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Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/IrwinSupplyandDemandChapter4Copyright
©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-2LaugherCurveQ.WhatdoyougetwhenyoucrosstheGodfatherwithan
economist?A.Anofferyoucan'tunderstand.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-3DemandDemandmeansthewil
lingnessandcapacitytopay.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-4DemandPricesarethetoolsbywhi
chthemarketcoordinatesindividualdesires.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-
Hill/Irwin4-5TheLawofDemandQuantitydemandedrisesaspricefalls,otherthingsconstant.Quantitydemandedfallsaspricesrise,
otherthingsconstant.Thus,thereisaninverserelationshipbetweenpriceandquantitydemanded.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrights
reserved.McGraw-Hill/Irwin4-6TheLawofDemandWhataccountsforthelawofdemand?PeopletendtosubstituteforgoodswhosepricehasgoneupCopyright©2001byT
heMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-7TheDemandCurveThedemandcurveisthegraphicrepresentationofthela
wofdemand.Thedemandcurveslopesdownwardandtotheright.Asthepricegoesup,thequantitydemandedgoesdown.Copyr
ight©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-8TheDemandCurveTheslopetellsusthatquantityde
mandedvariesindirectly—intheoppositedirection—withprice.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-9Oth
erThingsConstantOtherthingsconstantmeansthatallotherfactorsthataffecttheanalysisareassumedtoremainconstant,whethertheyactuallyremainconstantornot.
Thesefactorsmayincludechangingtastes,pricesofothergoods,eventheweather.Copyright©2001byTheMcGraw-HillCompanies,Inc.A
llrightsreserved.McGraw-Hill/Irwin4-10DPrice(perunit)0Quantitydemanded(perunitoftime)PAQAAASampleDeman
dCurveCopyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-11ShiftsinDemandVersusMovementsAlongaDemandCur
veDemandreferstoascheduleofquantitiesofagoodthatwillbeboughtperunitoftimeatvariousprices,otherthingsconstant.Graphically,i
treferstotheentiredemandcurve.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-12ShiftsinDemandVersusMove
mentsAlongaDemandCurveQuantitydemandedreferstoaspecificamountthatwillbedemandperunitoftimeataspecificprice.Graphical
ly,itreferstoaspecificpointonthedemandcurve.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsres
erved.McGraw-Hill/Irwin4-13ShiftsinDemandVersusMovementsAlongaDemandCurveAmovementalongademandcurveisthegraphicalrepresentationoftheeffectofachang
einpriceonthequantitydemanded.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Ir
win4-14ShiftsinDemandVersusMovementsAlongaDemandCurveAshiftindemandisthegraphicalrepresentationoftheeffectofanything
otherthanpriceondemand.Theoriginalcurvewillmovetotherightortotheleft.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw
-Hill/Irwin4-15ChangeinQuantityDemanded0D1Changeinquantitydemanded(amovementalongthecurve)BPrice(peru
nit)Quantitydemanded(perunitoftime)100$2$1200ACopyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsr
eserved.McGraw-Hill/Irwin4-16D0D1ShiftinDemandPrice(perunit)Quantitydemanded(perunitoftime)100$2$1200BA
Changeindemand(ashiftofthecurve)250Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-17S
hiftFactorsofDemandShiftfactorsofdemandarethosethatcauseshiftsinthedemandcurvetotherightorleft.Copyright©2001byTheMcGraw-HillCom
panies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-18ShiftFactorsofDemandShiftfactorsofdemandinclude—butaren
otlimited—tothefollowing:Society'sincomeThepricesofothergoodsTastesExpectationsCopyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-H
ill/Irwin4-19ShiftFactorsofDemandAriseinincomewillincreasedemandforgoods.Whenthepricesofsubstitutegoodsfa
ll,youwillconsumelessofthegoodwhosepricehasnotchanged.Achangeintastewillchangedemandwithnochangeinprice
.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-20ShiftFactorsofDeman
dIfyouexpectyourincometorise,youmayconsumemorenow.Ifyouexpectpricestofallinthefuture,youmayputoffpurchasestoday.Copyright©
2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-21TheDemandTableThedemandtableassumesallthefollowing:Aspr
