direct, or positive, relationship, because
the variables move in the same direction.
H
E
A Positive Relationship between
Price and
R
Quantity Supplied
R
Firms supplying goods and services want to increase
their profits, and the higher the price
Y
per unit, the greater the profitability generated by supplying more of that good. For example,
if you were a coffee grower, wouldn’t you much rather be paid $5 a pound than $1 a pound,
ceteris paribus?
2
When the price of coffee is low, the coffee business is less profitable and less coffee will
7
be produced. Some sellers may even shut down, reducing their quantity supplied to zero if
9
the price is low enough.
There is another reason that supply curves3
are upward sloping. In Chapter 3, the law of
increasing opportunity cost demonstrated that when we hold technology and input prices
constant, producing additional units of a good B
will require increased opportunity costs. That
is, when we produce something, we use the most
Uefficient resources first (those with the lowest opportunity cost) and then draw on less efficient resources (those with a higher opportunity cost) as more of the good is produced. Because costs per unit are rising as they produce
more, sellers must receive a higher price to increase the quantity supplied, ceteris paribus.
An Individual Supply Curve
To illustrate the concept of an individual supply curve, consider the amount of coffee that
an individual seller, Juan Valdés, is willing and able to supply in one year. The law of supply
can be illustrated, like the law of demand, by a table or graph. Juan’s supply schedule for
law of supply
the higher (lower) the price
of the good, the greater
(smaller) the quantity
supplied, ceteris paribus
ECS
economic
content
standards
Higher prices for a good or
service provide incentives
for producers to make or
sell more of it. Lower prices
for a good or service provide
incentives for producers to
make or sell less of it.
individual supply curve
a graphical representation
that shows the positive
relationship between the
price and quantity supplied
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
114
PART 2 Supply and Demand
An Individual Supply Curve
a. Juan’s Supply Schedule for Coffee
$5
$5
4
3
2
1
80
70
50
30
10
Other things being equal, the quantity
supplied will vary directly with
the price of the good. As the price
rises (falls), the quantity supplied
increases (decreases).
ECS
economic
content
standards
An increase in the price of
a good or service enables
producers to cover higher
costs, ceteris paribus,
causing the quantity
supplied to increase, and
vice versa.
market supply curve
a graphical representation
of the amount of goods and
services that sellers are
willing and able to supply at
various prices
section 4.4
exhibit 2
Juan’s Supply
Curve
3
2
1
0
10
30
50
70 80
Quantity of Coffee
(pounds per year)
W
coffee is shown in Exhibit 1(a).
RThe combinations of price and quantity supplied were then
plotted and joined to create the individual supply curve shown in Exhibit 1(b). Note that the
I
individual supply curve is upward sloping as you move from left to right. At higher prices, it
G production. Existing firms or growers will produce more
will be more attractive to increase
at higher prices than at lower H
prices.
T
, Curve
The Market Supply
The market supply curve may be thought of as the horizontal summation of the supply
S market supply curve shows how the total quantity supplied
curves for individual firms. The
varies positively with the priceH
of a good, while holding constant all other factors that affect
how much producers are able and willing to supply. The market supply schedule, which
E at each price by all of the coffee producers, is shown in
reflects the total quantity supplied
Exhibit 2(a). Exhibit 2(b) illustrates
R the resulting market supply curve for this group of c offee
producers.
R
Y
A Market Supply Curve
a. Market Supply Schedule for Coffee
Quantity Supplied
(pounds per year)
Price
(per pound) Juan
$5
4
3
2
1
4
© Cengage Learning 2013
Quantity Supplied
(pounds per year)
Price of Coffee
(per pound)
Price
(per pound)
b. Juan’s Supply Curve for Coffee
80
70
50
30
10
1
Other
Producers
5
1
1
1
1
1
7,920
6,930
4,950
2,970
990
5
5
5
5
5
2
7
9
Market
3
Supply
B
8,000
7,000
U
5,000
3,000
1,000
b. Market Supply Curve for Coffee
$5
4
3
Market
Supply Curve
2
1
0
1
3
5
7 8
Quantity of Coffee
(thousands of pounds per year)
The dots on this graph indicate different quantities of coffee that sellers would be willing and able to supply at
various prices. The line connecting those combinations is the market supply curve.
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
© Cengage Learning 2013
exhibit 1
Price of Coffee
(per pound)
section 4.4
115
chapter 4 Demand, Supply, and Market Equilibrium
SECTION QUIZ
1. An upward-sloping supply curve shows that
a. buyers are willing to pay more for particularly scarce products.
b. sellers expand production as the product price falls.
c. sellers are willing to increase production of their goods if they receive higher prices for them.
d. buyers are willing to buy more as the product price falls.
