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2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Input Markets and Output Markets
Output, or product,
markets are the markets
in which goods and
services are exchanged.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
MARKETS AND COMPETITION
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
MARKETS AND COMPETITION
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Competition: Perfect and Otherwise
Perfect Competition
Products are the same
Monopoly
One seller, and seller controls price
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Competition: Perfect and Otherwise
Oligopoly
Few sellers
Monopolistic Competition
Many sellers
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
DEMAND
Law of Demand
The law of demand states that, other things equal,
the quantity demanded of a good falls when the price
of the good rises.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Catherines Demand Schedule
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Demand Curve: The Relationship
between Price and Quantity Demanded
Demand Curve
The demand curve is a graph of the relationship
between the price of a good and the quantity
demanded.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Figure 1 Catherines Demand Schedule and Demand
Curve
Price of
Ice-Cream Cone
$3.00
2.50
1. A decrease
2.00
in price ...
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Copyright 2004 South-Western
Market Demand versus Individual Demand
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Shifts in the Demand Curve
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Changes in Quantity Demanded
Price of Ice-
Cream A tax that raises the price of
Cones
ice-cream cones results in a
B movement along the demand
$2.0 curve.
0
1.00 A
D
0 4 8Quantity of Ice-Cream Cones
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Shifts in the Demand Curve
Consumer income
Prices of related goods
Tastes
Expectations
Number of buyers
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Shifts in the Demand Curve
Change in Demand
A shift in the demand curve, either to the left or right.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Figure 3 Shifts in the Demand Curve
Price of
Ice-Cream
Cone
Increase
in demand
Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0 Quantity of
Ice-Cream Cones
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Copyright2003 Southwestern/Thomson Learning
Shifts in the Demand Curve
Consumer Income
As income increases the demand for a normal good
will increase.
As income increases the demand for an inferior good
will decrease.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Consumer Income
Normal Good
Price of Ice-
Cream Cone
$3.0 An increase in
0 income...
2.5
0 Increase
2.0 in demand
0
1.5
0
1.0
0
0.5
0
D2
D1 Quantity
of Ice-
0 1 2 3 4 5 6 7 8 9 10 11 12 Cream
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Cones
Consumer Income
Inferior Good
Price of Ice-
Cream Cone
$3.0
0
2.5 An increase in
0 income...
2.0
0 Decrease
1.5 in demand
0
1.0
0
0.5
0
D2 D1 Quantity of
Ice-Cream
0 1 2 3 4 5 6 7 8 9 10 11 12 Cones
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Shifts in the Demand Curve
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Table 1 Variables That Influence Buyers
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Copyright2004 South-Western
SUPPLY
Law of Supply
The law of supply states that, other things equal, the
quantity supplied of a good rises when the price of
the good rises.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Supply Curve: The Relationship
between Price and Quantity Supplied
Supply Schedule
The supply schedule is a table that shows the
relationship between the price of the good and the
quantity supplied.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Bens Supply Schedule
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Supply Curve: The Relationship
between Price and Quantity Supplied
Supply Curve
The supply curve is the graph of the relationship
between the price of a good and the quantity
supplied.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Figure 5 Bens Supply Schedule and Supply Curve
Price of
Ice-Cream
Cone
$3.00
2.50
1. An
increase
in price ... 2.00
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity of cones supplied.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Copyright2003 Southwestern/Thomson Learning
Market Supply versus Individual Supply
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Shifts in the Supply Curve
Input prices
Technology
Expectations
Number of sellers
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Shifts in the Supply Curve
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Change in Quantity Supplied
Price of Ice-
Cream Cone S
C
$3.0
0 A rise in the price
of ice cream cones
results in a
movement along the
A supply curve.
1.00
Quantity of
Ice-Cream
0 1 5 Cones
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Shifts in the Supply Curve
Change in Supply
A shift in the supply curve, either to the left or right.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Figure 7 Shifts in the Supply Curve
Price of
Ice-Cream Supply curve, S 3
Supply
Cone
curve, S 1
Supply
Decrease curve, S 2
in supply
Increase
in supply
0 Quantity of
Ice-Cream Cones
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Copyright2003 Southwestern/Thomson Learning
Table 2 Variables That Influence Sellers
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Copyright2004 South-Western
SUPPLY AND DEMAND TOGETHER
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
SUPPLY AND DEMAND TOGETHER
Equilibrium Price
The price that balances quantity supplied and quantity
demanded.
On a graph, it is the price at which the supply and
demand curves intersect.
Equilibrium Quantity
The quantity supplied and the quantity demanded at
the equilibrium price.
On a graph it is the quantity at which the supply and
demand curves intersect.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
SUPPLY AND DEMAND TOGETHER
Demand Supply
Schedule Schedule
Price of
Ice-Cream
Cone Supply
Equilibrium Demand
quantity
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of Ice-Cream Cones
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Copyright2003 Southwestern/Thomson Learning
Figure 9 Markets Not in Equilibrium
2.00
Demand
0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
demanded supplied Cones
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Copyright2003 Southwestern/Thomson Learning
Equilibrium
Surplus
When price > equilibrium price, then quantity
supplied > quantity demanded.
