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Roger LeRoy Miller Economics Today

Roger LeRoy Miller Economics Today. Chapter 3 Demand and Supply. China has been experiencing water stress. Even though rainfall has been normal, some cities only turn on the water for two hours per day. Can the Chinese only hope for more rain?. Introduction. Learning Objectives.

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Roger LeRoy Miller Economics Today

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  1. Roger LeRoy Miller Economics Today Chapter 3 Demand and Supply

  2. China has been experiencing water stress. Even though rainfall has been normal, some cities only turn on the water for two hours per day. Can the Chinese only hope for more rain? Introduction

  3. Learning Objectives • Explain the law of demand • Discuss the difference between money prices and relative prices • Distinguish between a change in demand and a change in quantity demanded

  4. Learning Objectives • Explain the law of supply • Distinguish between changes in supply and changes in quantity suppplied • Explain how supply and demand interact to determine equilibrium price and quantity

  5. Chapter Outline • The Law of Demand • The Demand Schedule • Shifts in Demand

  6. Chapter Outline • The Law of Supply • The Supply Schedule • Shifts in Supply • Putting Demand and Supply Together

  7. Did You Know That... • More than 75 million people currently own portable cellular phones? • Only 200,000 owned them in 1985? • 46 percent of new cellular phone users said that personal safety was the main reason they bought a portable phone?

  8. Markets • Markets • Arrangements that individuals have for exchanging with one another • Represent the interaction of buyers and sellers

  9. Markets • Markets • Markets for gasoline • Markets for labor • Stock market • Market for Super Bowl tickets • Compact disk market

  10. Markets • Markets • Markets set the prices we pay and receive

  11. The Law of Demand • Demand • Quantities of specific goods and services that individuals, taken singly or as a group, will purchase at various possible prices, other things being constant

  12. The Law of Demand • Law of Demand • Quantity demanded is inversely related to price, all things equal

  13. The Law of Demand • What are we holding constant? • Income • Price of other goods • Many other factors

  14. The Law of Demand • Relative prices versus money prices • Relative Price • The price of a commodity in terms of another commodity • Money Price • Price we observe today in today’s dollars (absolute, nominal price)

  15. $12 $6 $6 $12 $14 $8 $8 $14 = 2.0 = 0.5 = 1.75 = 0.57 Money Price versus Relative Price Money Price Relative Price Price Last Year Price This Year Price Last Year Price This Year CDs $12 $14 Cassettes $6 $8

  16. International Example:High Relative Price of a U.S. Education • Concept: relative prices • About 40 percent of international students in 1993 were in the U.S. compared to 30 percent today. • During the 1990s tuition and fees in U.S. universities rose faster than those at foreign universities .

  17. International Example:High Relative Price of a U.S. Education • Question • If the relative price of an education at U.S. universities continues to increase, what other means could these universities use to try to regain their lost share of international students?

  18. The Demand Schedule • The demand schedule is a table relating prices to quantity demanded. • We must consider: • The time dimension • Constant-quality units

  19. The Individual Demand Schedule Figure 3-1, Panel (a)

  20. The Individual Demand Curve Figure 3-1, Panel (b)

  21. The Horizontal Summationof Two Demand Schedules Figure 3-2, Panel (a)

  22. The Horizontal Summationof Two Demand Schedules Figure 3-2, Panels (b), (c), and (d)

  23. The Market DemandSchedule for Minidisks Figure 3-3, Panel (a)

  24. The Market DemandCurve for Minidisks Figure 3-3, Panel (b)

  25. Garth Brooks, Used CDs,and the Law of Demand • Scenario • Garth Brooks attempts to prevent the sale of used CDs • Questions • What impact would this have on the sale of new CDs? • Does this apply to the market for used books?

  26. Shifts in Demand • Scenario • The federal government gives every college student registered in college a minidisk player-recorder.

  27. D1 A Shift in the Demand Curve If some factor other than price changes, the only way we can show its effect is by moving the entire demand curve 5 4 3 Price of Minidisks ($) 2 1 0 2 4 6 8 10 12 14 Quantity of Minidisks Demanded (millions of constant-quality units per year)

  28. D1 A Shift in the Demand Curve 5 Suppose the federal government gives every student a minidisk player-recorder 4 3 Price of Minidisks ($) 2 1 0 2 4 6 8 10 12 14 Quantity of Minidisks Demanded (millions of constant-quality units per year)

  29. Increase in demand D2 A Shift in the Demand Curve 5 Suppose the federal government gives every student a minidisk player-recorder 4 3 Price of Minidisks ($) 2 1 D1 0 2 4 6 8 10 12 14 Quantity of Minidisks Demanded (millions of constant-quality units per year)