2. Along a supply curve,
a. supply changes as price changes.
b. quantity supplied changes as price changes.
c. supply changes as technology changes.
d. quantity supplied changes as technology changes.
3. A supply curve illustrates a(n) _____________ relationship between _____________ and _____________.
a. direct; price; supply
b. direct; price; quantity demanded
W
R
d. introverted; price; quantity demanded
I
e. inverse; price; quantity supplied
Which of the following is true?
G
a. The law of supply states that the higher (lower) the price of a good, the greater (smaller) the quantity supplied.
H
b. The relationship between price and quantity supplied is positive because profit opportunities are greater at
T costs of increased output mean that suppliers will require
higher prices and because the higher production
higher prices.
,
c. direct; price; quantity supplied
4.
c. The market supply curve is a graphical representation of the amount of goods and services that suppliers are
willing and able to supply at various prices.
S
H
What are the two reasons why a supply curve is positively sloped?
E
What is the difference between an individual supply curve and a market supply curve?
R
R
Y
d. All of the above are true.
2. b
3. c
2.
Answers: 1. c
1.
4. d
2
Shifts in
7 the Supply Curve
What is the difference between a change in
supply and a change in quantity supplied?
What are the determinants of supply?
How does the number of suppliers affect
the supply curve?
9
3
B
U
4.5
How does technology affect the supply
curve?
How do taxes affect the supply curve?
A Change in Quantity Supplied versus a
Change in Supply
Changes in the price of a good lead to changes in the quantity supplied by sellers, just
as changes in the price of a good lead to changes in the quantity demanded by buyers.
Similarly, a change in supply, whether an increase or a decrease, can occur for reasons
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
116
PART 2 Supply and Demand
other than changes in the price of the product itself, just as changes in demand may be due
to factors (determinants) other than the price of the good. In other words, a change in the
price of the good in question is shown as a movement along a given supply curve, leading
to a change in quantity supplied. A change in any other factor that can affect seller behavior (seller’s input prices, the prices of related products, expectations, number of sellers, and
technology results in a shift in the entire supply curve, leading to a change in quantity supplied at every price.
Shifts in Supply (“SPENT”)
Why is a change in supply
different than a change in
quantity supplied?
An increase in supply shifts the supply curve to the right; a decrease in supply shifts the
supply curve to the left, as shown in Exhibit 1. Anything that affects the costs of production
will influence supply and the position of the supply curve. We will now look at some of the
possible determinants of supply—factors that determine the position of the supply curve—in
greater depth.
There are a number of variables that can shift the supply curve but here are some of
W
the most important. It might be helpful to remember the word “SPENT.” This acronym can
R factors that shift the supply curve for a good or service.
help you remember the five principle
Changes
Changes
Changes
Changes
Changes
in
in
in
in
in
I (S)
seller’s input prices
the prices of related
G goods and services (P)
expectations (E)
H (N)
the number of sellers
technology (T) T
,
Changes in Seller’s Input Prices (S)
Sellers are strongly influenced by the costs of inputs used in the production process, such
S
as steel used for automobiles or microchips used in computers. For example, higher labor,
H costs increase the costs of production, causing the supply
materials, energy, or other input
curve to shift to the left at each
E and every price. If input prices fall, the costs of production
decrease, causing the supply curve to shift to the right—more will be supplied at each and
R
every price.
R
YChanges in the Prices of Related Goods
section 4.5
exhibit 1
and Services (P)
Supply Shifts
© Cengage Learning 2013
Price
S3
S1
S2
Decrease Increase
in
in
Supply
Supply
0
Quantity
An increase in supply shifts the supply curve
to the right. A decrease in supply shifts the
supply curve to the left.
2The supply of a good increases if the price of one of its
substitutes in production falls; and the supply of a good
7decreases if the price of one of its substitutes in production
9rises. Suppose you own your own farm, on which you plant
cotton and wheat. One year, the price of wheat falls, and
3farmers reduce the quantity of wheat supplied, as shown in
BExhibit 2(a). What effect does the lower price of wheat have
Uon your cotton production? It increases the supply of cotton.
You want to produce relatively less of the crop that has fallen
in price (wheat) and relatively more of the now more attractive other crop (cotton). Cotton and wheat are substitutes in
production because both goods can be produced using the
same resources. Producers tend to substitute the production
of more profitable products for that of less profitable products. So the decrease in the price in the wheat market has
caused an increase in supply (a rightward shift) in the cotton
market, as seen in Exhibit 2(b).
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chapter 4 Demand, Supply, and Market Equilibrium
117
If the price of wheat, a substitute in production, increases, then that crop becomes more
profitable. This leads to an increase in the quantity supplied of wheat. Consequently, farmers will shift their resources out of the relatively lower-priced crop (cotton); the result is a
decrease in supply of cotton.