There is excess supply or a surplus.
Suppliers will lower the price to increase sales, thereby
moving toward equilibrium.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Equilibrium
Shortage
When price < equilibrium price, then quantity
demanded > the quantity supplied.
There is excess demand or a shortage.
Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward equilibrium.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Figure 9 Markets Not in Equilibrium
$2.00
1.50
Shortage
Demand
0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
supplied demanded Cones
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Copyright2003 Southwestern/Thomson Learning
Equilibrium
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Three Steps to Analyzing Changes in
Equilibrium
Decide whether the event shifts the supply or
demand curve (or both).
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Figure 10 How an Increase in Demand Affects the
Equilibrium
Price of
Ice-Cream 1. Hot weather increases
Cone the demand for ice cream . . .
Supply
2.00
2. . . . resulting Initial
in a higher equilibrium
price . . .
D
0 7 10 Quantity of
3. . . . and a higher Ice-Cream Cones
quantity sold.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Copyright2003 Southwestern/Thomson Learning
Three Steps to Analyzing Changes in
Equilibrium
Shifts in Curves versus Movements along
Curves
A shift in the supply curve is called a change in
supply.
A movement along a fixed supply curve is called a
change in quantity supplied.
A shift in the demand curve is called a change in
demand.
A movement along a fixed demand curve is called a
change in quantity demanded.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Figure 11 How a Decrease in Supply Affects the Equilibrium
Price of
Ice-Cream 1. An increase in the
Cone price of sugar reduces
the supply of ice cream. . .
S2
S1
New
$2.50 equilibrium
2. . . . resulting
in a higher
price of ice
cream . . . Demand
0 4 7 Quantity of
3. . . . and a lower Ice-Cream Cones
quantity sold.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Copyright2003 Southwestern/Thomson Learning
Table 4 What Happens to Price and Quantity When Supply
or Demand Shifts?
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Copyright2004 South-Western
Demand in Output Markets
ANNA'S DEMAND
A demand schedule
SCHEDULE FOR is a table showing
TELEPHONE CALLS how much of a given
PRICE
QUANTITY
DEMANDED
product a household
(PER (CALLS PER would be willing to
$
CALL)
0
MONTH)
30
buy at different prices.
0.50 25
3.50 7 Demand curves are
7.00 3
10.00 1
usually derived from
15.00 0 demand schedules.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Demand Curve
ANNA'S DEMAND
SCHEDULE FOR
The demand curve is
TELEPHONE CALLS a graph illustrating
PRICE
QUANTITY
DEMANDED how much of a given
(PER
CALL)
(CALLS PER
MONTH)
product a household
$ 0
0.50
30
25
would be willing to
3.50
7.00
7
3
buy at different prices.
10.00 1
15.00 0
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Law of Demand
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Other Properties of Demand Curves
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Income and Wealth
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Related Goods and Services
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Related Goods and Services
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Shift of Demand Versus Movement Along a
Demand Curve
A change in demand is
not the same as a change
in quantity demanded.
In this example, a higher
price causes lower
quantity demanded.
Changes in determinants
of demand, other than
price, cause a change in
demand, or a shift of the
entire demand curve, from
DA to DB.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
A Change in Demand Versus a Change in Quantity
Demanded
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
A Change in Demand Versus a Change in Quantity
Demanded
To summarize:
Change in price of a good or service
leads to
Change in demand
(Shift of curve).
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Impact of a Change in Income
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Impact of a Change in the Price
of Related Goods
Demand for complement good
(ketchup) shifts left
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
From Household to Market Demand
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
From Household Demand to Market
Demand
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Supply in Output Markets
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Supply Curve and
the Supply Schedule
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Law of Supply
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
A Change in Supply Versus
a Change in Quantity Supplied
A change in supply is
not the same as a
change in quantity
supplied.
In this example, a higher
price causes higher
quantity supplied, and
a move along the
demand curve.
In this example, changes in determinants of supply, other
than price, cause an increase in supply, or a shift of the
entire supply curve, from SA to SB.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
A Change in Supply Versus
a Change in Quantity Supplied
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
A Change in Supply Versus
a Change in Quantity Supplied
To summarize:
Change in price of a good or service
leads to
Change in supply
(Shift of curve).
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
From Individual Supply
to Market Supply
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Market Supply
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Market Equilibrium
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Market Equilibrium
Only in equilibrium is
quantity supplied
equal to quantity
demanded.
At any price level
other than P0, the
wishes of buyers
and sellers do not
coincide.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Market Disequilibria
Excess demand, or
shortage, is the condition
that exists when quantity
demanded exceeds
quantity supplied at the
current price.
When quantity demanded
exceeds quantity
supplied, price tends to
rise until equilibrium is
restored.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Market Disequilibria
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Increases in Demand and Supply