Mini-Unit Demand and Supply And other crap I missed.

Mini-UnitMini-UnitDemand and SupplyAnd other crap I missed

IntroductionIntroduction

Copyright © 2008 Pearson Addison Wesley. All rights reserved. 3-2

They are small, thin and lightweight…

Some are not aware of their existence, while others allocate a lot of time and effort in obtaining them.

What are they? They are sports trading cards.

Most can be purchased for a few dollars or less, but many cost much more—up to thousands of dollars each!

In this chapter you will learn why the prices of different sports trading cards can vary so widely.

Supply and DemandSupply and DemandThe average price of an apartment-sized

condominium has often exceeded the average price of a standalone house?

The relative physical size of items does not determine the prices at which people exchange them for?

By using demand and supply you can develop a better understanding of why relative size of an item typically has little to do with the price at which it sells?


MarketsMarketsMarkets

◦ Arrangements that individuals have for exchanging with one another

◦ Represent the interaction of buyers and sellers for goods and services

◦ Markets set the prices we pay and receive. Automobile market Health care market Labor market Stock market


The Law of DemandThe Law of DemandDemand

◦A schedule showing how much of a good or service people will purchase at any price during a specified time period, other things being constant


The Law of DemandThe Law of DemandLaw of Demand

◦Quantity demanded is inversely related to price, holding other factors constant.

Price Qd

Price Qd


The Law of Demand The Law of Demand (cont'd)(cont'd)What are we holding constant?

◦Income

◦Tastes and preferences

◦Price of other goods

◦Many other factors

If any of these change, then the demand schedule will shift.


The Demand ScheduleThe Demand Schedule

The demand schedule ◦ Table relating prices to quantity demanded

Demand Curve◦ A graphical representation of the demand

schedule

◦ Negatively sloped line showing inverse relationship between price and quantity demanded, all else equal


Figure 3-1 Figure 3-1 The Individual Demand The Individual Demand Schedule and the Individual Demand Schedule and the Individual Demand Curve, Panel (a)Curve, Panel (a)


Combination Price per Starbucks coffee

Quantity of Starbucks Coffees consumed/year

A $5 10

B $4 20

C $3 30

D $2 40

E $1 50

Figure 3-1 Figure 3-1 The Individual Demand The Individual Demand Schedule and the Individual Demand Schedule and the Individual Demand Curve, Panel (b)Curve, Panel (b)

Copyright © 2008 Pearson Addison Wesley. All rights reserved.

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Number of coffees per year

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The Demand ScheduleThe Demand Schedule

Individual versus market demand curves

Market Demand

◦The demand of all consumers in the marketplace for a particular good or service

◦Summation at each price of the quantity demanded by each individual


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Figure 3-2 Figure 3-2 The Horizontal The Horizontal Summation of Two Demand Summation of Two Demand Curves, Panel (a)Curves, Panel (a)


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Combination

Price per Starbucks coffee

Quantity of Starbucks Coffees consumed/year (me)

Quantity of Starbucks Coffees consumed/year (wife)

Total Quantity consumed

A $5 10 10 20

B $4 20 20 40

C $3 30 40 70

D $2 40 50 90

E $1 50 60 110

Figure 3-2 Figure 3-2 The Horizontal The Horizontal Summation of Two Demand Summation of Two Demand Curves, Panels (b), (c), (d)Curves, Panels (b), (c), (d)


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Figure 3-3 Figure 3-3 The Market Demand The Market Demand Schedule for Flash Memory Pen Schedule for Flash Memory Pen Drives, Panel (a)Drives, Panel (a)


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Combination Price per Starbucks coffee

Quantity of Starbucks Coffees consumed/year in millions(total population)

A $5 2

B $4 4

C $3 6

D $2 8

E $1 10

Figure 3-3 Figure 3-3 The Market Demand The Market Demand Schedule for Flash Memory Pen Schedule for Flash Memory Pen Drives, Panel (b)Drives, Panel (b)


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Shifts in DemandShifts in DemandScenario

◦Imagine a news story runs on all networks claiming that Starbucks coffee is the only safe coffee shop open and all others have health care issues

If some factor other than price changes, we can show its effect by moving the entire demand curve, shifting the curve left or right.


