Slide 1Supply and Demand: An IntroductionBuyers and Sellers in MarketsBuyers and Sellers in the MarketSlide 10Slide 11The Yearly Demand Curve for Cell phonesSlide 13Slide 14Slide 15The Yearly Supply Curve of Cell phonesMarket EquilibriumThe Equilibrium Price and Quantity of Cell phonesSlide 19Slide 20Slide 21Excess SupplyExcess DemandSlide 26Predicting and Explaining Changes in Prices and QuantitiesSlide 28An Increase in Quantity Demanded vs. an Increase in DemandSlide 30Slide 31Slide 32An Increase in Quantity Supplied vs. an Increase in SupplySlide 34Demand, Supply, and Market EquilibriumFour Rules Governing the Effects of Supply and Demand Shifts: IFour Rules Governing the Effects of Supply and Demand Shifts: IIFour Rules Governing the Effects of Supply and Demand Shifts: IIIFour Rules Governing the Effects of Supply and Demand Shifts: IVReasons for changes in QSlide 41The Effects of Simultaneous Shifts in Supply and DemandSlide 43Supply and Demand:An IntroductionSupply and Demand:An IntroductionPrinciples of Macroeconomics Dr. Gabriel X. MartinezAve Maria UniversityChapter 3 - Supply and Demand: Chapter 3 - Supply and Demand: An IntroductionAn Introduction22Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Supply and Demand: Supply and Demand: An IntroductionAn IntroductionHow do consumers get the goods and How do consumers get the goods and services they want in the right quantities services they want in the right quantities and qualities?and qualities?–Some goods and services are allocated by the Some goods and services are allocated by the market forces of supply and demand.market forces of supply and demand.Economic forces are necessary reactions to Economic forces are necessary reactions to scarcity and opportunity costs.scarcity and opportunity costs.Market forces are economic forces acting Market forces are economic forces acting through the market.through the market.Chapter 3 - Supply and Demand: Chapter 3 - Supply and Demand: An IntroductionAn Introduction88Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Buyers and Sellers in Buyers and Sellers in MarketsMarketsA MarketA Market–Consists of all buyers and sellers of a good or Consists of all buyers and sellers of a good or serviceserviceWhat do you think?What do you think?–What determines the price of pizza, gasoline, a What determines the price of pizza, gasoline, a car wash, or other goods and services?car wash, or other goods and services?Chapter 3 - Supply and Demand: Chapter 3 - Supply and Demand: An IntroductionAn Introduction99Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Buyers and Sellers in the Buyers and Sellers in the MarketMarketThe Price of a good is determined byThe Price of a good is determined by–the the interactioninteraction between between–the the valuevalue that consumers give to the good that consumers give to the good–and the and the costcost of producing it. of producing it.–ValueValue is studied with the demand curve. is studied with the demand curve.–CostCost is studied with the supply curve is studied with the supply curve–Market EquilibriumMarket Equilibrium happens when value equals happens when value equals cost.cost.Chapter 3 - Supply and Demand: Chapter 3 - Supply and Demand: An IntroductionAn Introduction1010Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Buyers and Sellers in Buyers and Sellers in MarketsMarketsThe Demand CurveThe Demand Curve–A schedule or graph that tells us the A schedule or graph that tells us the quantityquantity of of a good that buyers wish to buy at each a good that buyers wish to buy at each priceprice..Demand reflects people’sDemand reflects people’swillingness to paywillingness to paya given pricea given pricefor a given quantityfor a given quantityof a good or service.of a good or service.Chapter 3 - Supply and Demand: Chapter 3 - Supply and Demand: An IntroductionAn Introduction1111Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Buyers and Sellers in Buyers and Sellers in MarketsMarketsA Property of DemandA Property of Demand–As price of a good or service goes downAs price of a good or service goes downthe quantity consumers wish to buy will the quantity consumers wish to buy will increase.increase.P P ↓↓ Q QDD ↑↑–Therefore, the demand curve is downward-Therefore, the demand curve is downward-sloping.sloping.Chapter 3 - Supply and Demand: Chapter 3 - Supply and Demand: An IntroductionAn Introduction1212Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. The Yearly DemandThe Yearly DemandCurve for Cell phones Curve for Cell phones Price($ per phone)Quantity(million of phones per year)4238 12 16DemandChapter 3 - Supply and Demand: Chapter 3 - Supply and Demand: An IntroductionAn Introduction1313Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Buyers and Sellers in Buyers and Sellers in MarketsMarketsThe Supply CurveThe Supply Curve–A curve or schedule showing the quantity of a A curve or schedule showing the quantity of a good that sellers wish to sell at each price.good that sellers wish to sell at each price.QuestionQuestion–Will the opportunity cost of producing Will the opportunity cost of producing additional cell phones increase or decrease additional cell phones increase or decrease as you produce more cell phones?as you produce more cell phones?Chapter 3 - Supply and Demand: Chapter 3 - Supply and Demand: An IntroductionAn Introduction1414Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Buyers and Sellers in Buyers and Sellers in MarketsMarketsThe Supply CurveThe Supply Curve–Sellers must receive a higher price to produce Sellers must receive a higher price to produce additional units of a product to cover the higher additional units of a product to cover the higher opportunity costs of each additional unit.opportunity costs of each additional unit.P P ↓↓ Q QSS ↓↓Chapter 3 - Supply and Demand: Chapter 3 - Supply and Demand: An IntroductionAn Introduction1515Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Buyers and Sellers in Buyers and Sellers in MarketsMarketsSupply reflectsSupply reflectsthe the cost of producingcost of producinga given quantitya given quantityof a good or service.of a good or service.Price must be equal to (or