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PRINCIPLES OF
ECONOMICS
FOURTH EDITION
N. G R E G O R Y M A N K I W
particular product.
In modern economics,
A market is a group of buyers and sellers of a
In modern economics,
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competitive.
2
Demand
The quantity demanded of any good is the
Demand schedule:
Example:
Helens demand for lattes.
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Price Quantity
of
of lattes
lattes demanded
$0.00
16
1.00
14
2.00
12
3.00
10
4.00
5.00
6.00
Price Quantity
of
of lattes
lattes demanded
Price of
Lattes
$6.00
$0.00
16
1.00
14
$4.00
2.00
12
$3.00
3.00
10
$5.00
4.00
$2.00
0
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Quantity
15 of Lattes
10
Price
Helens Qd
$0.00
16
24
1.00
14
21
2.00
12
18
3.00
10
15
4.00
12
5.00
6.00
Qd
(Market)
$0.00
24
$5.00
1.00
21
$4.00
2.00
18
$3.00
3.00
15
4.00
12
5.00
6.00
P
$6.00
$2.00
$1.00
$0.00
6.00
$0.00
5.00
$1.00
Kens Qd
Market Qd
Q
0
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10
15
20
25
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Increase in # of buyers
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
0
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10
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10
15
20
25
30
11
prices of
related goods
to income.
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12
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13
prices of
related goods
Example:
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14
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Variable
decisions.
16
Price
causes a movement
along the D curve
No. of buyers
Income
Price of
related goods
Tastes
Expectations
Examples:
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15
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17
ACTIVE LEARNING
1:
ACTIVE LEARNING
Demand curve
1:
Music
Music downloads
downloads
and
and iPods
iPods are
are
complements.
complements.
A
A fall
fall in
in price
price of
of
iPods
iPods shifts
shifts the
the
demand
demand curve
curve for
for
music
music downloads
downloads
to
to the
the right.
right.
Price of
music
downloads
P1
D1
C. The price of
compact discs falls
Q2
Q1
Quantity of
music downloads
18
19
1:
B. price of music downloads falls
ACTIVE LEARNING
Price of
music
downloads
Price of
music
downloads
ACTIVE LEARNING
The
The D
D curve
curve
does
does not
not shift.
shift.
Move
Move down
down along
along
curve
curve to
to aa point
point with
with
lower
lower P,
P, higher
higher Q.
Q.
P1
P2
CDs
CDs and
and
music
music downloads
downloads
are
are substitutes.
substitutes.
A
A fall
fall in
in price
price of
of CDs
CDs
shifts
shifts demand
demand for
for
music
music downloads
downloads
to
to the
the left.
left.
P1
D1
Q1
Q2
1:
D1
D2
Q2
Quantity of
music downloads
Q1
Quantity of
music downloads
20
21
Supply
Supply schedule:
Example:
Starbucks supply of lattes.
22
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Price
of
lattes
Quantity
of lattes
supplied
$0.00
1.00
2.00
3.00
4.00
12
5.00
15
6.00
18
23
Price
of
lattes
Quantity
of lattes
supplied
$0.00
1.00
2.00
3.00
4.00
12
5.00
15
6.00
18
Q
0
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10
15
24
Price
Starbucks
Jitters
$0.00
1.00
2.00
10
3.00
15
4.00
12
20
5.00
15
10
25
6.00
18
12
30
QS
(Market)
$0.00
1.00
2.00
10
$4.00
3.00
15
$3.00
4.00
20
$2.00
5.00
25
6.00
30
$5.00
$1.00
$0.00
0
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10 15
20 25 30
35
26
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27
Suppose the
price of milk falls.
At each price,
the quantity of
Lattes supplied
will increase
(by 5 in this
example).
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
0
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28
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10 15
20 25 30
35
29
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30
Variable
Example:
Events in the Middle East lead to expectations of
higher oil prices.
In response, owners of Texas oilfields reduce
supply now, save some inventory to sell later at
the higher price.
S curve shifts left.
supply*
ACTIVE LEARNING
32
2:
31
Price
causes a movement
along the S curve
Input prices
Technology
No. of sellers
Expectations
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33
A C T I V E L E A R N I N G 2:
A. fall in price of photo imaging software
Supply curve
Draw a supply curve for
photo imaging software.