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Figure 3-4 Figure 3-4 A Shift in the Demand CurveA Shift in the Demand Curve


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Suppose the news runs a story on other unsafe coffee shops

Suppose Starbucks has major health code violations


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Shifts in DemandShifts in DemandDeterminants of demand

◦Income

◦Tastes and preferences

◦The prices of related goods Substitutes

Complements


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Shifts in Demand (cont'd)Shifts in Demand (cont'd)Substitutes

◦Two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price change.


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Shifts in Demand (cont'd)Shifts in Demand (cont'd)Complements

◦Two goods are complements when a change in the price of one causes an opposite shift in the demand curve for the other.


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Shifts in Demand (cont'd)Shifts in Demand (cont'd)Determinants of demand

◦Expectations Future prices

Income

Product availability

◦Market size (number of buyers)


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Normal and Inferior Goods & Normal and Inferior Goods & IncomeIncomeNormal Goods

◦Goods for which demand rises as income rises, most goods are normal goods

Inferior Goods

◦Goods for which demand falls as income rises


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Shifts in Demand (cont'd)Shifts in Demand (cont'd)


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The Determinants of DemandIncome: Normal Good

D1

Q/Units

D2D3

Price

Decrease in incomedecreases demand

Increase in incomeincreases demand



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The Determinants of DemandIncome: Inferior Good

D1

Q/Units

Decrease in incomeincreases demand

Increase in incomedecreases demand

Price

D2D3



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The Determinants of DemandTastes and Preferences

D1

Q/Units

Price

Hybrid vehicles• Increase in demand

D2

SUVs• Decrease in demand

D3



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The Determinants of DemandPrice of Related Goods: Substitutes

D1

Q/Butter

Butter and Margarine• Price of both = $2/lb• Price of margarine

increases to $3/lb• Demand for butter

increases

D2

Price



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The Determinants of DemandPrice of Related Goods: Complements

D1

Q/Speakers

Speakers and Amplifiers• Decrease the relative

price of amplifiers• Demand for speakers

increases

D2D3

Speakers and Amplifiers• Increase the relative

price of amplifiers• Demand for speakers

decreases

Price



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The Determinants of DemandExpectations: Income, Future Prices

D1

Q/Units

A higher income or expectations of a higher future price will increase demand

D2D3

A lower income or expectations of a lower future price will decrease demand

Price



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The Determinants of DemandMarket Size (Number of Buyers)

D1

Q/Units

Increase in the number of buyers increases demand

D2D3

Decrease in the number of buyers decreases demand

Price

Shifts in Demand (cont'd)Shifts in Demand (cont'd)Changes in demand versus

changes in quantity demanded

◦A change in one or more of the non-price determinants (income, tastes, etc.) will lead to a change in demand. This is a shift of the whole curve.


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Shifts in Demand (cont'd)Shifts in Demand (cont'd)Changes in demand versus

changes in quantity demanded

◦A change in a good’s own price leads to a change in quantity demanded. This is a movement along the same

curve. ∆D is not the same as ∆Qd.


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Figure 3-5 Figure 3-5 Movement Movement Along a Given Demand Along a Given Demand CurveCurve


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A change in the price changes the quantity of a good demanded, movement along the curve


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The Law of SupplyThe Law of SupplySupply

◦Schedule showing relationship between price and quantity supplied for a specified time period, other things being equal

◦The amount of a product or service that firms are willing to sell at alternative prices


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The Law of Supply (cont'd)The Law of Supply (cont'd)Law of Supply

◦The price of a product or service and the quantity supplied are directly related.

P Qs

P Qs


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The Supply ScheduleThe Supply Schedule

The supply schedule is a table relating prices to quantity supplied at each price.

