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CHAPTER
2012 W
ORTH
UBLISHERS
CHAPTER OUTLINE
Demand curve Quantity demanded Consumer surplus Total consumer surplus Normal good Inferior good Substitutes For applications, click here Supply curve Quantity supplied Producer surplus Total producer surplus
Complements
To Try it! questions
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Demand
Demand
Demand represents the behavior of buyers. A Demand Curve shows the quantity demanded at different prices.
The Quantity Demanded: the quantity that buyers are willing (and able) to purchase at a particular price.
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Law of Demand
Price and Quantity Demanded are negatively related
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Quantity Demanded
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25 50
$5
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When the price is high, oil will only be used in the high value products. If the price falls, oil will also be used in lower value products.
$20
Demand
20 120 Quantity of Oil (MBD) BACK
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Consumer Surplus
Consumer Surplus is the consumers gain from exchange,
the difference between the highest price a consumer will pay at a given quantity and the actual market price.
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Try it!
Your roommate just bought an iPad for $600. She would have been willing to pay $1,000 for a machine that could make her life so much more worthwhile. How much consumer surplus does your roommate enjoy from the iPad? a) $600 b) $400 c) $1600 d) $1400
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Consumer Surplus
Consumer Surplus is the Area beneath the Demand Curve and above the Price
(80-20)x90 = $2,700 20
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If the price is $2010, what is the consumer surplus? a) $3,588,000 b) $1,794,000 c) $6,000,000 d) $3,000,000
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A Decrease in Demand
Price per Unit $50
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Quantity
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An Increase in Demand
Price per Unit $50 Greater Willingness to Pay for the Same Quantity Greater Quantity Demanded at the Same Price $25
New Demand Curve Old Demand Curve
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Quantity
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Demand Shifters
Income
1. The effect of changes in income on demand depends on the nature of the good in question.
A Normal Good: demand increases when income increases (and vice versa). An Inferior Good: demand decreases when income increases (and vice versa)
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When the price of petroleum goes up, the demand for natural gas ______, the demand for coal ______, and the demand for solar power ______. a) increases; increases; increases b) increases; increases; decreases c) decreases; decreases; increases d) decreases; decreases; decreases
Population
2. As the population of an economy changes, the # of buyers of a particular good also changes, (thereby changing its demand.)
What happens to the demand for diapers in Russia as birth rates drop?
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Price of Substitutes
3. Two goods are Substitutes if a decrease in the price of one leads to a decrease in demand for the other (or vice versa).
- What happens to the demand for
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Price of Complements
4. Two goods are Complements if a decrease in the price of one good leads to an increase in the demand for the other (or vice versa).
What happens to the demand for Sport Utility Vehicles when gasoline gets more expensive?
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Price of Complements
Consumers often have to buy goods together. An increase in price of gasoline will decrease the demand for SUVs
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Expectations
5. The expectation of a higher (lower) price for a good in the future increases (decreases) current demand for the good.
Consumers will adjust their current spending in anticipation of the direction of future prices in order to obtain the lowest possible price.
If prices for Xbox 360 consoles are expected to drop right before Christmas, what will happen to sales during November?
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Tastes
6. Tastes and preferences are subjective and will vary among consumers.
Seasonal changes or fads have predictable effects on demand. What happens to demand for boots in October? To carbohydrates during the Atkins diet fad? Or to Acai berries after newly perceived health benefits?
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A change in Demand
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When the price of a good increases the quantity demanded ______. When the price of a good decreases the quantity demanded ______. a) rises; rises b) rises; falls c) falls; rises d) falls; falls
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Supply
Supply
Supply represents the behavior of sellers. A Supply Curve shows the quantity supplied at different prices.
The Quantity Supplied is the quantity that producers are willing and able to sell at a particular price.
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Law of Supply
What do you think happens to the quantity of human organs donated in Israel when the government issues a point system that rewards donors? The Law of Supply: there is a direct relationship between price and quantity supplied.
When price rises, all else equal, quantity supplied rises and vice versa
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$55
$20 $20 $5
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$5 10
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50
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Supply Curves
Why is the supply curve upward sloping?
The cost of producing a good is not equal across all suppliers. At a low price, a good is produced and sold only by the lowest cost suppliers. At a high price, a good is also produced and sold by higher cost suppliers.
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Furthermore
Does sex have a price? See this blog post for a discussion about changes in supply and demand for sex.
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Producer Surplus
Producer Surplus is the producers gain from exchange
the difference between the market price and the minimum price at which producers would be willing to sell a certain quantity.
Total producer surplus is the sum of the producer surplus of each seller. Graphically, total producer surplus is measured by the area above the supply curve and below the price.
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Producer Surplus
Producer Surplus is the Area Above the Supply Curve and Below the Price Price of Oil per Barrel
$60
Supply Curve
$40
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Using the following diagram, calculate total producer surplus if the price of oil is $50 per barrel. a) 0 b) $45 c) $1,350 d) $2,700
Change in Supply
Price of Oil per Barrel $50 Greater Quantity Supplied at the Same Price Old Supply New Supply
$10
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Change in Supply
Price of Oil per Barrel New Supply
Smaller Quantity Supplied at the Same Price $10 Higher Price Needed to Sell Same Quantity
Old Supply
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Supply Shifters
Important Supply Shifters
1. Technological Innovations 2. Input Prices 3. Taxes and Subsidies 4. Expectations 5. Entry or Exit of Producers 6. Changes in Opportunity Costs
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Technological Innovations
1. A technological innovation makes sellers willing to offer more at a given price, or sell a their quantity at a lower price.
A technological innovation lowers costs and increases supply.
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Production Technology
Supply will increase for products when technology improves
Examples: Computers, gaming systems, laser
hair removal, flat screen TVs.
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Input Prices
2. A decrease in the price of an input (all else equal) increases profits and encourages more supply (and vice versa)
What will happen to the amount of new businesses if the government reduces the fees and red tape associated with new business licenses? What happens if the fees rise?
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Taxes and subsidies affect profits and therefore supply. A 10% yacht tax reduced the supply of yachts 53% in the early 1990s.
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Cotton Supply
When the U.S. decreases its cotton subsidies, U.S. cotton supply decreases
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$40
$10
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Expectations
4. The expectation of a higher price for a good in the future decreases current supply of the good if they can store the good- (and vice versa).
Sellers will adjust their current offerings in anticipation of the direction of future prices in order to obtain the highest possible price.
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Future Expectations
A change in producers expectations about profitability will affect supply curves
Windmill production increases as producers expect sales and profitability to increase.
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Expectations
Price per Unit
Supply Today
Into Storage
Quantity
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Number of Producers
As more producers enter a market, supply increases (and vice versa)
As more firms enter the solar installation market, the number of solar installations available for sale increases
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Domestic Supply
Quantity
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Producers have the ability to produce other goods An increase in the profitability of small cars will decrease the supply of SUVs
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3- 58
2,000
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A change in Supply
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Explain using the concepts of supply, demand, and transport costs (including in this case smuggling costs) the pattern of prices you see here
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The market price of the product is $20 per unit. Calculate the dollar amount of consumer surplus being earned in this market. a) $120,000 b) $60,000 c) $100,000 d) $80,000
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