Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 1

Obama’s State of the Union Address

§ What will be the impact on the:

– Price of U.S. renewable energy?

– Production Possibilities Frontier (PPF)?

“Obama predicted that because of the recovery plan, the United States will double its supply of renewable energy in the next three years. He also said the country will invest $15 billion a year to develop technology for green energy.”

“On education, Obama set a goal of having the highest college graduation rate in the world by 2020. “

[Source: CNNPolitics.com]

January 27, 2010

Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 2

ECON

Designed byAmy McGuire, B-books, Ltd.

McEachern 2010-2011

4CHAPTERDemand, Supply, and Markets

Macro

Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 3

LO1

Demand Demand

The quantity consumers are

willing and able to buy at each

possible price during a given

time period, other things

constant

Amounts purchased per period

At each possible price

Willing and able

Specific period

Other things constant

Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 4

LO1

The Demand Schedule and Demand Curve for Pizza

The market demand D shows the quantity of pizza demanded, at various prices, by all consumers.Price and quantity demanded are inversely related.

(a) Demand schedule

Exhibit 1

D

a

b

c

d

e

Price

per

pizza

Quantity Demanded

Per week (millions)

a

b

c

d

e

$15

12

9

6

3

8

14

20

26

32

2620148Millions of pizzas per week

32 0

9

6

3

12

Pric

e pe

r pi

zza

$15

Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 5

LO1

Shifts of the Demand Curve1. Money income of consumers

2. Prices of other goods

3. Consumer expectations

4. The number or composition of

consumers in the market

5. Consumer tastes

Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 6

LO1

An Increase in the Market Demand for Pizza

An increase in the demand for pizza is shown by a rightward shift of the demand curve, so the quantity demanded increases at each price.

Exhibit 2

D’

D

b f

2620148Millions of pizzas per week

32 0

9

6

3

12

Pric

e pe

r pi

zza

$15

Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 7

LO2

The Supply Schedule and Supply Curve for Pizza

Price

per

pizza

Quantity Supplied

Per week (millions)

$15

12

9

6

3

28

24

20

16

12The market supply S shows the quantity of pizza supplied, at various prices, by all pizza makers. Price and quantity supplied are directly related.

(a) Supply schedule

Exhibit 3

(b) Supply curve

S

24201612Millions of pizzas per week

28 0

9

6

3

12

Pric

e pe

r pi

zza

$15

Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 8

LO2

An Increase in the Supply of Pizza

An increase in the supply of pizza is reflected by a rightward shift of the supply curve, from S to S’.

Quantity supplied increases at each price level.

Exhibit 4

S’S

24201612Millions of pizzas per week

28 0

9

6

3

12

Pric

e pe

r pi

zza

$15

gh

Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 9

LO3

Equilibrium in the Pizza Market

Millions of pizzas per Week

Price per

pizza

Quantity

Demanded

Quantity

Supplied

Surplus or

Shortage Effect on Price

$15

12

9

6

3

8

14

20

26

32

28

24

20

16

12

Surplus of 20

Surplus of 10

Equilibrium

Shortage of 10

Shortage of 20

Falls

Falls

Remains the same

Rises

Rises

(a) Market schedules

Exhibit 5(a)

Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 10

LO3

Equilibrium in the Pizza Market(b) Market curves

S

24201614

Millions of pizzas per week

26 0

9

6

3

12

Pric

e pe

r pi

zza

$15

D

c

Shortage

SurplusMarket equilibrium occurs at:Price where QD=QS; Point c

Above the equilibrium price:QS>QD; Surplus; Downward pressure on P

Below the equilibrium price:QD>QS; Shortage; Upward pressure on P

Exhibit 5(b)

Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 11

LO4

Effects of an Increase in DemandS

2420

Millions of pizzas per week

30 0

9

$12

Pric

e pe

r pi

zza

D

c

D’

g

Increase in demand:Rightward shift to D’At P=$9: QD>QS; shortageUpward pressure on PQD decreasesQS increases

New equilibrium gHigher PHigher Q

Exhibit 6

Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 12

LO4

Effects of an Increase in Supply

Increase in supply:Rightward shift to S’At P=$9: QS>QD; surplusDownward pressure on PQD increasesQS decreases

New equilibrium dHigher QLower PE

xhibit 7

S

2620

Millions of pizzas per week

30 0

$9

6Pric

e pe

r pi

zza

D

c S’

d

Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 13

LO5

Price Floors and Price Ceilings

Exhibit 11

S

D

(a) Price floor for milk (b) Price ceiling for rent

$2.50

1.90

Pric

e pe

r ga

llon

1914Millions of gallons per month

0 24

S

D

$1,000

600

Mon

thly

ren

tal p

rice

5040Thousands of rental units per month 0 60

Surplus

Shortage

No effect if price floor is

set at or below equilibrium P

No effect if price ceiling is

set at or above equilibrium P

Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 14

Setting Your Price as an Entrepreneur

§ You think about producing a brand new product that’s never been done before…

§ How can you figure out the demand?§ Can you then determine the market price?

§ To determine price, you also have to determine your (supply) cost…it’s where demand & supply meet!