Supply Curve

◦A graphical representation of the supply schedule

◦Positively sloped line showing direct relationship between price and quantity supplied, all else equal


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Figure 3-6 Figure 3-6 The Individual Producer’s The Individual Producer’s Supply Schedule and Supply Curve for Supply Schedule and Supply Curve for Starbucks CoffeeStarbucks Coffee


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Combination Price of Starbucks Coffee

Quantity of Starbucks Coffee Supplied

F $5 55

G 4 40

H 3 35

I 2 25

J 1 20

Figure 3-6 Figure 3-6 The Individual Producer’s The Individual Producer’s Supply Schedule and Supply Curve for Supply Schedule and Supply Curve for Flash Memory Pen Drives, Panel (b)Flash Memory Pen Drives, Panel (b)


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Figure 3-7 Figure 3-7 Horizontal Horizontal Summation of Supply Summation of Supply Curves, Panel (a)Curves, Panel (a)


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Price per cup of Starbucks coffee

Starbucks #501

Starbucks #233

Combined Quantity Supplied per year

$5 55 35 90

4 40 30 70

3 35 20 55

2 25 15 40

1 20 10 30

Figure 3-7 Figure 3-7 Horizontal Horizontal Summation of Supply Summation of Supply Curves, Panels (b), (c), (d)Curves, Panels (b), (c), (d)


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Figure 3-8 Figure 3-8 The Market Supply The Market Supply Schedule and the Market Supply Curve Schedule and the Market Supply Curve for Starbucks Coffeefor Starbucks Coffee


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Price Quantity of Starbucks Coffee Supplies

$5 10

$4 8

$3 6

$2 4

$1 2

Figure 3-8 Figure 3-8 The Market Supply The Market Supply Schedule and the Market Supply Curve Schedule and the Market Supply Curve for Flash Memory Pen Drives, Panel (b)for Flash Memory Pen Drives, Panel (b)


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Shifts in SupplyShifts in SupplyScenario

◦A new method of manufacturing flash memory pen drives reduces the cost of production dramatically.


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Figure 3-9 Figure 3-9 A Shift in the Supply CurveA Shift in the Supply Curve


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If some other factor than price changes, the only way we can show its effect is by moving the entire supply curve

If costs decrease, supply increases

If costs increase, supply decreases


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Figure 3-9 Figure 3-9 A Shift in the Supply Curve A Shift in the Supply Curve (cont'd)(cont'd)


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S1

Quantity of Flash Memory Pen Drives Supplied (millions of constant-quality units per year)

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2 4 6 80

1

2

3

4

5

10 12 14

S2

a

cWhen supply increases the quantity supplied will be greater at each price


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S1

Quantity of Flash Memory Pen Drives Supplied(millions of constant-quality units per year)

2 4 6 80

1

2

3

4

5

10 12 14

a

b

d

c

S2

When supply increases the quantity supplied will be greater at each price

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Quantity of Flash Memory Pen Drives Supplied(millions of constant-quality units per year)

2 4 6 80

1

2

3

4

5

10 12 14

S1

a

c

S3

b

dWhen supply decreases the quantity supplied will be less at each price

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Shifts in Supply (cont'd)Shifts in Supply (cont'd)Determinants of supply

◦Cost of inputs

◦Technology and productivity

◦Taxes and subsidies

◦Price expectations

◦Number of firms in industry


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Shifts in Supply (cont'd)Shifts in Supply (cont'd)


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The Determinants of SupplyCost of Inputs

S1

Q/Units

Decrease in cost increases supply

S2Increase in costdecreases supply

S3

Price



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The Determinants of SupplyTechnology and Productivity

S1

Q/Units

Improvements in technology or increases in productivity increase supply

S2

Decreases in productivity decrease supply

S3

Price



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The Determinants of SupplyTaxes and Subsidies

S1

Q/Units

Decreases in taxes or increases in subsidies increase supply

S2

Increases in taxes or decreases in subsidies decrease supply

S3

Price

Policy Example: Import Policy Example: Import Restrictions Restrictions Reduce the Supply of Reduce the Supply of CementCementU.S. cement manufacturers produce more than

80 million metric tons of cement per year.