icerises,quantitydemandeddeclines.Quantitydemandedhasaspecifictimedimensiontoit.Copyright©2001byTheMcGraw-HillCompanies,In
c.Allrightsreserved.McGraw-Hill/Irwin4-22TheDemandTableThedemandtableassumesallthefollowing:Alltheproductsinvolvedareidentic
alinshape,size,quality,etc.Thescheduleassumesthateverythingelseisheldconstant.Copyright©2001byTheMcGra
w-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-23FromaDemandTabletoaDemandCurveYouploteachpointinthedemandtab
leonagraphandconnectthepointstoderivethedemandcurve.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsre
served.McGraw-Hill/Irwin4-24FromaDemandTabletoaDemandCurveThedemandcurvegraphicallyconveysthesameinformationthatisonthede
mandtable.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-25FromaDemandTabletoaDemandCurveThecurv
erepresentsthemaximumpricethatyouwillforvariousquantitiesofagood—youwillhappilypayless.Copyright©2001byTheMcGraw-HillCo
mpanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-26Pricepercassette(indollars)ADemandCurveQuantityofcassett
esdemanded(perweek)12345678910111213$6.005.004.003.002.001.00.5003.50EDCBFAFromaDemandTabletoaDemandCurvePricepercassetteABCDEA
DemandTableCassetterentalsdemandedperweek$0.501.002.003.004.0098642DemandforcassettesGCopyright©2001byThe
McGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-27IndividualandMarketDemandGoodsAmarketdemandcurveisthehorizontal
sumofallindividualdemandcurves.Thisisdeterminedbyaddingtheindividualdemandcurvesofallthedemanders.Copyright©2001
byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-28IndividualandMarketDemandGoodsRealworldsellersd
onotaddupindividualdemandcurves.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-29
IndividualandMarketDemandGoodsTheyestimatetotalmarketdemandfortheirproductwhichbecomessmoothanddownwardslopingcurve.C
opyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-30IndividualandMarketDem
andGoodsThedemandcurveisdownwardslopingforthefollowingreasons:Atlowerprices,existingdemandersbuymore.Atlowerpri
ces,newdemandersenterthemarket.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-31FromIndividualDemandstoaM
arket(1)Pricepercassette$.0.501.001.502.002.503.003.504.00(2)Alice’sdemand(3)Bruce’sdemand(2)Cathy’sdemand(3)Marketdemand987654326543210
01100000016141197532ABCDEFGHQuantityofcassettesdemandedperweek2CathyBruceAliceDACEFG$4.003.503.002.502.001.501.000.5
00Pricepercassette(indollars)46810121416BCopyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-
Hill/Irwin4-32SupplyIndividualscontrolthefactorsofproduction.Factorsofproductionaretheresourcesorinputs,necessarytoproducegoodsorservices.Copyri
ght©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-33SupplyIndividualssupplyfactorsofproductiontointermediariesorfirms.
Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-34SupplyTheanalysisofthesupplyofproducedgoodshastwoparts:Ananal
ysisofthesupplyofthefactorsofproductiontohouseholdsandfirms.Ananalysisofwhyfirmstransformthosefactorsofproductionintousablego
odsandservices.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-35TheLawofSupplyQ
uantitysuppliedrisesaspricerises,otherthingsconstant.Quantitysuppliedfallsaspricefalls,otherthingscon
stant.Thus,thereisadirectrelationshipbetweenpriceandquantitysupplied.Copyright©2001byTheMcGraw-HillCompanie
s,Inc.Allrightsreserved.McGraw-Hill/Irwin4-36TheLawofSupplyThelawofsupplyisaccountedforbytwofactors:Inthefaceofrisingprices,firmsarrangetheir
activitiestosupplymoreofthegoodtothemarket,substitutingproductionofthatgoodfortheproductionofothergoods.Assumingfirms'costsareconstant
,ahigherpricemeanshigherprofits.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-37TheSupplyCurveThesupplycurvei
sthegraphicrepresentationofthelawofsupply.Thesupplycurveslopesupwardtotheright.Theslopetellsusthatthequant
itysuppliedvariesdirectly—inthesamedirection—withtheprice.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserv
ed.McGraw-Hill/Irwin4-38Quantitysupplied(perunitoftime)0SAPrice(perunit)PAQAASampleSupplyCurveCopyright©2001byTheMcG
raw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-39ShiftsinSupplyVersusMovementsAlongaSupplyCurveSupplyrefe