Other examples of substitutes in production include automobile producers that have to
decide between producing sedans and pick-ups or construction companies that have to choose
between building single residential houses or commercial buildings.
Some goods are complements in production. Producing one good does not prevent the
production of the other, but actually enables production of the other. For example, leather
and beef are complements in production. Suppose the price of a beef rises and, as a result,
cattle ranchers increase the quantity supplied of beef, moving up the supply curve for beef,
as seen in Exhibit 2(c). When cattle ranchers produce more beef, they automatically produce
more leather. Thus, when the price of beef increases, the supply of the related good, leather,
shifts to the right, as seen in Exhibit 2(d). Suppose the price of beef falls, and as a result,
the quantity supplied of beef falls; this leads to a decrease (a leftward shift) in the supply of
leather.
Other examples of complements in production where goods are produced simultaneW mill that produces lumber and sawdust
ously from the same resource include: a lumber
or an oil refinery that can produce gasolineR
and heating oil from the same resource—
crude oil.
section 4.5
exhibit 2
I
G
H in Production
Substitutes and Complements
T
,Substitutions in Production
Supply
P1
P2
0
S
H
E
R
Q RQ
Quantity of Y
Wheat
2
b. Market for Cotton
Price of Cotton
Price of Wheat
a. Market for Wheat
S1
S2
0
1
Quantity of Cotton
Complements in Production
P1
0
Q1
Supply
d. Market for Leather
S1
S2
0
2
Quantity of Cattle
Quantity of Leather
If land can be used for either wheat or cotton, a decrease in the price of wheat causes a decease in the quantity
supplied; a movement down along the supply curve in Exhibit 2(a). This may cause some farmers to shift out
of the production of wheat and into the substitute in production—cotton—shifting the cotton supply curve to the
right in Exhibit 2(b). If the price of the complement in production increases (cattle), it becomes more profitable
and and as a result cattle ranchers increase the quantity supplied of beef, moving up the supply curve for beef,
as seen in Exhibit 2(c). When cattle ranchers produce more beef, they also produce more leather. Thus, when
the price of beef increases, the supply of the related good, leather, shifts to the right, as seen in Exhibit 2(d).
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
© Cengage Learning 2013
P2
2
7
9
3
B
UQ
Price of Leather
Price of Cattle
c. Market for Cattle
118
PART 2 Supply and Demand
Changes in Expectations (E)
Another factor shifting supply is sellers’ expectations. If producers expect a higher price in
the future, they will supply less now than they otherwise would have, preferring to wait and
sell when their goods will be more valuable. For example, if a cotton producer expected the
future price of cotton to be higher next year, he might decide to store some of his current
production of cotton for next year when the price will be higher. Similarly, if producers
expect now that the price will be lower later, they will supply more now. Oil refiners will
often store some of their spring supply of gasoline for summer because gasoline prices typically peak in summer. In addition, some of the heating oil for the fall is stored to supply it
in the winter when heating oil prices peak.
Changes in the Number of Sellers (N)
We are normally interested in market demand and supply (because together they determine
prices and quantities) rather than in the behavior of individual consumers and firms. As we
discussed earlier in the chapter, the supply curves of individual suppliers can be summed
horizontally to create a market supply curve. An increase in the number of sellers leads to an
increase in supply, denoted byW
a rightward shift in the supply curve. For example, think of
the number of gourmet coffee R
shops that have sprung up over the last 15 to 20 years, shifting
the supply curve of gourmet coffee to the right. An exodus of sellers has the opposite impact,
a decrease in supply, which is Iindicated by a leftward shift in the supply curve.
G
Changes in Technology
H (T)
Technological change can lower
T the firm’s costs of production through productivity
advances. These changes allow the firm to spend less on inputs and produce the same level
,
of output. Human creativity works to find new ways to produce goods and services using
Price
Quantity
Number of sellers
increases
0
2
7
9
S 3
B
U
Quantity
Input price (fuel) falls
S2
S2
Price
Price
S1
0
0
Quantity
Input price (wages)
increases
S1
2
S1
0
0
Quantity
Price decreases for
a substitute in production
S1
1
Quantity
Producers expects now that
the price will be higher later.
S2
S2
0
Quantity
Producer expects
now that the price
will be lower later
S2
S2
S1
Quantity
Productivity
rises
0
Quantity
Price increase for a
substitute in production
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
© Cengage Learning 2013
0
S1
Price
S1
Price
S2
Price
Possible Supply Shifts
Price
exhibit 3
S
H
E
S R
R
Y
Price
section 4.5
119
chapter 4 Demand, Supply, and Market Equilibrium
fewer or less costly inputs of labor, natural resources, or capital. Because the firm can now
produce the good at a lower cost it will supply more of the good at each and every price—the
supply curve shifts to the right.