The rest of the cement supplied—15 to 20 million metric tons—is imported, much of it from Mexico.

During the 1990s the U.S. government began imposing an import duty on Mexican cement.

The continuation of this tariff during the 2000s caused Mexican producers to limit sales to the United States at any given price, reducing the U.S. supply of cement.


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Shifts in SupplyShifts in Supply


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The Determinants of SupplyPrice Expectations*

S1

Q/Units

Expectations of increase in price increases supply

S2Expectations of lower prices decrease supply

S3Price

Expectations of higher future prices decrease supply

Expectations of lower future prices increase supply



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The Determinants of SupplyNumber of Firms in Industry

S1

Q/Units

Increase in the number of firms increases supply

S2Decrease in the number of firms decreases supply

S3

Price

Shifts in Supply (cont'd)Shifts in Supply (cont'd)Changes in supply versus

changes in quantity supplied

◦A change in one or more of the non-price determinants will lead to a change in supply. This is a shift of the whole curve.


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Shifts in Supply (cont'd)Shifts in Supply (cont'd)Changes in supply versus

changes in quantity supplied

◦A change in a good’s own price leads to a change in quantity supplied. This is a movement along the same

curve. ∆S is not the same as ∆Qs.


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Putting Demand Putting Demand and Supply Togetherand Supply TogetherPutting demand and supply

together

Equilibrium (Market Clearing) Price

◦The price that clears the market

◦The price at which quantity demanded equals quantity supplied

◦The price where the demand curve intersects the supply curve


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Figure 3-10 Figure 3-10 Putting Putting Demand and Supply Demand and Supply Together, Panel (a)Together, Panel (a)


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Price of Coffee

Quantity Supplied in millions

Quantity demanded in millions

Difference Condition

$5 10 2 8 million Excess quantity (surplus)

4 8 4 4 million Excess quantity (surplus)

3 6 6 0 Market clearing (equilibrium)

2 4 8 -4 million Excess demand (shortage)

1 2 10 -8 million Excess demand (shortage)

Figure 3-10 Figure 3-10 Putting Putting Demand and Supply Demand and Supply Together, Panel (b)Together, Panel (b)


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Putting DemandPutting Demandand Supply Together (cont'd)and Supply Together (cont'd)Equilibrium

◦The situation when quantity supplied equals quantity demanded at a particular price


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Putting DemandPutting Demandand Supply Together (cont'd)and Supply Together (cont'd)Shortages

◦The situation when quantity demanded is greater than quantity supplied Qd > Qs

◦Exist at any price below the market clearing price


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Putting DemandPutting Demandand Supply Together (cont'd)and Supply Together (cont'd)Surpluses

◦The situation when quantity supplied is greater than quantity demanded Qd < Qs

◦Exist at any price above the market clearing price


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Policy Example: Should Shortages Policy Example: Should Shortages in the Ticket Market Be Solved by in the Ticket Market Be Solved by Scalpers?Scalpers?If you’ve ever tried to get tickets

to the big game you know all about “shortages.”

Since the quantity of tickets is fixed, the price can go pretty high.

Enter the scalper.


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Figure 3-11 Figure 3-11 Shortages of Super Bowl Shortages of Super Bowl TicketsTickets


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Issues and Applications: The Issues and Applications: The Market Clearing Prices of Baseball Market Clearing Prices of Baseball CardsCardsVarious companies, such as Topps and Upper

Deck, print sports trading cards that provide photos and stats on pro athletes.

Why are some of the market clearing prices so high?

The answer has to do with demand and supply. (A relatively low supply helps explain the relatively high market clearing price.)

You can buy a “Shoeless” Joe Jackson card for up to $9,000!


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Table 3-2 Table 3-2 Baseball Cards Baseball Cards with the Highest Market with the Highest Market Clearing PricesClearing Prices


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Mini-Unit Demand and Supply And other crap I missed.

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