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). 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. 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 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 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 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 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. 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. 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 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. 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) 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 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). 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 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 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 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 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. 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). 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 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. 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 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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