Microeconomics Hubbard O Brien Ch03

Chapter
3
Where Prices Come From: The Interaction of Demand and Supply
Prepared by: Fernando & Yvonn Quijano

2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick OBrien, 2e.
Apple and the Demand for iPods

Learning Objectives
3.1 Discuss the variables that influence demand. 3.2 Discuss the variables that influence supply.
3.3 Use a graph to illustrate market equilibrium. 3.4 Use demand and supply graphs to predict changes in prices and quantities. By early 2007, over 100 million iPods had been sold and more than two billion songs had been downloaded from iTunes. Clearly the strategy of selling an expensive digital music player and selling the music cheaply has been very successful for Apple. But how long will the iPods dominance last? 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick OBrien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Where Prices Come From: The Interaction of Demand and Supply

Perfectly competitive market A market in which there are many buyers and sellers, all the products are identical, and there are no barriers to new sellers entering the market.
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Learning Objective 3.1
The Demand Side of the Market

Demand Schedules and Demand Curves
Demand schedule A table showing 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. 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.
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Demand Schedules and Demand Curves
FIGURE 3-1
A Demand Schedule and Demand Curve
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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.
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What Explains the Law of Demand? 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 goods price on consumers purchasing power.
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Holding Everything Else Constant: The Ceteris Paribus Condition Ceteris paribus (all else equal) The requirement that when analyzing the relationship between two variablessuch as price and quantity demandedother variables must be held constant. A shift of a demand curve is an increase or decrease in demand. A movement along a demand curve is an increase or decrease in the quantity demanded.
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Holding Everything Else Constant: The Ceteris Paribus Condition
FIGURE 3-2
Shifting the Demand Curve
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Variables That Shift Market Demand
Many variables other than price can influence market demand. Income Normal good A good for which the demand increases as income rises and decreases as income falls. Inferior good A good for which the demand increases as income falls and decreases as income rises.
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Price of related goods Substitutes Goods and services that can be used for the same purpose. Complements Goods and services that are used together. Tastes
Consumers can be influenced by an advertising campaign for a product.
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Population and demographics
Demographics The characteristics of a population with respect to age, race, and gender.
Expected Future Prices Consumers choose not only which products to buy but also when to buy them.
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TABLE 3-1
Variables That Shift Market Demand Curves
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TABLE 3-1
Variables That Shift Market Demand Curves (continued)
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Making Why Supermarkets Need to Understand the Substitutes and Complements Connection
FROZEN PIZZA COFFEE Varieties in Five Chicago Supermarkets Varieties Introduced in a 2-Year Period Varieties Removed in a 2-Year Period
HOT DOGS
ICE CREAM
POTATO CHIPS
REGULAR CEREAL
SPAGHETTI SAUCE
YOGURT
391
337
128
421
285
242
194
288
113
109
47
129
93
114
70
107
135
86
32
118
77
75
36
51
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Making Companies Respond to a Growing the Hispanic Population Connection
As the demand for goods purchased by Hispanic households increases, more can be sold at every price. Not surprisingly, companies have responded by devoting more resources to serving this demographic group.
You can download Spanish music from iTunes. Apple is one of many companies responding to a growing Hispanic population.
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A Change in Demand versus a Change in Quantity Demanded
FIGURE 3-3
A Change in Demand versus a Change in the Quantity Demanded
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Making Apple Forecasts the Demand for iPhones the and other Consumer Electronics Connection
To decide which products to develop, firms need to forecast the demand for those products. Time will tell whether Apples forecast of a large demand for the iPhone will turn out to be correct.
Will Apples iPhone match the success of its iPod?
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The Supply Side of the Market

Quantity supplied The amount of a good or service that a firm is willing and able to supply at a given price.
Supply Schedules and Supply Curves

Supply schedule A table that shows the relationship between the price of a product and the quantity of the product supplied. Supply curve A curve that shows the relationship between the price of a product and the quantity of the product supplied.
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The Supply Side of the Market Supply Schedules and Supply Curves
FIGURE 3-4
Supply Schedule and Supply Curve
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The Law of Supply Law of supply The rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.
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The Law of Supply
FIGURE 3-5
Shifting the Supply Curve
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Variables That Shift Supply
The following are the most important variables that shift supply:
Prices of inputs Technological change

Technological change A positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs.
Prices of substitutes in production Number of firms in the market Expected future prices
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TABLE 3-2
Variables That Shift Market Supply Curves
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TABLE 3-2
Variables That Shift Market Supply Curves (continued)
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A Change in Supply versus a Change in Quantity Supplied
FIGURE 3-6
A Change in Supply versus a Change in the Quantity Supplied
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Market Equilibrium: Putting Demand and Supply Together