Change in Supply versus Change in
Quantity Supplied—Revisited
If the price of a good changes, it leads to a change in the quantity supplied. If one of the other
factors influences sellers’ behavior, we say it results in a change in supply. For example, if
production costs rise because of a wage increase or higher fuel costs, other things remaining
constant, we would expect a decrease in supply—that is, a leftward shift in the supply curve.
Alternatively, if some variable, such as lower input prices, causes the costs of production to
fall, the supply curve will shift to the right. Exhibit 3 illustrates the effects of some of the
determinants that cause shifts in the supply curve.
How would you graph the following two scenarios: (1) the price of wheat per bushel rises;
S and
(2) good weather causes an unusually abundant
H
wheat harvest?
E
R
In the first scenario, the price of wheat (per
Rchanges
bushel) increases, so the quantity supplied
(i.e., a movement along the supply curve).
Y In the
A
second scenario, the good weather causes the supply curve for wheat to shift to the right, which is
2
called a change in supply (not quantity supplied).
A
shift in the whole supply curve is caused 7
by one of
the other variables, not by a change in the price of
9
the good in question.
3
As shown in Exhibit 4, the movement
B from A
to B is called an increase in quantity supplied, and
U
the movement from B to A is called a decrease in
from C to B is called a decrease in supply.
section 4.5
exhibit 4
Change in Supply vs. Change
in Quantity Supplied
S1
B
$10
5
0
S2
C
A
B Change
in quantity
supplied
B
C Change
in supply
A
4
7
11
Quantity of Wheat (thousands of bushels per year)
quantity supplied. However, the change from B to C
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
© Cengage Learning 2013
Q
Price of Wheat (per bushel)
what you’ve learned
W
R
I
ChangeGin Supply versus Change in
H Supplied
Quantity
T
is called an increase in supply, and the movement
,
120
PART 2 Supply and Demand
SECTION QUIZ
1. All of the following factors will affect the supply of shoes except one. Which will not affect the
supply of shoes?
a. higher wages for shoe factory workers
b. higher prices for leather
c. a technological improvement that reduces waste of leather and other raw materials in shoe production
d. an increase in consumer income
2. The difference between a change in quantity supplied and a change in supply is that a change in
a. quantity supplied is caused by a change in a good’s own price, while a change in supply is caused by
a change in some other variable, such as input prices, prices of related goods, expectations, or taxes.
b. supply is caused by a change in a good’s own price, while a change in the quantity supplied is caused by a change
in some other variable, such as input prices, prices of related goods, expectations, or taxes.
c. quantity supplied is a change in the amount people want to sell, while a change in supply is a change in the
amount they actually sell.
d. supply and a change in the quantity supplied are the same thing.
W
R
I
a. future expectations; supply decreases
G
b. future expectations; supply increases
H
c. input prices; supply decreases
d. input prices; supply increases
T
e. technology; supply increases
,
Which of the following is not a determinant of supply?
3. Antonio’s makes the greatest pizza and delivers it hot to all the dorms around campus. Last week Antonio’s supplier
of pepperoni informed him of a 25 percent increase in price. Which variable determining the position of the supply
curve has changed, and what effect does it have on supply?
4.
a. input prices
b. technology
c. tastes
d. expectations
e. the prices of related goods
5. A leftward shift in supply could be caused by
a. an improvement in productive technology.
b. a decrease in income.
c. some firms leaving the industry.
S
H
E
R
R
Y
d. a fall in the price of inputs to the industry.
2
7
2. If a seller expects the price of a good to rise in the near future, how will that expectation affect the current supply
9
curve?
3. Would a change in the price of wheat change the supply
3 of wheat? Would it change the supply of corn, if wheat and
corn can be grown on the same type of land?
4. If a guitar manufacturer increased its wages in orderB
to keep its workers, what would happen to the supply of guitars
as a result?
U
1. What is the difference between a change in supply and a change in quantity supplied?
5. What happens to the supply of baby-sitting services in an area when many teenagers get their driver’s licenses at
about the same time?
Answers: 1. d
2. a
3. c
4. c 5. c
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
121
chapter 4 Demand, Supply, and Market Equilibrium
4.6
Market Equilibrium Price
and Quantity
What is the equilibrium price?
What is a shortage?
What is the equilibrium quantity?
What is a surplus?
Equilibrium Price and Quantity
market equilibrium
The market equilibrium is found at the point at which the market supply and market
demand curves intersect. The price at the intersection of the market supply curve and
the market demand curve is called the equilibrium price, and the quantity is called the
equilibrium quantity. At the equilibrium price, the amount that buyers are willing and
able to buy is exactly equal to the amount that sellers are willing and able to produce.