rstoascheduleofquantitiesaselleriswillingtosellperunitoftimeatvariousprices,otherthingsconstant.Copyright©2001byTheMcGraw-HillCompanies
,Inc.Allrightsreserved.McGraw-Hill/Irwin4-40ShiftsinSupplyVersusMovementsAlongaSupplyCurveIftheamountsuppliedisaffectedbyanythingotherthanachangeinpr
ice,therewillbeashiftinsupply.Shiftinsupply--thegraphicrepresentationoftheeffectofachangeinafactorotherthanpriceonsupply.Copyrig
ht©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-41ShiftsinSupplyVersusMovementsAlongaSupplyCurveQuantitysuppl
iedreferstoaspecificamountthatwillbesuppliedataspecificprice.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-H
ill/Irwin4-42ShiftsinSupplyVersusMovementsAlongaSupplyCurveChangesinpricecauseschangesinquantitysuppliedrepresentedbyamovementalongas
upplycurve.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-43ShiftinSupplyPrice(perunit)Quantitysupplied(pe
runitoftime)S0ShiftinSupply(ashiftofthecurve)S1$15AB1,2501,500Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-H
ill/Irwin4-44Changeinquantitysupplied(amovementalongthecurve)ChangeinQuantitySuppliedPrice(perunit)Quantitysupplied(perunitoftime)S0$15A1,2501,50
0BCopyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-45ShiftFactorsofSupplyShift
factorsofsupplyarethosefactorsthatcauseshiftsintheentiresupplycurvetotheleftorright.Copyright©2001byTheMcGraw-HillCompani
es,Inc.Allrightsreserved.McGraw-Hill/Irwin4-46ShiftFactorsofSupplyThefollowingareshiftfactorsofsupply:Changesinthepricesofinputsusedintheproduct
ionofagoodChangesintechnologyChangesinsuppliers'expectationsChangesintaxesandsubsidiesCopyright©2001byTheMcGraw-HillCompanies,Inc.Allrig
htsreserved.McGraw-Hill/Irwin4-47ShiftFactorsofSupplyChangesinthepricesofinputsusedintheproductionofagood.Ifcostsgoup,thenprofitsgodown,a
ndtheincentivetosupplyalsogoesdown.Ifcostsgoupsubstantially,thefirmmayevenshutdown.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrights
reserved.McGraw-Hill/Irwin4-48ShiftFactorsofSupplyTechnologymakescostsgodown,profitsgoup,thustheincentivetosupplyalsogoesup.Thi
sisespeciallytruewhentechnologyreplaceslabor.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4
-49ShiftFactorsofSupplyIftheyexpectpricestoriseinthefuture,suppliersmaystoretoday'sproductionforanexpectedwindfalllater.Iftheyexpectpricestofallinthe
future,suppliersmayselloffmoreoftheirinventoriestoday.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-50Shift
FactorsofSupplyIftaxesgoup,costsalsogoup,andprofitsgodown,leadingsupplierstoreduceoutput.Ifgovernmentsubsidiesgoup,costsgodo
wn,andprofitsgoup,leadingsupplierstoincreaseoutput.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/I
rwin4-51FromaSupplyTabletoaSupplyCurveToderiveasupplycurvefromasupplytable,youploteachpointinthesupplytableonagraphandconnectthepoints.Copyright©2001
byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-52FromaSupplyTabletoaSupplyCurveThesupplycurverepresentstheset
ofminimumpricesanindividualsellerwillacceptforvariousquantitiesofagood.Copyright©2001byTheMcGraw-HillCompa
nies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-53FromaSupplyTabletoaSupplyCurveCompetingsuppliers’entryin
tothemarketplacesalimitonthepriceanysuppliercancharge.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrigh
tsreserved.McGraw-Hill/Irwin4-54IndividualandMarketSupplyCurvesThemarketsupplycurveisderivedbyhorizontallyaddingtheindividualsupplycurvesofeachsup
plier.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-55FromIndividualSupplie
stoaMarketSupplyQuantitiesSuppliedABCDEFGHI(1)Price(indollars)(2)Ann'sSupply(5)MarketSupply(4)Charlie'sS
upply$0.000.501.001.502.002.503.003.504.00012345678001234555000000022013579111415(3)Barry'sSupplyCopyright©2001byTheMcGra
w-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-5612345678910111213141516FromIndividualSuppliestoaMarketSupplyPricepercassette(in
dollars)CharlieBarryAnnQuantityofcassettessupplied(perweek)$4.003.503.002.502.001.501.000.500IHGFEDCBAMarketSupplyCACopyright©2001byTheMcGraw
-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-57TheMarriageofSupplyandDemandTheEnglishhistorianThomasCarlyleonce
said:“Teachanyparrotthewordssupplyanddemandandyou’vegotaneconomist.”Copyright©2001byTheMcGraw-HillCompanies,Inc.
