Chapter 3Supply, Demand, and

the Market Process

7 Learning Goals1) Investigate and describe consumer behavior2) Distinguish a change in demand from a

change in quantity demanded3) Investigate and describe firm behavior4) Distinguish a change in supply from a change

in quantity supplied5) Build a market model and illustrate how

equilibrium is reached6) Demonstrate how markets respond to changes

in demand and supply7) Recognize how prices and the invisible hand

principle create market order

Please note:

Chapter heading: Consumer Choice and the Law of Demand– Skip 2 sections: Consumer Surplus; Responsiveness

of Quantity Demanded to Price Changes: Elastic and Inelastic Demand Curves

Chapter heading: Producer Choice and the Law of Supply– Skip 2 sections: Producer Surplus; Responsiveness

of Quantity Supplied to Price Changes: Elastic and Inelastic Supply Curves

Consumer Choice and the Law of Demand

The Law of Demand:The inverse relationship between price and quantity demanded; when price rises, quantity demanded falls

Quantity demanded is a number; it’s how many units of a good you bought

We usually draw a picture of this relationship

Graph:

Watch Macro content video: Macro Chapter 3-Demand curve

Q3.1 In economics, the demand for a good refers to the amount of the good people

1) would like to have if the good were free.

2) are willing to buy at various prices.

3) need to achieve a minimum standard of living.

4) will buy at alternative income levels.

Changes in Demand Versus Changes in

Quantity Demanded

Other variables besides price determine what you buyChanges:

(1) When price changes, quantity demanded changes but demand does NOT change– This is movement along a demand curve

(2) When something else changes, demand changes (i.e., the relationship changes)– This is movement of the entire curve

Another way to think about the difference between demand and

quantity demanded

Why is the consumer buying more (or less)?

If price is the reason, then quantity demanded changes; move along the demand curve

If any variable besides price is the reason, then demand changes; shift the demand curve

Graphs:

Watch Macro content video: Macro Chapter 2-Shift versus moving along demand curve

Another bad night’s sleep! Perhaps that’s because my wage is too high. Sleep takes time, and time has value- its opportunity cost. Instead of sleeping, I could be working and earning a wage. A study of the economics of sleep a number of years ago showed that higher-wage people sleep less. Your wage is the price of sleep, and there is a downward-sloping demand curve for sleep. The demand curve shifts with other characteristics: Having young kids at home reduces the amount of sleep people get, especially women. Additional nonwage income- inheritances and gifts- has small positive effects on sleep time, and people say that if they had more hours in the day, extra sleep is one of the top three things they would do with that extra time. Because time is scarce (there will always be only twenty-four hours in a day), the amount we sleep requires economic decision making.Q: If your long-lost relative suddenly left you $1 million, would you sleep more or less? What factors in your life cause you to sleep less?

Q3.2 When economists say the quantity demanded of a product has increased, they mean the

1) demand curve has shifted to the left.

2) demand curve has shifted to the right.

3) price of the product has fallen, and consequently, consumers are buying more of it.

4) price of the product has risen, and consequently, consumers are buying less of it.

Q3.3 When economists say the demand for a product has decreased, they mean

1. the demand curve has shifted to the left.

2. the product price has increased, and as a consequence, consumers are buying less of the product.

3. consumers are now willing and able to buy more of this product at each possible price.

4. the demand curve has shifted to the right.

Producer Choice and the Law of Supply

Watch video: Catch Me If You Can- Go fish supply curve

In the movie Catch Me If You Can, Leonardo DiCaprio winds up in a hotel room (in the 1960s) with a woman he discovers is a very high-priced call girl. She says, “You can have me for the night- just say the right price.” He says “$300,” and she throws a card at him and says, “Go fish!” He then says $500, getting the same answer, then $600, with the same result. He finally says $1,000, and she agrees. As with most activities, this transaction, too, has an upward-sloping supply curve.

Q: Is $600 the opportunity cost of the call girl’s time? Is $1,000? What does this story tell you about her opportunity cost?

Goal: Explain and Predict Firm Behavior

The Law of Supply:– The positive relationship between price and

quantity supplied; when price rises, quantity supplied rises

– Quantity supplied is a number; it’s how many units of a good you made

We usually draw a picture of this relationship

Graph:

Watch Macro content video: Macro Chapter 3-Supply curve

Q3.4 According to the law of supply,

1) more of a good is desired by consumers as the price falls.

2) less of a good is desired by consumers as the price rises.

3) more of a good will be offered by suppliers as the price rises.

4) less of a good will be offered by suppliers as the price rises.

Changes in Supply Versus Changes in Quantity Supplied

Other variables determine how much firms are willing to makeChanges:

(1) When price changes, quantity supplied changes but supply does NOT change– This is movement along a supply curve

(2) When something else changes, supply changes (i.e., the relationship changes)– This is movement of the entire curve

Another way to think about the difference between supply and quantity

supplied

Why is the firm producing more (or less)?