W with the help of a simple graph. Let’s
The equilibrium market solution is best understood
return to the coffee example we used in ourRearlier discussions of supply and demand.
Exhibit 1 combines the market demand curve for coffee with the market supply curve. At
I pounds of coffee and sellers are willing to
$3 per pound, buyers are willing to buy 5,000
supply 5,000 pounds of coffee. Neither may beG“happy” about the price; the buyers would
probably like a lower price and the sellers would probably like a higher price. But both
H
buyers and sellers are able to carry out their purchase and sales plans at the $3 price. At
any other price, either suppliers or demandersTwould be unable to trade as much as they
would like.
,
Shortages and Surpluses
the point at which the
market supply and market
demand curves intersect
equilibrium price
the price at the intersection
of the market supply
and demand curves; at
this price, the quantity
demanded equals the
quantity supplied
equilibrium quantity
the quantity at the
intersection of the market
supply and demand curves;
at the equilibrium quantity,
the quantity demanded
equals the quantity supplied
surplus
a situation where quantity
supplied exceeds quantity
demanded
shortage
S
a situation where quantity
exceeds quantity
What happens when the market price is not equal
H to the equilibrium price? Suppose the mar- demanded
supplied
ket price is above the equilibrium price, as seen in Exhibit 2(a). At $4 per pound, the quantity
E
of coffee demanded would be 3,000 pounds, but the quantity
section 4.6
supplied would be 7,000 pounds. At this price,Ra surplus, or
Market Equilibrium
exhibit 1
excess quantity supplied, would exist. That is,Rat this price,
growers would be willing to sell more coffee than demanders
Y surplus,
Supply
would be willing to buy. To get rid of the unwanted
$5
4
3
Equilibrium
Price
2
1
Equilibrium
Equilibrium
Quantity
0
1
2
Demand
3 4 5 6 7 8 9 10
Quantity of Coffee
(thousands of pounds)
The equilibrium is found at the intersection of
the market supply and demand curves. The
equilibrium price is $3 per pound, and the
equilibrium quantity is 5,000 pounds of coffee.
At the equilibrium quantity, the quantity
demanded equals the quantity supplied.
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
© Cengage Learning 2013
Price of Coffee
(per pound)
frustrated sellers would cut their price and cut back on
production. And as price falls, consumers would buy more,
2
ultimately eliminating the unsold surplus and returning the
7
market to the equilibrium level.
What would happen if the market price of
9 coffee were
below the equilibrium price? As seen in Exhibit 2(b), at $2
per pound, the yearly quantity demanded of 3
7,000 pounds
would be greater than the 3,000 pounds that
B producers
would be willing to supply at that low price. So at $2 per
U
pound, a shortage or excess quantity demanded of 4,000
pounds would exist. Some consumers are lucky enough to
find coffee, but others are not able to find any sellers who are
willing to sell them coffee at $2 per pound. Some frustrated
consumers may offer to pay sellers more than $2. In addition,
sellers noticing that there are disappointed consumers raise
their prices. These actions by buyers and sellers cause the
market price to rise. As the market price rises, the amount
that sellers want to supply increases and the amount that
122
PART 2 Supply and Demand
section 4.6
Market in Temporary Disequilibrium
exhibit 2
a. Excess Quantity Supplied
Price of Coffee
(per pound)
4
3
2
Demand
Quantity
Demanded
1
Quantity
Supplied
3
5
7
Quantity of Coffee
(thousands of pounds)
Supply
4
3
2
Demand
Quantity
Supplied
1
0
4,000 Pound
Shortage
Quantity
Demanded
7
3
5
Quantity of Coffee
(thousands of pounds)
W
In (a), the market price is above the equilibrium price.RAt $4, the quantity supplied (7,000 pounds) exceeds the
quantity demanded (3,000 pounds), resulting in a surplus of 4,000 pounds. To get rid of the unwanted surplus, supI eliminating the surplus and moving the market back to
pliers cut their prices. As prices fall, consumers buy more,
equilibrium. In (b), the market price is below the equilibrium price. At $2, the quantity demanded (7,000 pounds)
G
exceeds the quantity supplied (4,000 pounds), and a shortage of 5,000 pounds is the result. The many frustrated
buyers compete for the existing supply, offering to buyH
more and driving the price up toward the equilibrium level.
Therefore, with both shortages and surpluses, market prices tend to pull the market back to the equilibrium level.
T
,
Shortages
S
H
Imagine that you own a butcher shop.E
Recently, you have noticed that at about noon, youR
run out of your daily supply of chicken. Puzzling
over your predicament, you hypothesize that youR
are charging less than the equilibrium price forY
Q
your chicken. Should you raise the price of your
chicken? Explain using a simple graph.
