Chapter 3: Markets, Demand and Supply and the Price System



Chapter 3: Markets, Demand and Supply and the Price System

Objectives

• Describe a market system

• Explain how money facilitates the exchange process

• Distinguish between demand and quantity demanded and supply and quantity supplied

• Explain the laws of demand and supply

• Construct the demand and supply curves from demand and supply schedules

• Distinguish between a change in demand and a change in quantity demanded

• Distinguish between a change in supply and a change in quantity supplied

• List factors that cause shifts in demand and supply curves

• Determine equilibrium price and quantity

• Explain surpluses and shortages

• Determine impacts on equilibrium price and quantity resulting from shifts in demand and supply

• Explain the impact of price floors and price ceilings

Key Terms

|Market |Barter |Double coincidence of wants |

|Transaction costs |Relative price |Demand |

|Quantity demanded |Law of demand |Determinants of demand |

|Demand schedule |Demand curve |Normal goods |

|Inferior goods |Substitute goods |Complementary goods |

|Exchange rate |Supply |Quantity supplied |

|Law of supply determinants of supply |Supply schedule |Supply curve |

|Productivity |Equilibrium |Surplus |

|Shortage |Price floor |Price ceiling |

LAW OF DEMAND

Slide 1 and 2: Situation 1

1. Would you increase the price of the quantity of water bottles that hikers are willing and able to purchase to the exact quantity of water bottles for sale?

2. Sell the water for $1

3. Have the local authority buy the water at a $1 a bottle and distribute it accordingly

4. Sell the water for a $1 using a lottery

Slide 3 and 4: Situation 2

1. Raise the price so that the pricing equals the number of patients that the doctor is willing to see

2. Sell your services for $100 on a first come, first serve basis

3. Have the local authorities decide who gets to see you

4. Sell your services using a random or lottery system

Slide 5 Markets

Slide 6 Demand vs. Quantity demanded

A. Demand: Amount that people would be _________________ and able to

___________ at ______________possible price.

B. Quantity Demanded: Amount people would be _______________ to buy a

product at a _________________ price.

Slide 7: Law of Demand

• The ______________ of a ______________ or ________________ that people are to ___________________ during a _____________________ period of time.

• People are more willing to _________ a good or service as the price ________ causing an ____________________ in ______________________.

• Everything is constant

• ______________________ relationship.

Slide 8: The Demand Schedule

|Combination |Price |Quantity |

| | | |

| | | |

| | | |

| | | |

| | | |

From the points above, create a demand graph.

Slide 9 and 10 : Determinants of Demand

Income

Taste

Price of Related Goods

Complementary

Substitute

Expectations

Number of Buyers

Practice Questions

Please answer the following questions:

1. Indicate whether there is an increase or decrease in demand, an increase or decrease in quantity demanded or no effect on demand. The market of interest is in italic.

1. TV sets. The number of producers of TV sets decreases.

2. Radios. The price of radios goes up

3. Cassette recorders. The price of cassette recorders falls.

4. Coffee. The price of tea falls.

2. Dot, Diane and Mardi are college students who share an apartment. Dot loves strawberries and buys them whenever they are available. Diane is a fair-weather strawberry eater; she only buys them if she thinks she is getting a good price. Mardi eats strawberries for their Vitamin C content but isn’t crazy about them. The table on the following page shows the individual demand schedules for Dot, Diane and Mardi. Suppose that these three are the only consumers in the local market for strawberries.

| |Quantity |

|Price per Quart |Dot |Diane |Mardi |

|$0 |6 |4 |2 |

|1 |5 |3.5 |1.5 |

|2 |4 |3 |1 |

|3 |3.25 |2 |.75 |

|4 |2 |1.5 |.5 |

|5 |1.25 |.5 |.25 |

|6 |0 |0 |0 |

a. Create a demand graph for the three individuals.

b. Suppose that the price of strawberries increases from $2 to $3 per quart. The increase in price would effect the demand curve in which way?

c. Suppose that Dot reads in the paper that eating strawberries increases the health of females. As a group, Dot and her friends decide to buy twice as many strawberries as they did before. Plot the new demand curve on your graph and make sure to label it D2. What has cause the change?

d. What will an increase income do to the graph? Show the change and label it D3.

LAW OF SUPPLY

Slide 1: Law of Supply

Slide 4: Supply Schedule

|Combinations |Price |Quantity |

| | | |

| | | |

| | | |

| | | |

| | | |

Draw the Curve

Slide 2: Changes in Supply

Price of Resources

Technology and Production

Expectations of Producers

Number of Producers

Price of Related Goods or services

Practice Questions

Please answer the following questions:

1. Timber beams are made from logs, and in the process of making beams, the mill produces sawdust, which is made into pressed wood. In the market for timber beams, several events occur at a time. Explain the influence of each event on the quantity supplied of timber beans and the supply of timber beams. Use a graph to illustrate the effects of each event. Does any event (or events) illustrate the law of supply? These events are

a. The wage rate of sawmill workers rises.

b. The price of sawdust rises

c. The price of a timber beam rises

d. The price of a timber beam is expected to rise

e. Environmentalists convince Congress to introduce a new law that reduces the amount of forest that can be cut for timber products

f. A new technology lowers the cost of producing timber beams.

2. Explain how each of the following events changes the demand for or supply of air travel.

a. Airfares tumble, while long-distance bus fares don’t change.

b. The price of jet fuel rises.

c. Airlines reduce the number of flights each day.

d. People expect airfares to increase next summer.

e. As the winter turns very cold in New York, many people decide to take a midwinter break to Florida.

f. With deep snow in the Rockies, many people flock to the ski slopes.

g. The price of train travel falls.

h. The price of a pound of cargo increases.

Slide 3: Determining Equilibrium

|Price Per Video |Quantity Demanded |Quantity Supplied |

| | | |

| | | |

| | | |

| | | |

| | | |

Draw the Graph.

Slide 8&9: Equilibrium

Slide 10: Shortages and Surplus

Shortage

Surplus

Practice Question

Please answer the following questions

1. The following table shows the demand and supply schedules for milk.

|Price (dollars for carton) |Quantity Demanded |Quantity Supply |

| |(cartons per day) |

|1.00 |200 |110 |

|1.25 |175 |130 |

|1.50 |150 |150 |

|1.75 |125 |170 |

|2.00 |100 |190 |

a. What is the equilibrium price and equilibrium quantity for milk?

b. Describe the situation in the milk market if the price were $1.75 a carton and explain how the market reaches its new equilibrium.

c. A drought decreases the quantity supplied by 45 cartons a day at each price. What is the new equilibrium and how does the market adjust it?

d. Milk becomes more popular and better feeds increase the quantity of milk. How do these events influence demand and supply? If there is no drought, do they create a shortage or a surplus at the equilibrium price in part a? Describe how the equilibrium price and equilibrium quantity change.

2. The following table shows the demand and supply schedules for rolls of film.

|Price (dollars per roll) |Quantity Demanded |Quantity Supplied |

| |(rolls per week) |

|2.00 |3000 |1000 |

|3.00 |2500 |1500 |

|4.00 |2000 |2000 |

|5.00 |1500 |2500 |

|6.00 |1000 |3000 |

a. What is the market equilibrium?

b. If the price of film is $3 a roll, describe the situation in the film market. Explain how market equilibrium is restored.

c. A rise in income increase the quantity demanded by 1,000 rolls a week at each price. Explain how the film market adjusts to its new equilibrium.

d. The number of film production lines increases, and at the same time, people switch to digital cameras. How do these events influence demand and supply? Do they create a shortage or a surplus at the equilibrium prince in part a? Describe how the price and quantity change.

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