Chapter 03 40

1 © Pearson Education 2011
Economics,
Arab World Edition
R. Glenn Hubbard, Anthony Patrick O’Brien,
Ashraf Eid, Amany El Anshasy,
Chapter 3
Where Prices Come From:
The Interaction of Demand and
Supply

Apple and the Demand
for iPods
LEARNING Objectives
By early 2008, over 150 million iPods had been 3.1 Discuss the variables that influence
sold and more than 4 billion songs had been demand.
downloaded from iTunes. Clearly the strategy of 3.2 Discuss the variables that influence
selling an expensive digital music player and supply.
selling the music cheaply has been very
3.3 Use a graph to illustrate market
successful for Apple. But how long will the equilibrium.
iPod’s dominance last?
3.4 Use demand and supply graphs to
predict changes in prices and
quantities.

Where Prices Come From: The Interaction of
Demand and Supply
Perfectly competitive market

A market that meets the
conditions of
(1) many buyers and sellers, (2)
The Interaction of Demand and Supply
Chapter 3: Where Prices Come From:
all firms selling identical

products, and
(3) no barriers to new firms
entering the market.

Learning Objective 3.1
The Demand Side of the Market

Demand Schedules and Demand Curves
Demand schedule A table showing the relationship

between the price of a product and the quantity of the
product demanded.
Quantity demanded The amount of a good or service that

a consumer is willing and able to purchase at a given price.
Demand curve A curve that shows the relationship between

the price of a product and the quantity of the product
demanded.
Market demand The demand by all the consumers of a

given good or service.


Demand Schedules and Demand Curves
FIGURE 3-1
A Demand Schedule
and Demand Curve


The Law of Demand
Law of demand The rule that, holding

everything else constant, when the
price of a product falls, the quantity
demanded of the product will increase,

and when the price of a product rises,
the quantity demanded of the product
will decrease.


Holding Everything Else Constant:
The Condition
(“all else equal”) The requirement that when

analyzing the relationship between two variables—
such as price and quantity demanded—other

variables must be held constant.
A shift of a demand curve is an increase or

decrease in demand. A movement along a demand
curve is an increase or decrease in the quantity
demanded.


Holding Everything Else Constant
Condition
FIGURE 3-2
Shifting the
Demand Curve


Variables That Shift Market Demand
Many variables other than price can influence

market demand.
• Income
Normal good A good for which the

demand increases as income rises and
decreases as income falls.
Inferior good A good for which the

demand increases as income falls and
decreases as income rises.


• Price of related goods
Substitutes Goods and services that

can be used for the same purpose.
Complements Goods and services that

are used together.
• Tastes
Consumers can be influenced by an

advertising campaign for a product.


• Population and demographics
Demographics The characteristics

of a population with respect to age,
race, and gender.
• Expected Future Prices
Consumers choose not only which

products to buy but also when to buy
them.

Making Google Responds to a Growing Arab

the
World Demand on Internet Navigation by
Connection launching “Ahlan Online”
As internet users in the Arab world increase, the demand for basic
guidance on net navigation also rises. Not surprisingly, Google
have responded by creating an Arabic website that provides users
with the basic tips they need to navigate the Internet using Google
tools, such as Google search, Gmail, and Google Talk (chat).
http://www.google.com/intl/ar/ahlanonline/


TABLE 3-1
Variables That Shift Market Demand Curves


TABLE 3-1
Variables That Shift Market Demand Curves (continued)


A Change in Demand versus a Change in Quantity Demanded
FIGURE 3-3
A Change in Demand
for digital music players
versus a Change in the
Quantity Demanded

Making Apple Forecasts the Demand for iPhones

the
and other Consumer Electronics
Connection
To decide which products to develop,

firms need to forecast the demand for
those products.
Apple forecasted that it would sell 10

million iPhones during the product’s first
year on the market, with much larger
sales expected in future years. In April
2010, Apple announced that the
company was able to sell over 50 million
iPhones as of that date.

The Supply Side of the Market
Quantity supplied The amount of a good or service

that a firm is willing and able to supply at a given
price.
Supply Schedules and Supply Curves

Supply schedule A table that shows the relationship

product supplied.
Supply curve A curve that shows the relationship

product supplied.

Supply Schedules and Supply Curves

FIGURE 3-4
Supply Schedule and
Supply Curve


The Law of Supply
Law of supply The rule that, holding

everything else constant, increases in
price cause increases in the quantity
supplied, and decreases in price cause

decreases in the quantity supplied.


The Law of Supply
FIGURE 3-5
Shifting the Supply Curve


Variables That Shift Supply
The following are the most important variables that shift supply:
• Prices of inputs
• Technological change
Technological change A positive or negative

change in the ability of a firm to produce a
given level of output with a given quantity of
inputs.
• Prices of substitutes in production

• Number of firms in the market
• Expected future prices


TABLE 3-2
Variables That Shift Market Supply Curves


TABLE 3-2
Variables That Shift Market Supply Curves (continued)


A Change in Supply versus a Change in Quantity Supplied
FIGURE 3-6
A Change in Supply
versus a Change in the
Quantity Supplied

Market Equilibrium: Putting Demand

and Supply Together
FIGURE 3-7
Market Equilibrium

Market Equilibrium: Putting Demand and Supply

Together
Market equilibrium A situation

in which quantity demanded
equals quantity supplied.
Competitive market
equilibrium A market
equilibrium with many buyers
and many sellers.