FIGURE 3-7
Market Equilibrium
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Market equilibrium A situation in which quantity demanded equals quantity supplied. Competitive market equilibrium A market equilibrium with many buyers and many sellers.
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How Markets Eliminate Surpluses and Shortages
Surplus A situation in which the quantity supplied is greater than the quantity demanded.
Shortage A situation in which the quantity demanded is greater than the quantity supplied.
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How Markets Eliminate Surpluses and Shortages
FIGURE 3-8
The Effect of Surpluses and Shortages on the Market Price
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Demand and Supply Both Count
Always keep in mind that it is the interaction of demand and supply that determines the equilibrium price. Neither consumers nor firms can dictate what the equilibrium price will be.
No firm can sell anything at any price unless it can find a willing buyer, and no consumer can buy anything at any price without finding a willing seller.
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Solved Problem
3-3
Demand and Supply Both Count: A Tale of Two Letters
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The Effect of Demand and Supply Shifts on Equilibrium

The Effect of Shifts in Supply on Equilibrium
FIGURE 3-9
The Effect of an Increase in Supply on Equilibrium
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Making
the
The Falling Price of LCD Televisions
Connection
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The Effect of Shifts in Demand on Equilibrium
FIGURE 3-10
The Effect of an Increase in Demand on Equilibrium
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The Effect of Shifts in Demand and Supply over Time
FIGURE 3-11
Shifts in Demand and Supply over Time
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The Effect of Shifts in Demand and Supply over Time
TABLE 3-3
How Shifts in Demand and Supply Affect Equilibrium Price (P) and Quantity (Q)
SUPPLY CURVE UNCHANGED DEMAND CURVE UNCHANGED Q unchanged P unchanged
SUPPLY CURVE SHIFTS TO THE RIGHT Q increases P decreases Q increases P increases or decreases Q increases or decreases P decreases
SUPPLY CURVE SHIFTS TO THE LEFT Q decreases P increases Q increases or decreases P increases Q decreases P decreases or increases
DEMAND CURVE SHIFTS TO THE RIGHT Q increases P increases DEMAND CURVE SHIFTS TO THE LEFT Q decreases P decreases
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Solved Problem
3-4
High Demand and Low Prices in the Lobster Market?
Supply and demand for lobster both increase during the summer, but the increase in supply is greater than the increase in demand, therefore, equilibrium price falls.
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Shifts in a Curve versus Movements along a Curve
When analyzing markets using demand and supply curves, it is important to remember that when a shift in a demand or supply curve causes a change in equilibrium price, the change in price does not cause a further shift in demand or supply.
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Shifts in a Curve versus Movements along a Curve
Dont Let This Happen to YOU!
Remember: A Change in a Goods Price Does Not Cause the Demand or Supply Curve to Shift
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An Inside LOOK
How Does the iPhone Help Apple and AT&T?
Apple Coup: How Steve Jobs Played Hardball in iPhone Birth
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Key Terms
Ceteris paribus (all else equal) Competitive market equilibrium Complements Demand curve Demand schedule Demographics Income effect Inferior good Law of demand Law of supply Market demand Market equilibrium
Normal good Perfectly competitive market Quantity demanded Quantity supplied Shortage Substitutes Substitution effect Supply curve Supply schedule Surplus Technological change
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Microeconomics Hubbard O Brien Ch03

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Chapter

Prepared by: Fernando & Yvonn Quijano

Apple and the Demand for iPods

Where Prices Come From: The Interaction of Demand and Supply

Learning Objective 3.1

The Demand Side of the Market

Learning Objective 3.1

The Demand Side of the Market

Learning Objective 3.1

The Demand Side of the Market

Learning Objective 3.1

The Demand Side of the Market

Learning Objective 3.1

The Demand Side of the Market

Learning Objective 3.1

The Demand Side of the Market

Learning Objective 3.1

The Demand Side of the Market

Learning Objective 3.1

The Demand Side of the Market

Consumers can be influenced by an advertising campaign for a product.

Learning Objective 3.1

The Demand Side of the Market

Learning Objective 3.1

The Demand Side of the Market

Learning Objective 3.1

The Demand Side of the Market

Learning Objective 3.1

Learning Objective 3.1

Making Companies Respond to a Growing the Hispanic Population Connection

Learning Objective 3.1

The Demand Side of the Market

Learning Objective 3.1

Will Apples iPhone match the success of its iPod?

Learning Objective 3.2

The Supply Side of the Market

Supply Schedules and Supply Curves

Learning Objective 3.2

Learning Objective 3.2

The Supply Side of the Market

Learning Objective 3.2

The Supply Side of the Market

Learning Objective 3.2

The Supply Side of the Market

Prices of inputs Technological change

Learning Objective 3.2

The Supply Side of the Market

Learning Objective 3.2

The Supply Side of the Market

Learning Objective 3.2

The Supply Side of the Market

Learning Objective 3.3

Market Equilibrium: Putting Demand and Supply Together

Learning Objective 3.3

Market Equilibrium: Putting Demand and Supply Together

Learning Objective 3.3

Market Equilibrium: Putting Demand and Supply Together

Learning Objective 3.3

Market Equilibrium: Putting Demand and Supply Together

Learning Objective 3.3

Market Equilibrium: Putting Demand and Supply Together

Learning Objective 3.3

Demand and Supply Both Count: A Tale of Two Letters