2
7
If the price you are charging is below the
9
equilibrium price (PE), you can draw a horizontal
line from that price straight across Exhibit 3 and see3
where it intersects the supply and demand curves.B
The point where this horizontal line intersects the
U
A
demand curve indicates how much chicken consumers are willing to buy at the below-equilibrium price
(P1). Likewise, the intersection of this horizontal line
with the supply curve indicates how much chicken
producers are willing to supply at P1. From this, it is
clear that a shortage (or excess quantity demanded)
exists, because consumers want more chicken (QD)
than producers are willing to supply (QS) at this
relatively low price. This excess quantity demanded
results in competition among buyers, which will push
prices up and reduce or eliminate the shortage. That
is, it would make sense to raise your price on chicken.
As the price moves up toward the equilibrium price,
consumers will be willing to purchase less (some will
substitute fish, steak, or ground round), and producers will have an incentive to supply more chicken.
section 4.6
exhibit 3
Shortages
Supply
PE
P1
Shortage
0
QS
Demand
QD
Quantity of Chicken
© Cengage Learning 2013
what you’ve learned
Price of Chicken
© Cengage Learning 2013
0
$5
Supply
Price of Coffee
(per pound)
4,000 Pound
Surplus
$5
b. Excess Quantity Demanded
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
123
chapter 4 Demand, Supply, and Market Equilibrium
buyers want to buy decreases. The upward pressure on price continues until equilibrium is
reached at $3.
economic
content
standards
Scarcity and Shortages
People often confuse scarcity with shortages. Remember most goods are scarce—desirable
but limited. A shortage occurs when the quantity demanded is greater than the quantity supplied at the current price. We can eliminate shortages by increasing the price but we cannot
eliminate scarcity.
A market exists when
buyers and sellers interact.
This interaction between
supply and demand curves
determines market prices
and thereby allocates scarce
goods and services.
Scalping and the Super Bowl
The Market for Super Bowl
Tickets
exhibit 4
Supply
PE
P1
Shortage
Demand
0
QS
QD
Quantity of Super Bowl Tickets
At the face value for Super Bowl tickets (P1),
there is a shortage. That is, at P1, the quantity
demanded (QD) is greater than the quantity
supplied (QS).
But is ticket scalping for athletic events and conY
certs really so objectionable? Could scalpers be transferring tickets into the hands of those who value them
the most? The buyer must value attending2the event
more than the scalped price of the ticket or he would
7
not buy the ticket. The seller would not sell her ticket
9 more
unless she valued the money from the ticket
than attending the event. That is, the scalper
has
3
helped transfer tickets from those placing lower valB
ues on them to those placing higher values on them.
The sponsors of the event are the losers, inUthe form
of lost profits, for failing to charge the higher equilibrium market price. Why would the NFL not charge
the higher price? Perhaps it sends a sign of goodwill
to NFL fans, even if they have no appreciable chance
of getting a ticket. That is, maybe the NFL is willing
to take a hit on short-run profits to make sure they
keep their base of fans (long-run profits).
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
© Cengage Learning 2013
R
section 4.6
AP Photo/Kyle Ericson
The Super Bowl is a high demand, limited supply
sports event. The face value for general admission
Super Bowl tickets, depending on what level, range
W Many
from $600 to $800 and club seats go for $1,200.
of the recipients of the tickets are corporate
R sponsors or are affiliated with the teams playing in the
I
game. There are also some tickets that are allocated
G for the
through a lottery. However, at the face value
tickets at P1, the quantity demanded far exceeds
the
H
quantity supplied as seen in Exhibit 4. In other words,
T
the National Football League (NFL) has not priced
their tickets equal to what the market ,will bear.
Consequently, some fans are willing to pay much
more, sometimes $6,000 to $7,000, for these tickets
from scalpers, who buy the tickets at face S
value and
try to sell them for a higher price. While ticket
H scalping is illegal in many states, scalpers will still descend
E
on the host city to make a profit, even though the
R
probability of arrest and conviction are substantial.
Price per Ticket
in the
ECS
124
PART 2 Supply and Demand
SECTION QUIZ
1. A market will experience a ________ in a situation where quantity supplied exceeds quantity
demanded and a _______ in a situation where quantity demanded exceeds quantity supplied.
a. shortage; shortage
b. surplus; surplus
c. shortage; surplus
d. surplus; shortage
2. The price of a good will tend to rise when
a. a temporary shortage at the current price occurs (assuming no price controls are imposed).
b. a temporary surplus at the current price occurs (assuming no price controls are imposed).
c. demand decreases.
d. supply increases.
3. Which of the following is true?
W
R
c. A shortage is a situation where quantity demanded exceeds quantity supplied.
I
d. Shortages and surpluses set in motion actions by many buyers and sellers that will move the market toward the
G
equilibrium price and quantity unless otherwise prevented.
