CHAPTER

1. AP MACROECONOMICS Supply, Demand, Prices, and Elasticity 4 CHAPTER

2. Markets and Competition A market is a group of buyers and sellers of a particular product. A competitive market is one with many buyers and sellers, each has a negligible effect on price. In a perfectly competitive market: All goods exactly the same Buyers & sellers so numerous that no one can affect market price – each is a “price taker” In this chapter, we assume markets are perfectly competitive. 0 THE MARKET FORCES OF SUPPLY AND DEMAND

3. The Law of Demand Price What is the law of demand? • As the price of a product increases, the quantity demanded decreases • As the price of a product decreases, the quantity demanded increases What do you need to have demand? WILLING + ABLE = DEMAND What creates the law of demand? • Income effect • Substitution effect Quantity Demanded vs. Demand • Quantity Demanded is the amount of a good or service people are willing and able to buy at a particular PRICE other things being equal. • Demand is the entire schedule. It represents the amount people are willing and able to buy at ALL price levels. Quantity demanded

4. GRAPHING DEMAND • Demand schedule A list of the quantities demanded at each different price when all the other influences on buying plans remain the same. • Demand curve A graph of the relationship between the quantity demanded of a good and its price when all other influences on buying plans remain the same.

5. Market demand • The sum of the demands of all the buyers in a market. • The market demand curve is the horizontal sum of the demand curves of all buyers in the market. INDIVIDUAL VS. MARKET DEMAND

6. REMOVING THE ASSUMPTION: SHIFTING THE DEMAND CURVE Changes in Demand A change in the quantity that people plan to buy when any influence other than the price of the good changes. A change in demand means that there is a new demand schedule and a new demand curve. What happens? When demand decreases, the demand curve shifts leftward from D0 to D1. When demand increases, the demand curve shifts rightward from D0 to D2.

7. WHAT WILL CAUSE A SHIFT IN DEMAND? The main influences on buying plans that change demand are • Prices of related goods (compliments and substitutes) • Income (normal and inferior goods) • Expectations • Number of buyers (population) • Consumer Preference/Tastes and Advertising

8. To illustrate the difference….

9. THE MARKET FORCES OF SUPPLY AND DEMAND Review: Variables That Influence Buyers Variable A change in this variable… 0 Price …causes a movement along the D curve # of buyers …shifts the D curve Income …shifts the D curve Price ofrelated goods …shifts the D curve Tastes …shifts the D curve Expectations …shifts the D curve

10. SUPPLY Supply • The relationship between the quantity supplied of a good and the price of the good when all other influences on selling plans remain the same. Quantity supplied The amount of a good, service, or resource that people are willing and able to sell during a specified period at a specified price. The Law of Supply Other things remaining the same (ceteris paribus), • If the price of a good rises, the quantity supplied of that good increases. • If the price of a good falls, the quantity supplied of that good decreases.

11. Supply schedule ~ A list of the quantities supplied at each different price when all other influences on selling plans remain the same. Supply curve ~A graph of the relationship between the quantity supplied and the price of the good when all other influences on selling plans remain the same.

12. Market supply • The sum of the supplies of all sellers in a market. • The market supply curve is the horizontal sum of the supply curves of all the sellers in the market. INDIVIDUAL VS. MARKET SUPPLY

13. A change in the quantity that suppliers plan to sell when any influence on selling plans other than the price of the good changes. • A change in supply means that there is a new supply schedule and a new supply curve. • What Happens? • When supply decreases, the supply curve shifts leftward from S0 to S1. • When supply increases, the supply curve shifts rightward from S0 to S2. CHANGES IN SUPPLY

14. What will cause a change in supply? The main influences on selling plans that change supply are: • Prices of resources and other inputs • Expectations • Number of sellers • Technology/Productivity

15. Change in quantity supplied • A change in the quantity of a good that suppliers plan to sell that results from a change in the price of the good. • Change in supply • A change in the quantity that suppliers plan to sell when any influence on selling plans other than the price of the good changes. CHANGES IN QUANTITY SUPPLIED VERSUS SUPPLY

16. THE MARKET FORCES OF SUPPLY AND DEMAND Summary: Variables that Influence Sellers Variable A change in this variable… 0 Price …causes a movement along the S curve Input Prices …shifts the S curve Technology …shifts the S curve # of Sellers …shifts the S curve Expectations …shifts the S curve

17. MARKET EQUILIBRIUM Market equilibrium When the quantity demanded equals the quantity supplied—when buyers’ and sellers’ plans are consistent. Equilibrium price The price at which the quantity demanded equals the quantity supplied. Equilibrium quantity The quantity bought and sold at the equilibrium price.

18. MARKET EQUILIBRIUM 1. Market equilibrium at the intersection of the demand curve and the supply curve. • 2. The equilibrium price is $1 a bottle. • 3. The equilibrium quantity is 10 million bottles a day.

19. MARKET EQUILIBRIUM: AUTOMATIC REGULATION • Law of market forces • When there is a shortage, the price rises. • When there is a surplus, the price falls. • ShortageorExcess Demand • The quantity demanded exceeds the quantity supplied. • SurplusorExcess Supply • The quantity supplied exceeds the quantity demanded.

20. MARKET EQUILIBRIUM At 75 cents a bottle: 1. Quantity is demanded 11 million bottles. 2. Quantity supplied is 9 million bottles. 3. There is a shortage of 2 million bottles. 4. Price rises until the shortage is eliminated and the market is in equilibrium.

