Slide 1CHAPTER OUTLINEDefinitionsDefinitions (continued)Quantity Demanded and Quantity SuppliedMarketsHeritage Foundation Index of Economic FreedomThe Scientific Method and Ceteris ParibusDemand and SupplyThe Supply and Demand ModelThe Demand ScheduleFigure 1 The Demand CurveThe Supply ScheduleFigure 2 The Supply CurveEquilibrium, Shortages, and SurplusesA Combined Supply and Demand ScheduleFigure 3 The Supply and Demand ModelAll About DemandWhy Does the Law of Demand Make Sense?The Law of SupplyWhy Does the Law of Supply Make Sense?Determinants of DemandMovements in the Demand CurveFigure 4 The Effect of an Increase in DemandFigure 5 The Effect of a Decrease in DemandThe Determinants of SupplyMovements in the Supply CurveFigure 6 An Increase in SupplyFigure 7 A Decrease in SupplyKick it Up a Notch: Why the New Equilibrium?Slide 31Slide 32Slide 33Slide 342-1©2015 McGraw-Hill Education. All Rights Reserved ©2015 McGraw-Hill Education. All Rights Reserved Chapter 2Supply and Demand2-2©2015 McGraw-Hill Education. All Rights Reserved CHAPTER OUTLINE•Definitions•The Supply and Demand Model•All About Demand•All About Supply •Determinants of Demand•Determinants of Supply•The Effect of Changes in Price Expectations on the Supply and Demand Model•Kick it Up a Notch: Why the New Equilibrium2-3©2015 McGraw-Hill Education. All Rights Reserved Definitions•Supply and Demand: the name of the most important model in all economics•Price: the amount of money that must be paid for a unit of output•Market: any mechanism by which buyers and sellers negotiate price•Output: the good or service and/or the amount of it sold2-4©2015 McGraw-Hill Education. All Rights Reserved Definitions (continued)•Consumers: those people in a market who are wanting to exchange money for goods or services•Producers: those people in a market who are wanting to exchange goods or services for money•Equilibrium Price: the price at which no consumers wish they could have purchased more goods at that price; no producers wish that they could have sold more•Equilibrium Quantity: the amount of output exchanged at the equilibrium price2-5©2015 McGraw-Hill Education. All Rights Reserved Quantity Demanded and Quantity Supplied•Quantity demanded: how much consumers are willing and able to buy at a particular price during a particular period of time•Quantity supplied: how much firms are willing and able to sell at a particular price during a particular period of time2-6©2015 McGraw-Hill Education. All Rights Reserved Markets•Capitalism •free markets in financial capital as well as goods and services•freedom to borrow or lend•profits go to the owners of capital•Communism•capital and the profit that it generates is controlled by a government authority. •a government authority decides how the money is used. •Socialism•a significant part of the profit generated by financial capital goes to government in the form of taxes. •a government uses the tax money to counter the wealth impacts of the distribution of profit.2-7©2015 McGraw-Hill Education. All Rights Reserved Heritage Foundation Index of Economic Freedom•Free•Hong Kong•Singapore•Australia•New Zealand•Canada•Chile•Oppressed•Chad•Iran•Venezuela•North Korea•Cuba2-8©2015 McGraw-Hill Education. All Rights Reserved The Scientific Method and Ceteris Paribus•Scientists •conduct experiments in laboratories.•use replication and verification to ensure the accuracy of their conclusions.•Social Scientists •cannot experiment on their subjects.•must use models and look at the effects of individual variables within those models.•Economists•hold variables constant within models to examine the effect of other variables. •use the Latin phrase ceteris paribus which means “holding other things equal” to identify this is the case.2-9©2015 McGraw-Hill Education. All Rights Reserved Demand and Supply•Demand is the relationship between price and quantity demanded, ceteris paribus.•Supply is the relationship between price and quantity supplied, ceteris paribus.2-10©2015 McGraw-Hill Education. All Rights Reserved The Supply and Demand Model2-11©2015 McGraw-Hill Education. All Rights Reserved The Demand Schedule•The Demand Schedule presents, in tabular form, the price and quantity demanded for a good.Price Individual QDQD for 10,000$0.00 5 50,000$0.50 4 40,000$1.00 3 30,000$1.50 2 20,000$2.00 1 10,000$2.50 0 02-12©2015 McGraw-Hill Education. All Rights Reserved Figure 1 The Demand Curve0 10 20 30 40 50PQ/t$2.50$2.00$1.50$1.00$0.500Demand2-13©2015 McGraw-Hill Education. All Rights Reserved The Supply Schedule•The Supply Schedule presents, in tabular form, the price and quantity supplied for a good.Price Individual QsQS for 10 firms$0.00 0 0$0.50 0 0$1.00 1,000 10,000$1.50 2,000 20,000$2.00 3,000 30,000$2.50 4,000 40,0002-14©2015 McGraw-Hill Education. All Rights Reserved Figure 2 The Supply Curve0 10 20 30 40 50PQ/t$2.50$2.00$1.50$1.00$0.500Supply2-15©2015 McGraw-Hill Education. All Rights Reserved Equilibrium, Shortages, and Surpluses•Equilibrium is the point where the amount that consumers want to buy and the amount that firms want to sell are the same. This occurs where the supply curve and the demand curve cross.•Shortage (Excess Demand): the condition where firms do not want to sell as many as consumers want to buy.•Surplus (Excess Supply): the condition where firms want to sell more than consumers want to buy2-16©2015 McGraw-Hill Education. All Rights Reserved A Combined Supply and Demand SchedulePrice QDQSShortageSurplus$0.00 50,0000 50,000$0.50 40,0000 40,000$1.00 30,00010,00020,000$1.50 20,00020,000$2.00 10,00030,00020,000$2.50 0 40,00040,0002-17©2015 McGraw-Hill Education. All Rights Reserved Figure 3 The Supply and Demand Model0 10 20 30 40 50PQ/t$2.50$2.00$1.50$1.00$0.500SupplyDemandEquilibrium2-18©2015 McGraw-Hill Education. All Rights Reserved All About Demand•The Law of Demand•The relationship between price and quantity demanded is a negative or inverse one.2-19©2015 McGraw-Hill Education. All Rights Reserved Why Does the Law of Demand Make Sense?•The Substitution Effect•moves people toward the good that is now cheaper or away from the good that is now more expensive •The Real Balances Effect•When a price increases it decreases your buying power causing you to buy less.•The Law of