H
e. All of the above are true.
T
1. How does the intersection of supply and demand indicate the equilibrium price and quantity in a market?
,
2. What can cause a change in the supply and demand equilibrium?
a. The intersection of the supply and demand curves shows the equilibrium price and equilibrium quantity in a market.
b. A surplus is a situation where quantity supplied exceeds quantity demanded.
3. What must be true about the price charged for a shortage to occur?
S
H
6. If tea prices were above their equilibrium level, what force would tend to push tea prices down? If tea prices were
Epush tea prices up?
below their equilibrium level, what force would tend to
R
R
Y
4. What must be true about the price charged for a surplus to occur?
5. Why do market forces tend to eliminate both shortages and surpluses?
Answers: 1. d
2. a 3. e
2
7
Interactive Summary
9
Fill in the blanks:
3
B
1. A(n) _____________ is the process of buyers and
sellers _____________ goods and services.
U
2. The important point about a market is what it
does—it facilitates _____________.
3. _____________, as a group, determine the demand
side of the market. _____________, as a group,
determine the supply side of the market.
4. A(n) _____________ market consists of many buyers
and sellers, no single one of whom can influence the
market price.
5. According to the law of demand, other things being
equal, when the price of a good or service falls, the
_____________ increases.
6. An individual _____________ curve reveals the
different amounts of a particular good a person
would be willing and able to buy at various p
ossible
prices in a particular time interval, other things
being equal.
7. The _____________ curve for a product is the
horizontal summing of the demand curves of the
individuals in the market.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
chapter 4 Demand, Supply, and Market Equilibrium
8. A change in _____________ leads to a change
in quantity demanded, illustrated by a(n)
_____________ demand curve.
16. An individual supply curve is a graphical representation that shows the _____________ relationship
between the price and the quantity supplied.
9. A change in demand is caused by changes in any
of the other factors (besides the good’s own price)
that would affect how much of the good is purchased: the _____________, _____________, the
_____________ of buyers, _____________, and
_____________.
17. The market supply curve is a graphical representation of the amount of goods and services that sellers
are _____________ and _____________ to supply at
various prices.
10. An increase in demand is represented by a
_____________ shift in the demand curve; a decrease
in demand is represented by a(n) _____________
shift in the demand curve.
11. Two goods are called _____________ if an increase
in the price of one causes the demand curve for
another good to shift to the _____________.
W
12. For normal goods an increase in income leads to
a(n) _____________ in demand, and a decrease R
in
income leads to a(n) _____________ in demand,
I
other things being equal.
G
13. An increase in the expected future price of a good
or an increase in expected future income may H
_____________ current demand.
T
14. According to the law of supply, the higher the price
of the good, the greater the _____________, and,
the lower the price of the good, the smaller the
_____________.
S
15. The quantity supplied is positively related to the
H
price because firms supplying goods and services
want to increase their _____________ and because
E
increasing _____________ costs mean that the sellers
R to
will require _____________ prices to induce them
increase their output.
R
Y
125
18. Possible supply determinants (factors that determine
the position of the supply curve) are _____________
prices; _____________; _____________ of sellers and
_____________.
19. A fall in input prices will _____________ the costs of
production, causing the supply curve to shift to the
_____________.
20. The supply of a good _____________ if the price of
one of its substitutes in production falls.
21. The supply of a good _____________ if the price of
one of its substitutes in production rises.
22. The price at the intersection of the market
demand curve and the market supply curve is called
the _____________ price, and the quantity is called
the _____________ quantity.
23. A situation where quantity supplied is greater than
quantity demanded is called a(n) _____________.
24. A situation where quantity demanded is greater than
quantity supplied is called a(n) _____________.
25. At a price greater than the equilibrium price, a(n)
_____________, or excess quantity supplied, would
exist. Sellers would be willing to sell _____________
than demanders would be willing to buy. Frustrated
suppliers would _____________ their price and
_____________ on production, and consumers would
buy ____________, returning the market to equilibrium.
Answers: 1. market; exchanging 2. trade 3. Buyers; Sellers 4. competitive 5. quantity demanded 6. demand 7. market demand
8. a good’s price; movement along 9. prices of related goods; income; number; tastes; expectations 10. rightward; leftward
11. substitutes; right 12. increase; decrease 13. increase 14. quantity supplied; quantity supplied 15. profits; production; higher
16. positive 17. willing; able 18. seller’s input; expectations; number of sellers; technology and the prices of related goods 19. lower;
right 20. increases 21. decreases 22. equilibrium; equilibrium 23. surplus 24. shortage 25. surplus; more; lower; cut back; more
2
7
9
3
B
U
market 99
competitive market 100
law of demand 101
diminishing marginal utility 101
individual demand schedule 102
individual demand curve 102
market demand curve 103
Key Terms and Concepts
change in quantity demanded 105
shifts in the demand curve 105
substitutes 106
complements 107
normal good 108
inferior good 108
law of supply 113
individual supply curve 113
market supply curve 114
market equilibrium 121
equilibrium price 121
equilibrium quantity 121
surplus 121
shortage 121
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
126
PART 2 Supply and Demand
Section Quiz Answers
4.1
Markets
1. Why is it difficult to define a market
precisely?