  30. Decrease in demand D3 A Shift in the Demand Curve 5 Suppose universities outlaw the use of minidisk player-recorders 4 3 Price of Minidisks ($) 2 D2 1 D1 0 2 4 6 8 10 12 14 Quantity of Minidisks Demanded (millions of constant-quality units per year)

  31. a c D2 D1 A Shift in the Demand Curve 5 When demand increases the quantity demanded will be greater at each price 4 3 Price of Minidisks ($) 2 1 0 2 4 6 8 10 12 14 Quantity of Minidisks Demanded (millions of constant-quality units per year)

  32. A Shift in the Demand Curve 5 When demand increases the quantity demanded will be greater at each price 4 b a 3 Price of Minidisks ($) d c 2 D2 1 D1 0 2 4 6 8 10 12 14 Quantity of Minidisks Demanded (millions of constant-quality units per year)

  33. A Shift in the Demand Curve 5 4 3 Price of Minidisks ($) 2 D2 1 D1 D3 0 2 4 6 8 10 12 14 Quantity of Minidisks Demanded (millions of constant-quality units per year) Figure 3-4

  34. Shifts in Demand • Determinants of demand • Income • Tastes and preferences • The price of related goods • Complements • Substitutes

  35. Shifts in Demand • Determinants of demand • Expectations • Future prices • Income • Product availability • Market size (number of buyers)

  36. Increase in income increases demand Decrease in income decreases demand D3 D2 Shifts in Demand The Determinants of Demand Income: Normal Good Price D1 Q/Units

  37. Decrease in income increases demand Increase in income decreases demand D3 D2 Shifts in Demand The Determinants of Demand Income: Inferior Good Price D1 Q/Units

  38. Sport Utility Vehicle • Increase in demand Smoking • Decrease in demand D3 D2 Shifts in Demand The Determinants of Demand Income: Tastes and Preferences Price D1 Q/Units

  39. Butter and Margarine • Price of both = $2/lb.• Price of margarine increases to $3/lb. • Demand for butter increases D2 Shifts in Demand The Determinants of Demand Price of Related Goods: Substitutes Price D1 Q/Butter

  40. Butter and Margarine • Price of both = $2/lb.• Price of margarine decreases to $1/lb. • Demand for butter decreases D2 Shifts in Demand The Determinants of Demand Price of Related Goods: Substitutes Price D1 Q/Butter

  41. Speakers and Amplifiers • Decrease the relative price of amplifiers • Demand for speakers increases Speakers and Amplifiers • Increase the relative price of amplifiers • Demand for speakers decreases D3 D2 Shifts in Demand The Determinants of Demand Price of Related Goods: Complements Price D1 Q/Speakers

  42. Expectations of higher income or of a future price increase decreases demand Expectations of a lower income or of a future price decrease increases demand D3 D2 Shifts in Demand The Determinants of Demand Expectations Price D1 Q/Units

  43. Increase in the population increases demand Decrease in population decreases demand D3 D2 Shifts in Demand The Determinants of Demand Population Price D1 Q/Units

  44. Shifts in Demand • Changes in demand versus changes in quantity demanded • A change in one or more of the non-price determinants (income, tastes, etc.) will lead to a change in demand. • This is a movement of the curve.

  45. Shifts in Demand • Changes in demand versus changes in quantity demanded • A change in a good’s own price leads to a change in quantity demanded. • This is a movement on the curve.

  46. Movement Along a Given Demand Curve 5 4 3 Price of Minidisks ($) 2 1 0 2 4 6 8 10 12 Quantity of Minidisks Demanded (millions of constant-quality units per year)

  47. D Movement Along a Given Demand Curve 5 A change in the price changes the quantity of a good demanded 4 3 Price of Minidisks ($) 2 1 0 2 4 6 8 10 12 Quantity of Minidisks Demanded (millions of constant-quality units per year)

  48. D Movement Along a Given Demand Curve 5 A change in the price changes the quantity of a good demanded 4 3 Price of Minidisks ($) 2 1 0 2 4 6 8 10 12 Quantity of Minidisks Demanded (millions of constant-quality units per year)

  49. Movement Along a Given Demand Curve 5 A change in the price changes the quantity of a good demanded 4 3 Price of Minidisks ($) 2 1 D 0 2 4 6 8 10 12 Quantity of Minidisks Demanded (millions of constant-quality units per year) Figure 3-5

  50. The Law of Supply • Supply • The amount of a product or service that firms are willing to sell at alternative prices

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