The Market Forces of Supply and Demand

N. Gregory Mankiw

Macroeconomics

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The Market Forces of Supply and Demand

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Premium PowerPoint Slides by Ron Cronovich

2012 UPDATE

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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This is perhaps the most important chapter in the textbook. It’s worth mentioning to your students that investing extra time to master this chapter will make it easier for them to learn much of the subsequent material in the book.

 

This is also one of the longest chapters in the textbook, and this PowerPoint file is one of the most graph-intensive. Many students taking economics for the first time have difficulty grasping the graphs, which are critically important in this and all subsequent chapters in the book. So an extra degree of hand-holding might be appropriate.

 

Accordingly, this PowerPoint has carefully detailed animations that build many of the graphs with great care. For example, we show a demand or supply schedule next to the axes, and highlight each coordinate pair in the table as the corresponding point appears on the graph.

 

Please be assured that the presentation of graphs is more streamlined in subsequent chapters. In this early chapter, though, we do not want to leave any students behind.

 

If your students are already very comfortable with scatter-type graphs, you may wish to simplify or turn off the animation on these slides, in order to get through them faster.

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In this chapter, look for the answers to these questions:

What factors affect buyers’ demand for goods?

What factors affect sellers’ supply of goods?

How do supply and demand determine the price of a good and the quantity sold?

How do changes in the factors that affect demand or supply affect the market price and quantity of a good?

How do markets allocate resources?

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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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Markets and Competition

A market is a group of buyers and sellers of a particular product.

A competitive market is one with many buyers and sellers, each has a negligible effect on price.

In a perfectly competitive market:

All goods exactly the same

Buyers & sellers so numerous that no one can affect market price—each is a “price taker”

In this chapter, we assume markets are perfectly competitive.

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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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In the real world, there are relatively few perfectly competitive markets. Most goods come in lots of different varieties—including ice cream, the example in the textbook. And there are many markets in which the number of firms is small enough that some of them have the ability to affect the market price.

 

For now, though, we look at supply and demand in perfectly competitive markets, for two reasons: First, it’s easier to learn. Understanding perfectly competitive markets makes it a lot easier to learn the more realistic but complicated analysis of imperfectly competitive markets. Second, despite the lack of realism, the perfectly competitive model can teach us a LOT about how the world works, as we will see many times in the chapters that follow.

 

Demand

The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase.

Law of demand: the claim that the quantity demanded of a good falls when the price of the good rises, other things equal

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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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Demand comes from the behavior of buyers.

The Demand Schedule

Demand schedule: a table that shows the relationship between the price of a good and the quantity demanded

Example: Helen’s demand for lattes.

Notice that Helen’s preferences obey the law of demand.

Price of lattes Quantity of lattes demanded
$0.00 16
1.00 14
2.00 12
3.00 10
4.00 8
5.00 6
6.00 4

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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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Price of Lattes

Quantity of Lattes

 

 

Helen’s Demand Schedule & Curve

Price of lattes Quantity of lattes demanded
$0.00 16
1.00 14
2.00 12
3.00 10
4.00 8
5.00 6
6.00 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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Market Demand versus Individual Demand

The quantity demanded in the market is the sum of the quantities demanded by all buyers at each price.

Suppose Helen and Ken are the only two buyers in the Latte market. (Qd = quantity demanded)

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Helen’s Qd

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Ken’s Qd

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Market Qd

$0.00

6.00

5.00

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3.00

2.00

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Price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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This example violates the “many buyers” condition of perfect competition. Yet, we are merely trying to show here that, at each price, the quantity demanded in the market is the sum of the quantity demanded by each buyer in the market. This holds whether there are two buyers or two million buyers. But it would be harder to fit data for two million buyers on this slide, so we settle for two.

 

 

 

 

P

Q

 

The Market Demand Curve for Lattes

P Qd (Market)
$0.00 24
1.00 21
2.00 18
3.00 15
4.00 12
5.00 9
6.00 6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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Demand Curve Shifters

The demand curve shows how price affects quantity demanded, other things being equal.

These “other things” are non-price determinants of demand (i.e., things that determine buyers’ demand for a good, other than the good’s price).

Changes in them shift the D curve…

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Demand Curve Shifters: # of Buyers

Increase in # of buyers increases quantity demanded at each price, shifts D curve to the right.

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Income is the first demand shifter discussed in this chapter of the textbook. I chose to start with a different one (number of buyers), for the following reason:

In discussing the impact of changes in income on the demand curve, the textbook also introduces the concept of normal goods and inferior goods. Students may find it easier to learn about curve shifts if the presentation focuses solely on a curve shift (at least initially) without simultaneously introducing other concepts.

 

If you wish to present the demand shifters in the same order as they appear in the book, simply reorder the slides in this presentation.

 

 

 

P

Q

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Suppose the number of buyers increases.

Then, at each P, Qd will increase (by 5 in this example).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Demand Curve Shifters: # of Buyers

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Beginning economics students often have trouble understanding the difference between a movement along the curve and a shift in the curve. Here, the animation has been carefully designed to help students see that a shift in the curve results from an increase in quantity at each price.

 

(A more realistic scenario would involve a non-parallel shift, where the horizontal distance of the shift would be greater for lower prices than higher ones. However, to remain consistent with the textbook, and to keep things simple, this slide shows a parallel shift.)

 

Demand Curve Shifters: Income

Demand for a normal good is positively related to income.

Increase in income causes increase in quantity demanded at each price, shifts D curve to the right.

(Demand for an inferior good is negatively related to income. An increase in income shifts D curves for inferior goods to the left.)

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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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Two goods are substitutes if an increase in the price of one causes an increase in demand for the other.

Example: pizza and hamburgers. An increase in the price of pizza increases demand for hamburgers, shifting hamburger demand curve to the right.

Other examples: Coke and Pepsi, laptops and desktop computers, CDs and music downloads

Demand Curve Shifters: Prices of Related Goods

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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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If you are willing to spend a couple extra minutes on substitutes and complements, and have a blackboard or whiteboard to draw on, here’s an idea:

 

Before (or instead of) showing this slide, draw the demand curve for hamburgers. Pick a price, say $5, and draw a horizontal line at that price, extending from the vertical axis through the D curve and continuing to the right. Suppose Q = 1000 when P = $5. Label this on the horizontal axis.

 

Now ask your students: If pizza becomes more expensive, but price of hamburgers does not change, what would happen to the quantity of hamburgers demanded? Would it remain at 1000, would it increase, or would it decrease? Explain.

 

Some and perhaps most students will see right away that people will want more hamburgers when the price of pizza rises. After establishing this, note that the increase in the price of pizza caused an increase in the quantity demanded of hamburgers. Then state the term “substitutes” and give the definition.

 

Before giving the other examples (listed in the 3rd bullet of this slide), do a similar exercise to develop the concept of complements. Finally, give the examples of substitutes and complements from the 3rd bullet point of this and the following slides, but mix up the order and ask students to identify whether each example is complements or substitutes.

 

Two goods are complements if an increase in the price of one causes a fall in demand for the other.

Example: computers and software. If price of computers rises, people buy fewer computers, and therefore less software. Software demand curve shifts left.

Other examples: college tuition and textbooks, bagels and cream cheese, eggs and bacon

Demand Curve Shifters: Prices of Related Goods

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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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Demand Curve Shifters: Tastes

Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right.

Example: The Atkins diet became popular in the ’90s, caused an increase in demand for eggs, shifted the egg demand curve to the right.

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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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