Every market is different. An incredible variety of
exchange arrangements arise for different types of
products, different degrees of organization, different
geographical extents, and so on.
2. Why do you get your produce at a supermarket
rather than directly from farmers?
Supermarkets act as middlepersons between g rowers
of produce and consumers of produce. You hire
roduce
them to do this task for you when you buy p
from them, rather than directly from g rowers, W
because they conduct those transactions at lower
R
costs than you could. (If you could do it more
I
cheaply than supermarkets, you would buy directly
rather than from supermarkets.)
3.
G
Why do the prices people pay for similarH
items at garage sales vary more than for
T
similar items in a department store?
Items for sale at department stores are more stand,
ardized, easier to compare, and more heavily advertised, which makes consumers more aware of the
prices at which they could get a particular goodS
elsewhere, reducing the differences in price that can
H
persist among department stores. Garage sale items
E
are nonstandardized, costly to compare, and not
advertised, which means people are often quite unaR
ware of how much a given item could be purchased
R
for elsewhere, so that price differences for similar
items at different garage sales can be substantial.
Y
4.2
Demand
2
1. What is an inverse relationship?
7
An inverse, or negative, relationship is one where
one variable changes in the opposite direction from
9
the other—if one increases, the other decreases.
3
2. How do lower prices change buyers’
B
incentives?
U
A lower price for a good means that the opportunity
cost to buyers of purchasing it is lower than before,
and self-interest leads buyers to buy more of it as a
result.
3. How do higher prices change buyers’
incentives?
A higher price for a good means that the opportunity cost to buyers of purchasing it is higher than
before, and self-interest leads buyers to buy less of it
as a result.
4. What is an individual demand schedule?
An individual demand schedule reveals the different amounts of a good or service a person would be
willing to buy at various possible prices in a particular time interval.
5. What is the difference between an individual
demand curve and a market demand curve?
The market demand curve shows the total amounts
of a good or service all the buyers as a group are
willing to buy at various possible prices in a particular time interval. The market quantity demanded
at a given price is just the sum of the quantities
demanded by each individual buyer at that price.
6. Why does the amount of dating on campus
tend to decline just before and during final
exams?
The opportunity cost of dating—in this case, the
value to students of the studying time forgone—is
higher just before and during final exams than during most of the rest of an academic term. Because
the cost is higher, students do less of it.
4.3
Shifts in the Demand
Curve
1. What is the difference between a change
in demand and a change in quantity
demanded?
A change in demand shifts the entire demand curve,
while a change in quantity demanded refers to a
movement along a given demand curve, caused by a
change in the good’s price.
2. If the price of zucchini increases, causing the
demand for yellow squash to rise, what do
we call the relationship between zucchini and
yellow squash?
Whenever an increased price of one good increases
the demand for another, they are substitutes. The
fact that some people consider zucchini an alternative to yellow squash explains in part why zucchini
becomes more costly. Therefore, some people substitute into buying relatively cheaper yellow squash
now instead.
3. If incomes rise and, as a result, demand
for jet skis increases, how do we describe
that good?
If income rises and, as a result, demand for jet skis
increases, we call jet skis a normal good, because for
most (or normal) goods, we would rather have more
of them than less, so an increase in income would
lead to an increase in demand for such goods.
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
chapter 4 Demand, Supply, and Market Equilibrium
4. How do expectations about the future
influence the demand curve?
Expectations about the future influence the demand
curve because buying a good in the future is an alternative to buying it now. Therefore, the higher future
prices are expected to be compared to the present, the
less attractive future purchases become, and the greater the current demand for that good, as people buy
more now when it is expected to be cheaper, rather
than later, when it is expected to be more costly.
5. Would a change in the price of ice cream
cause a change in the demand for ice
cream? Why or why not?
No. The demand for ice cream represents the different quantities of ice cream that would be purchased
at different prices. In other words, it represents the
relationship between the price of ice cream and the
quantity of ice cream demanded. Changing theW
price
of ice cream does not change this relationship, so it
R
does not change demand.
I
6. Would a change in the price of ice cream
likely cause a change in the demand for G
frozen yogurt, a substitute?
H
Yes. Changing the price of ice cream, a substitute
T
for frozen yogurt, would change the quantity of frozen yogurt demanded at a given pric...
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