What happens to it in each
of the following scenarios?
A. Retailers cut the price of
the software.
B. A technological advance
allows the software to be
produced at lower cost.
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CHAPTER 4
Price of
photo
imaging
software
S1
P1
P2
S
S curve
curve does
does
not
not shift.
shift.
Move
Move down
down
along
along the
the curve
curve
to
to aa lower
lower P
P
and
and lower
lower Q.
Q.
Q2 Q1
Quantity of
photo imaging
software
35
2:
B. fall in cost of producing the software
2:
C. professional photoshops raise their price
ACTIVE LEARNING
Price of
photo
imaging
software
S1
Q2
Price of
photo
imaging
software
S
S curve
curve shifts
shifts
to
to the
the right:
right:
at
at each
each price,
price,
Q
Q increases.
increases.
S2
P1
Q1
ACTIVE LEARNING
Quantity of
photo imaging
software
$5.00
$4.00
$3.00
$2.00
Equilibrium:
P has reached
the level where
quantity supplied
equals
quantity demanded
QS
$5.00
$0
24
$4.00
21
$3.00
18
10
15
15
12
20
25
30
$2.00
$1.00
$0.00
$0.00
Q
5
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10 15 20 25 30 35
38
Equilibrium quantity:
The quantity supplied and quantity demanded
at the equilibrium price
P
D
S
$6.00
D
S
P
24
$5.00
$4.00
21
$4.00
$3.00
18
10
$3.00
15
15
12
20
25
$1.00
30
$0.00
$1.00
Q
0
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and
QS = 25 lattes
resulting in a surplus
of 16 lattes
Q
0
40
39
then
QD = 9 lattes
$2.00
10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND
10 15 20 25 30 35
Surplus:
when quantity supplied is greater than
quantity demanded
P
Example:
D Surplus
S
$6.00
If P = $5,
$0
$2.00
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$5.00
$0.00
Q
0
37
Equilibrium price:
The price that equates quantity supplied
with quantity demanded
P
D
S
$6.00
D
$1.00
This
This shifts
shifts the
the
demand
demand curve
curve for
for
photo
photo imaging
imaging
software,
software, not
not the
the
supply
supply curve.
curve.
Quantity of
photo imaging
software
36
$6.00
S1
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10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND
41
Surplus:
when quantity supplied is greater than
quantity demanded
P
D Surplus
S Facing a surplus,
$6.00
sellers try to increase
$5.00
sales by cutting price.
Surplus:
when quantity supplied is greater than
quantity demanded
P
D Surplus
S Facing a surplus,
$6.00
sellers try to increase
$5.00
sales by cutting price.
$4.00
This causes
QD to rise and QS to fall
$4.00
$2.00
$3.00
$2.00
$1.00
$0.00
5
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$1.00
$0.00
Q
0
This causes
QD to rise and QS to fall.
$3.00
10 15 20 25 30 35
Q
0
42
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10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND
Shortage:
when quantity demanded is greater than
quantity supplied
P
Example:
D
S
$6.00
If P = $1,
$5.00
then
$4.00
QD = 21 lattes
and
$3.00
QS = 5 lattes
$2.00
resulting in a
$1.00
shortage of 16 lattes
Shortage:
when quantity demanded is greater than
quantity supplied
P
Facing a shortage,
D
S
$6.00
sellers raise the price,
$0.00
$0.00
Shortage
0
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10 15 20 25 30 35
44
Shortage:
when quantity demanded is greater than
quantity supplied
P
Facing a shortage,
D
S
$6.00
sellers raise the price,
$2.00
$1.00
$2.00
$1.00
Shortage
CHAPTER 4
10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND
45
To
To determine
determine the
the effects
effects of
ofany
anyevent,
event,
1.
1. Decide
Decide whether
whetherevent
eventshifts
shifts SScurve,
curve,
DDcurve,
curve,or
orboth.
both.
2.
2. Decide
Decide in
in which
which direction
direction curve
curve shifts.
shifts.
$3.00
$3.00
causing QD to fall
and QS to rise.
$4.00
causing QD to fall
and QS to rise,
which reduces the
shortage.