If price is the reason, then quantity supplied changes; move along the supply curve

If any variable besides price is the reason, then supply changes; shift the supply curve

Graphs:

Watch Macro content video: Macro Chapter3-Shift versus move along supply curve

Q3.5 Ceteris paribus, an increase in the price of a good will cause the

1. quantity demanded of the good to increase.

2. quantity supplied of the good to increase.

3. supply of the good to increase.

4. supply of the good to decrease.

Q3.6 When economists say the supply of a product has increased, they mean the

1) supply curve has shifted to the right.

2) price of the product has risen, and consequently, suppliers are producing more of it.

3) supply curve has shifted to the left.

4) amount of the product that consumers are willing to purchase at various prices has increased.

How Market Prices are Determined:

Supply and Demand Interact

Graph:Watch Macro content video: Macro Chapter 3-Supply and Demand graph

Key points:– (1) Excess supply and excess demand are NOT

unique points– (2) Equilibrium IS a unique point

Class Activity: Start with a market in a surplus. How would you solve the surplus problem without changing price? Then start with a market in a shortage. How would you solve the shortage without changing price?

Watch video: Stossel-Price gouging

Q3.7 (Multiple Answer) Which of the following statements are true?

1) With a shortage, quantity demanded exceeds quantity supplied and price will be pushed up

2) With a shortage, quantity supplied exceeds quantity demanded and price will be pushed up

3) With a shortage, quantity demanded exceeds quantity supplied and price will be pushed down

4) With a surplus, quantity supplied exceeds quantity demanded and price will be pushed up

5) With a surplus, quantity demanded exceeds quantity supplied and price will be pushed down

6) With a surplus, quantity supplied exceeds quantity demanded and price will be pushed down

How Markets Respond to Changes

in Demand and Supply

This is called supply and demand analysisYou don’t have to use graphs but it’s helpful

Use this 3 step procedure:– (1) Identify the change– (2) Determine if Supply or Demand is

affected and how– (3) Draw and read graph (or reason through

the change)

One of the students in my class is a saxophone player. Like all reed-instrument players, he buys a lot of reeds for his instrument. In 2001, bamboo trees in a large part of the world were infected with a virus that destroyed much of the bamboo crop. This change shifted the supply curve of bamboo to the left. This shift raised the price of bamboo, which is the major input into making reeds. As a result of this increase in the input price, the supply curve of reeds shifted leftward, too. The student noticed that the price of reeds skyrocketed. Being a smart young fellow, he wisely decreased the amount of reeds he demanded each month because they now were more expensive. He moved leftward along his demand curve for reeds.Q: As anyone who lives in a warm climate knows, bamboo is a weed that grows quite rapidly. How long do you think it will be until the original equilibrium in this market is restored?

Graph: Decrease in Supply

Watch Macro content video: Macro Chapter 3-Decrease in supply

Q3.8 If there is a decrease in demand for laptop computers, we would expect

1. both the price and quantity sold to increase.

2. both the price and quantity sold to decrease.

3. the price to decrease and the quantity sold to increase.

4. the price to increase and the quantity sold to decrease.

Q3.9 Which of the following would reduce the price of DVD players and increase the quantity sold?

1. an increase in the demand for DVD players

2. a decrease in the demand for DVD players

3. a decrease in the supply of DVD players

4. an increase in the supply of DVD players

What if supply and demand shift at the same time?

Suppose supply and demand both decrease

Watch Macro content video: Macro Chatper 3-Supply and Demand decrease

Q3.10 (Potential Multiple Answer) If there is a simultaneously an increase in demand and an increase in supply, we would expect

1. An increase in equilibrium price and an increase in equilibrium quantity

2. A decrease in equilibrium price and an increase in equilibrium quantity

3. An increase in equilibrium price and a decrease in equilibrium quantity

4. A decrease in equilibrium price and a decrease in equilibrium quantity

Class Activity: Why do you think that the amount of goods on the shelves of stores in Tallahassee is about equal to the amount of goods that consumers want to buy?

Watch video: Stossel Micro 04-Invisible hand steak example

Invisible Hand Principle

Adam Smith- An Inquiry into the Nature and Causes of the Wealth of Nations

Personal self-interest directed by market prices is a powerful force promoting economic progress

“Every individual is continually exerting himself to find out the most advantageous employment for whatever [income] he can command. It is his own advantage, indeed, and not that of the society which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society…He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”

Q3.11 Adam Smith's invisible hand principle stresses

1. that benevolence is a powerful motivator that encourages individuals to engage in productive economic activity.

2. the tendency of the competitive market process to direct self-interested individuals into activities that enhance the economic welfare of society.

3. the potential of government regulation as a means of bringing the self interest of individuals into harmony with the economic welfare of society.

4. the tendency of self-interested individuals to pursue activities that benefit themselves but harm the overall economic welfare of society.

Question Answers:Q3.1 = 2

Q3.2 = 3

Q3.3 = 1

Q3.4 = 3

Q3.5 = 2

Q3.6 = 1

Q3.7 = 1 & 6

Q3.8 = 2

Q3.9 = 4

Q3.10 = 1 & 2

Q3.11 = 2