21. 4.3 MARKET EQUILIBRIUM At $1.50 a bottle: 1. Quantity supplied is 11 million bottles. 2. Quantity demanded is 9 million bottles. 3. There is a surplus of 2 million bottles. 4. Price falls until the surplus is eliminated and the market is in equilibrium.

22. Predicting Price Changes: Three Questions • We can work out the effects of an event by answering: • Does the event change demand or supply? • Does the event increase or decrease demand or supply—shift the demand curve or the supply curve rightward or leftward? • What are the new equilibrium price and equilibrium quantity and how have they changed?

23. Effects of Changes in Demand • Event: A new study says that tap water is unsafe. • To work out the effects on the market for bottled water: • With tap water unsafe, demand for bottled water changes. • The demand for bottled water increases, the demand curve shifts rightward. • What are the new equilibrium price and equilibrium quantity and how have they changed?

24. MARKET EQUILIBRIUM • 1. An increase in demand shifts the demand curve rightward. 2. At $1.00 a bottle, there is a shortage, so the price rises. 3. Quantity supplied increases along the supply curve. 4. Equilibrium quantity increases.

25. MARKET EQUILIBRIUM • Event: A new zero-calorie sports drink is invented. • To work out the effects on the market for bottled water: • The new drink is a substitute for bottled water, so the demand for bottled water changes • The demand for bottled water decreases, the demand curve shifts leftward. • What are the new equilibrium price and equilibrium quantity and how have they changed?

26. MARKET EQUILIBRIUM • 1. A decrease in demand shifts the demand curve leftward. 2. At $1.00 a bottle, there is a surplus, so the price falls. • 3. Quantity supplied decreases along the supply curve. 4. Equilibrium quantity decreases.

27. MARKET EQUILIBRIUM • When demand changes: • The supply curve does not shift. • But there is a change in the quantity supplied. • Equilibrium price and equilibrium quantity change in the same direction as the change in demand.

28. Effects of Changes in Supply • Event: Europeans produce bottled water in the United States. • To work out the effects on the market for bottled water: • With more suppliers of bottled water, supply changes. • The supply of bottled water increases, the supply curve shifts rightward. • What are the new equilibrium price and equilibrium quantity and how have they changed?

29. MARKET EQUILIBRIUM • 1. An increase in supply shifts the supply curve rightward. 2. At $1.00 a bottle, there is a surplus, so the price falls. • 3. Quantity demanded increases along the demand curve. 4. Equilibrium quantity increases.

30. MARKET EQUILIBRIUM • Event: Drought dries up some springs in the United States. • To work out the effects on the market for bottled water: • Drought changes the supply of bottled water. • The supply of bottled water decreases, the supply curve shifts leftward. • What are the new equilibrium price and equilibrium quantity and how have they changed?

31. MARKET EQUILIBRIUM • 1. A decrease in supply shifts the supply curve leftward. 2. At $1.00 a bottle, there is a shortage, so the price rises. 3. Quantity demanded decreases along the demand curve. 4. Equilibrium quantity decreases.

32. MARKET EQUILIBRIUM • When supply changes: • The demand curve does not shift. • But there is a change in the quantity demanded. • Equilibrium price changes in the same direction as the change in supply. • Equilibrium quantity changes in the opposite direction to the change in supply.

33. Changes in Both Demand and Supply • When two events occur at the same time, work out how • each event influences the market: • Does each event change demand or supply? • Does either event increase or decrease demand or increase or decrease supply? • What are the new equilibrium price and equilibrium quantity and how have they changed?

34. MARKET EQUILIBRIUM An increase in demand shifts the demand curve rightward; an increase in supply shifts the supply curve rightward. 1. Equilibrium quantity increases. 2. Equilibrium price might rise or fall.

35. Increase in Both Demand and Supply • Increases the equilibrium quantity. • The change in the equilibrium price is ambiguous because the: Increase in demand raises the price. Increase in supply lowers the price.

36. MARKET EQUILIBRIUM This figure shows the effects of a decrease in both demand and supply. • A decrease in demand • shifts the demand curve • leftward; a decrease in • supply shifts the supply • curve leftward. 3. Equilibrium quantity decreases. 4. Equilibrium price might rise or fall.

37. MARKET EQUILIBRIUM Decrease in Both Demand and Supply • Decreases the equilibrium quantity. • The change in the equilibrium price is ambiguous because the: Decrease in demand lowers the price Decrease in supply raises the price.

38. MARKET EQUILIBRIUM The figure shows the effects of an increase in demand and a decrease in supply. An increase in demand shifts the demand curve rightward; a decrease in supply shifts the supply curve leftward. 1. Equilibrium price rises. 2. Equilibrium quantity might increase, decrease, or not change.

39. MARKET EQUILIBRIUM Increase in Demand and Decrease in Supply • Raises the equilibrium price. • The change in the equilibrium quantity is ambiguous because the: Increase in demand increases the quantity. Decrease in supply decreases the quantity.

40. MARKET EQUILIBRIUM This figure shows the effects of a decrease in demand and an increase in supply. A decrease in demand shifts the demand curve leftward; an increase in supply shifts the supply curve rightward. 3. Equilibrium price falls. 4. Equilibrium quantity might increase, decrease, or not change.

41. MARKET EQUILIBRIUM Decrease in Demand and Increase in Supply • Lowers the equilibrium price. • The change in the equilibrium quantity is ambiguous because the: Decrease in demand decreases the quantity. Increase in supply increases the quantity.