Allrightsreserved.McGraw-Hill/Irwin4-58TheDynamicLawsofSupplyandDemandSupplyanddemandcometogethertodetermineequilibriumquantityandequilibriumprice.
Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-59ExcessSupplyandExc
essDemandExcesssupply–pricestendtofallifquantitysuppliedisgreaterthanquantitydemanded.Excessdemand–pricestendtoriseifquanti
tydemandedisgreaterthanquantitysupplied.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McG
raw-Hill/Irwin4-60PriceAdjustsThelargerthedifferencebetweenquantitydemandedandquantitysupplied,thegreaterthepressureforpricestorise(ifthereisexcessde
mand)orfall(ifthereisexcesssupply.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-61Pri
ceAdjustsWhenquantitydemandedequalsquantitysupplied,priceshavenotendencytochange.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserv
ed.McGraw-Hill/Irwin4-62ATheMarriageofSupplyandDemandPricepercassette(indollars)$5.004.003.503.002.502.001.501.00SDQuantityofcasse
ttessuppliedanddemanded(perweek)CExcessdemand123456789101112ExcesssupplyExcesssupplyBECopyright©2001byTheMcGraw-HillCompanies,Inc.Allrigh
tsreserved.McGraw-Hill/Irwin4-63EquilibriumEquilibriumisaconceptinwhichopposingdynamicforcespushingcanceleachotherout.Copyright©2001byTheMcGra
w-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-64EquilibriumInsupplyanddemandanalysis,equilibriummeansthattheup
wardpressureonpriceisexactlyoffsetbythedownwardpressureonprice.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-65E
quilibriumEquilibriumpriceisthepricetowardwhichtheinvisiblehanddrivesthemarket.Equilibriumquantityistheamountboughtandso
ldattheequilibriumprice.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-66Equilibrium
Isn't:Astateoftheworld—it'sacharacteristicofthemodelusedtolookattheworld.Inherentlygoodorbad—butsimplyastateinw
hichdynamicpressuresoffseteachother.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-67DesirableCharact
eristicsofSupply/DemandEquilibriumConsumersurplus–thedistancebetweenthedemandcurveandthepricethedemanderpaysisnetbenefittoconsumers.Copyri
ght©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-68DesirableCharacteristicsofSupply/DemandEquilibriumProducersurplus
–ifaproducerreceivesmorethanthepricehewouldbewillingtosellitfor,hereceivesanetbenefit.Copyright©2001byTheMcGraw-HillCompa
nies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-69DesirableCharacteristicsofSupply/DemandEquilibriumWhat'sgoodaboutequilibriumisthatitmakesthecombinat
ionofconsumerandproducersurplusaslargeasitcanbe.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsre
served.McGraw-Hill/Irwin4-70DesirableCharacteristicsofSupply/DemandEquilibriumMarketsallowtrade,therebyleadingtoanincreaseinthecombination
ofconsumerandproducersurplus.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin4-71ConsumerandProducerSurpl
usSupplyDemandQuantity0$1098765432110987654321ProducerSurplusConsumerSurplusLostSurplusCopyright©2001byTheMcGraw-HillCompanies,Inc.Al
lrightsreserved.McGraw-Hill/IrwinSupplyandDemandEndofChapter4