Together
How Markets Eliminate Surpluses and Shortages
Surplus A situation in which the

quantity supplied is greater than the
quantity demanded.
Shortage A situation in which the

quantity demanded is greater than
the quantity supplied.


Together
How Markets Eliminate Surpluses and Shortages
FIGURE 3-8
The Effect of
Surpluses and
Shortages on the
Market Price


Together
Demand and Supply Both Count
Always keep in mind that it is the interaction of demand

and supply that determines the equilibrium price.
Neither consumers nor firms can dictate what the

equilibrium price will be.
No firm can sell anything at any price unless it can find

a willing buyer, and no consumer can buy anything at
any price without finding a willing seller.

The Effect of Demand and Supply Shifts on Equilibrium

The Effect of Shifts in Supply on Equilibrium
FIGURE 3-9
The Effect of an Increase
in Supply on Equilibrium

Making
the The Falling Price of LCD Televisions
Connection
Sources: David Richards, “Sony and Panasonic Flat Screen Kings,” Smarthouse.com, February 13, 2007; Evan
Ramstad, “Big Display: Once a Footnote, Flat Screens Grow into Huge Industry,” Wall Street Journal, August 30,
2004, p. A1; and Michael Schuman, “Flat Chance: Prices on Cool TVs Are Dropping as New Factories Come on
Line,” Time, October 18, 2004, pp. 64–66.


The Effect of Shifts in Demand on Equilibrium
FIGURE 3-10
The Effect of an Increase
in Demand on Equilibrium


The Effect of Shifts in Demand and Supply over Time
FIGURE 3-11
Shifts in Demand and
Supply over Time


The Effect of Shifts in Demand and Supply over Time
TABLE 3-3
How Shifts in Demand and Supply Affect
Equilibrium Price (P) and Quantity (Q)
SUPPLY CURVE SUPPLY CURVE SUPPLY CURVE

UNCHANGED SHIFTS TO THE RIGHT SHIFTS TO THE LEFT

DEMAND CURVE Q unchanged Q increases Q decreases

UNCHANGED P unchanged P decreases P increases
DEMAND CURVE Q increases Q increases or

SHIFTS TO THE RIGHT Q increases P increases or decreases
P increases decreases P increases
DEMAND CURVE Q decreases Q increases or Q decreases

SHIFTS TO THE LEFT P decreases decreases P increases or
P decreases decreases

Solved Problem 3-4

Low Demand and High Prices in the
Saudi Fresh Poultry Market?
Supply and demand for poultry both increase during winter, but the increase in
supply is greater than the increase in demand, therefore, equilibrium price falls.

Shifts in a Curve versus Movements along a Curve
When analyzing markets using demand

and supply curves, it is important to
remember that when a shift in a demand
or supply curve causes a change in
equilibrium price, the change in price

does not cause a further shift in demand
or supply.

An Inside LOOK How 'Perfect' Oil Price Hides Divisions
within OPEC?
Oil prices are determined by both supply and
demand factors.

Key Terms
(“all else equal”) condition Normal good

Competitive market equilibrium Perfectly competitive market
Complements Quantity demanded
Demand curve Quantity supplied
Demand schedule Shortage

Demographics Substitutes
Income effect Substitution effect
Inferior good Supply curve
Law of demand Supply schedule
Law of supply Surplus
Market demand Technological change
Market equilibrium

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1 © Pearson Education 2011

2 © Pearson Education 2011

3 © Pearson Education 2011

Perfectly competitive market

all firms selling identical

4 © Pearson Education 2011

The Demand Side of the Market

Demand schedule A table showing the relationship

Quantity demanded The amount of a good or service that

Demand curve A curve that shows the relationship between

Market demand The demand by all the consumers of a

5 © Pearson Education 2011

The Demand Side of the Market

6 © Pearson Education 2011

The Demand Side of the Market

Law of demand The rule that, holding

demanded of the product will increase,

7 © Pearson Education 2011

The Demand Side of the Market

(“all else equal”) The requirement that when

such as price and quantity demanded—other

variables must be held constant.

A shift of a demand curve is an increase or

8 © Pearson Education 2011

The Demand Side of the Market

9 © Pearson Education 2011

The Demand Side of the Market

Many variables other than price can influence

Normal good A good for which the

Inferior good A good for which the

10 © Pearson Education 2011

The Demand Side of the Market

Substitutes Goods and services that

Complements Goods and services that

Consumers can be influenced by an

11 © Pearson Education 2011

The Demand Side of the Market

• Population and demographics

Demographics The characteristics

race, and gender.

• Expected Future Prices

Consumers choose not only which

12 © Pearson Education 2011

Making Google Responds to a Growing Arab

tools, such as Google search, Gmail, and Google Talk (chat).

13 © Pearson Education 2011

The Demand Side of the Market

14 © Pearson Education 2011

The Demand Side of the Market

15 © Pearson Education 2011

The Demand Side of the Market

16 © Pearson Education 2011

Making Apple Forecasts the Demand for iPhones

To decide which products to develop,

Apple forecasted that it would sell 10

17 © Pearson Education 2011

The Supply Side of the Market

Quantity supplied The amount of a good or service

Supply Schedules and Supply Curves

Supply schedule A table that shows the relationship