CHAPTER3Where Prices Come From:The Interaction of Demand and SupplyChapterOutlineandLearningObjectives3.1TheDemand Side oftheMarket3.2TheSupplySide oftheMarket3.3Market Equilibrium:PuttingDemand and SupplyTogether3.4TheEffectofDemandandSupplyShiftsonEquilibrium
1 Chapter Outline and Learning Objectives 3.1 The Demand Side of the Market 3.2 The Supply Side of the Market 3.3 Market Equilibrium: Putting Demand and Supply Together 3.4 The Effect of Demand and Supply Shifts on Equilibrium CHAPTER 3 CHAPTER Where Prices Come From: The Interaction of Demand and Supply
WhatDetermines the Price of a Smartphone?Demandforsmartphones. How many smartphones do consumers want to buy?:Affected byprice of thesmartphones.Affected byotherfactors,including pricesof othergoodsSupplyofsmartphones: How many smartphones are producers willingto sell?. Affected by price of the smartphones. Affected by otherfactors, including prices of other goodsWe will analyze these in a perfectly competitive market: amarket with (1) many buyers and sellers, (2) all firms sellingidentical products, and (3) no barriers to new firms entering themarket.2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 2 What Determines the Price of a Smartphone? Demand for smartphones • How many smartphones do consumers want to buy? • Affected by price of the smartphones • Affected by other factors, including prices of other goods Supply of smartphones • How many smartphones are producers willing to sell? • Affected by price of the smartphones • Affected by other factors, including prices of other goods We will analyze these in a perfectly competitive market: a market with (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market
TheDemandSideoftheMarket3.1LEARNINGOBJECTIVEDiscussthevariablesthatinfluencedemand2015PearsonEducation,lnc
LEARNING OBJECTIVE © 2015 Pearson Education, Inc. 3 The Demand Side of the Market 3.1 Discuss the variables that influence demand
DemandSchedulesandQuantityDemandedDemand schedule:A table that shows the relationship betweenthe price of a product and the quantity of the product demanded.Quantity demanded: The amount of a good or service that aconsumeriswillingandabletopurchaseatagivenpricePriceDemand Schedule(dollarsperPriceQuantitysmartphone)(millionsof(dollarspersmartphonessmartphone)perweek)$300$30082509250200102001501115012100100DemandFigure 3.1Ademandscheduleandademandcurve809101112Quantity(millionsofsmartphonesperweek)@2015PearsonEducation,lnc
© 2015 Pearson Education, Inc. 4 Demand Schedules and Quantity Demanded Demand schedule: A table that shows the relationship between the price of a product and the quantity of the product demanded. Quantity demanded: The amount of a good or service that a consumer is willing and able to purchase at a given price. A demand schedule and a demand curve Figure 3.1
DemandCurveandMarketDemandDemand curve:A curve that shows the relationship between theprice of a product and the quantity of the product demanded.Market demand: the demand by all the consumers of a given goodorservicePriceDemand Schedule(dollarsperPriceQuantitysmartphone)(dollarsper(millionsofsmartphonessmartphone)perweek)$300$30082509250200102001501115012100100DemandFigure 3.1Ademandscheduleandademandcurve809101112Quantity(millionsofsmartphonesperweek)@2015PearsonEducation,lnc
© 2015 Pearson Education, Inc. 5 Demand Curve and Market Demand Demand curve: A curve that shows the relationship between the price of a product and the quantity of the product demanded. Market demand: the demand by all the consumers of a given good or service. A demand schedule and a demand curve Figure 3.1
CeterisParibusWhendrawing the demand curve,we assume ceterisparibusCeterisparibus("all else egual"")condition:Therequirementthat when analyzing the relationship between two variables-suchas price and quantity demanded-other variables must be heldconstant.PriceDemandSchedule(dollarsperPriceQuantitysmartphone)(dollarsper(millionsofsmartphonessmartphone)perweek)$300$30082509250200102001501115012100100DemandFigure 3.1Ademandscheduleandademandcurve809101112Quantity(millionsofsmartphonesperweek)@2015PearsonEducation,Inc6
© 2015 Pearson Education, Inc. 6 Ceteris Paribus When drawing the demand curve, we assume ceteris paribus. Ceteris paribus (“all else equal”) condition: The requirement that when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held constant. A demand schedule and a demand curve Figure 3.1
TheLawofDemandLaw of demand: The rule that, holding everything else constant.when the price of a product falls, the quantity demanded of theproduct will increase, and when the price of a product rises, thequantity demanded of the product will decrease.Implication:DemandcurveslopesdownwardPriceDemand Schedule(dollarsperPriceQuantitysmartphone)(dollarsper(millionsofsmartphonessmartphone)perweek)$300$30082509250200102001501115012100100DemandFigure 3.1Ademand scheduleandademandcurve089101112Quantity(millionsofsmartphonesperweek)@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 7 The Law of Demand Law of demand: The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease. Implication: Demand curve slopes downward A demand schedule and a demand curve Figure 3.1
WhatExplainstheLawof Demand?When the price of a product falls, two effects cause consumers topurchase more ofit:Theproducthasbecomecheaperrelativetoothergoods,soconsumers substitutetoward it. This is the substitution effect.The consumer nowhasgreater purchasing power, and elects topurchase more goods overall. This is income effect.Substitution effect: The change in the quantity demanded of a goodthat results from a change in price making the good more or lessexpensive relativeto other goodsthat are substitutes.Income effect: The change in the quantity demanded of a good thatresults from the effect of a change in the good's price on consumerspurchasing power.2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 8 What Explains the Law of Demand? When the price of a product falls, two effects cause consumers to purchase more of it: • The product has become cheaper relative to other goods, so consumers substitute toward it. This is the substitution effect. • The consumer now has greater purchasing power, and elects to purchase more goods overall. This is income effect. Substitution effect: The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes. Income effect: The change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumers’ purchasing power
IncreaseandDecreaseinDemandA change in somethingother than price thatPriceaffects demand(dollarspersmartphone)causes the entiredemand curve to shift.IncreaseindemandA shift to the right (D)to D2) is an increaseDemand, D2Decreasein demand.indemandDemand,DA shift to the left (D, toDemand,DD3) is a decrease in0Quantity(millionsofdemand.smartphonesperweek)Figure 3.2Shiftingthedemand curvea@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 9 Increase and Decrease in Demand A change in something other than price that affects demand causes the entire demand curve to shift. A shift to the right (D1 to D2 ) is an increase in demand. A shift to the left (D1 to D3 ) is a decrease in demand. Figure 3.2 Shifting the demand curve
Shiftsof the Demand CurveAsthe demand curveshifts, the quantityPricedemanded will change,(dollarspersmartphone)even ifthepricedoesn't change.IncreaseindemandThe quantityP1demanded changes atDemand,D2Decreaseieverypossibleprice.indemandDemahd,D,Demand,D3-0Quantity(millionsof--smartphonesperweek)Q2Q1Q3Figure 3.2Shifting the demand curve10@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 10 Shifts of the Demand Curve As the demand curve shifts, the quantity demanded will change, even if the price doesn’t change. The quantity demanded changes at every possible price. Figure 3.2 Shifting the demand curve P1 Q2 Q1 Q3