$4.00
$5.00
$5.00
43
3.
3. Use
Use supply-demand
supply-demand diagram
diagram to
to see
see
how
the
shift
changes
eqm
P
how the shift changes eqm Pand
and Q.
Q.
Shortage
$0.00
Q
0
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10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND
46
CHAPTER 4
47
EXAMPLE:
price of
hybrid cars
S1
STEP 1:
D curve shifts
because
STEP 2: price of gas
affects demand for
D shifts right
hybrids.
because
high gas
STEP
3: does
S
curve
not
price
makes
hybrids
The shift causes
an
shift,
more because
attractiveprice
increase
in price
of
gas
does
not
relative to other cars.
and quantity
affect
cost of of
hybrid cars.
producing
hybrids.
P1
D1
Q
Q1
quantity of
hybrid cars
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48
CHAPTER 4
D2
D1
Q1 Q2
S1
P2
P1
D2
D1
Q1 Q2
EVENTS:
price of gas rises AND
new technology reduces
production costs
and Demand
S1
S2
STEP 1:
S curve shifts
because
STEP 2: event affects P1
cost of production.
P2
S shifts right
D
curve does
not
because
event
STEPbecause
3:
shift,
reduces
cost,
The shift causes
production
technology
makes production
price
to
fallof the
is
not
one
more profitable at
and quantity
to rise.
factors
thatprice.
affect
any given
demand.
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49
Always be careful
to distinguish b/w
a shift in a curve
and a movement
along the curve.
P1
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S1
P2
STEP 1:
P
S1
S2
P2
P1
STEP 2:
D1
Q1 Q2
52
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D1
Q1
Q2
D2
Q
53
3:
Changes in supply and demand
ACTIVE LEARNING
and Demand
EVENTS:
price of gas rises AND
new technology reduces
production costs
STEP 3, cont.
But if supply
increases more
than demand,
P falls.
P
S1
P1
P2
D2
D1
Q1
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S2
Q2
54
3:
ACTIVE LEARNING
ACTIVE LEARNING
B. fall in cost of
royalties
STEPS
1. D curve shifts
P1
2. D shifts left
P2
55
STEPS
3. P and Q both
fall.
D2
Q2 Q1
3:
1. S curve shifts
(royalties are part
2. S shifts right
of sellers costs)
3. P falls,
Q rises.
D1
S2
P1
P2
D1
Q1 Q2
56
57
CONCLUSION:
3:
C. fall in price of CDs
AND fall in cost of royalties
ACTIVE LEARNING
STEPS
STEPS
1.
1. Both
Both curves
curves shift
shift (see
(see parts
parts AA && B).
B).
2.
2. D
D shifts
shifts left,
left, SS shifts
shifts right.
right.
3.
3. PP unambiguously
unambiguously falls.
falls.
Effect
Effect on
on Q
Q is
is ambiguous:
ambiguous:
The
The fall
fall in
in demand
demand reduces
reduces Q,
Q,
the
increase
in
supply
the increase in supply increases
increases Q.
Q.
58
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59
CHAPTER SUMMARY
A competitive market has many buyers and
CHAPTER SUMMARY
Besides price, demand depends on buyers
CHAPTER 4
CHAPTER SUMMARY
The intersection of S and D curves determine
CHAPTER 4
61
CHAPTER SUMMARY
We can use the supply-demand diagram to
analyze the effects of any event on a market:
First, determine whether the event shifts one or
both curves. Second, determine the direction of
the shifts. Third, compare the new equilibrium to
the initial one.
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62
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63
12
10
9
10
8
7
Demand
Price
Price
6
6
Supply
4
4
3
2
1
0
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Quantity
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Quantity
12
12
10
10
Demand
Supply
Price
Price
Demand
4
2
2
0
1
10
Quantity
11
13
15
17
19
Quantity
10
10
Supply
Price
Price
Demand
Supply
0
1
10
Quantity
Summary
Supply, Demand, and Equilibrium
Step 1: Identify which curve shifts (or both)
Step 2: Identify what direction did it shift
Step 3: Use the S/D graph to find how
equilibrium price and quantity change
Homework: Mankiw, p. 85-87, Problem 4,
7, 8, 12, 13
Quantity
10