The Market Forces of Supply and Demand 4 The Market Forces of Supply and Demand Economics P R I N C I P L E S O F N. Gregory Mankiw This is perhaps the most important chapter in the textbook. It’s worth mentioning to your students that investing extra time to master this chapter will make it easier for them to learn much of the subsequent material in the book. This is also one of the longest chapters in the textbook, and this PowerPoint file is one of the most graph-intensive. Many students taking economics for the first time have difficulty grasping the graphs, which are critically important in this and all subsequent chapters in the book. So an extra degree of hand-holding might be appropriate. Accordingly, this PowerPoint has carefully detailed animations that build many of the graphs with great care. For example, we show a demand or supply schedule next to the axes, and highlight each coordinate pair in the table as the corresponding point appears on the graph. Please be assured that the presentation of graphs is more streamlined in subsequent chapters. In this early chapter, though, we do not want to leave any students behind. If your students are already very comfortable with scatter-type graphs, you may wish to simplify or turn off the animation on these slides, in order to get through them faster. Premium PowerPoint Slides by Ron Cronovich

In this chapter, look for the answers to these questions: What factors affect buyers’ demand for goods? 어떤 요인들이 재화에 대한 구매자들의 수요에 영향을 미치는가? What factors affect sellers’ supply of goods? 어떤 요인들이 재화에 대한 판매자들의 공급에 영향을 미치는가? How do supply and demand determine the price of a good and the quantity sold?수요와 공급이 어떻게 재화의 가격과 거래량을 결정하는가? How do changes in the factors that affect demand or supply affect the market price and quantity of a good? 수요와 공급에 영향을 미치는 요인들의 변화가 어떻게 시장가격과 거래량에 영향을 미치는가? How do markets allocate resources? 어떻게 시장이 자원을 배분하는가? 1

Markets and Competition A market is a group of buyers and sellers of a particular product. 시장은 특정 생산물의 구매자와 판매자들의 모임이다. A competitive market is one with many buyers and sellers, each has a negligible effect on price. 경쟁시장이란 수많은 구매자와 판매자가 있어 누구도 가격에 거의 영향을 미치지 못하는 시장이다. In a perfectly competitive market: 완전경쟁시장에서는 All goods exactly the same 모든 상품은 정확히 동일하며 Buyers & sellers so numerous that no one can affect market price – each is a “price taker” 구매자와 판매자가 너무 많아서 누구도 시장가격에 영향을 미칠 수 없다. –그들 모두는 “가격 수용자”다 In this chapter, we assume markets are perfectly competitive. 이 장에서 우리는 시장이 완전경쟁적이라고 가정한다. In the real world, there are relatively few perfectly competitive markets. Most goods come in lots of different varieties – including ice cream, the example in the textbook. And there are many markets in which the number of firms is small enough that some of them have the ability to affect the market price. For now, though, we look at supply and demand in perfectly competitive markets, for two reasons: First, it’s easier to learn. Understanding perfectly competitive markets makes it a lot easier to learn the more realistic but complicated analysis of imperfectly competitive markets. Second, despite the lack of realism, the perfectly competitive model can teach us a LOT about how the world works, as we will see many times in the chapters that follow. THE MARKET FORCES OF SUPPLY AND DEMAND 2

Demand The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase.수요량: 구매자들이 값을 치르고 구입할 의사와 능력이 있는 재화의 양 Law of demand: the claim that the quantity demanded of a good falls when the price of the good rises, other things equal 수요의 법칙 : 다른 조건이 불변일 때, 어떤 재화의 가격이 상승하면 그 재화의 수요량이 감소하는 법칙 Demand comes from the behavior of buyers. THE MARKET FORCES OF SUPPLY AND DEMAND 3

Quantity of lattes demanded The Demand Schedule Price of lattes Quantity of lattes demanded $0.00 16 1.00 14 2.00 12 3.00 10 4.00 8 5.00 6 6.00 4 Demand schedule: 수요표 a table that shows the relationship between the price of a good and the quantity demanded 어떤 재화의 가격과 수요량의 관계를 나타내는 표 Example: Helen’s demand for lattes. 헬렌의 라떼에 대한 수요 Notice that Helen’s preferences obey the Law of Demand. 헬렌의 선호는 수요의 법칙을 따르고 있다. THE MARKET FORCES OF SUPPLY AND DEMAND 4

Helen’s Demand Schedule & Curve 헬렌의 수요표와 수요곡선 Price of Lattes Quantity of Lattes Price of lattes Quantity of lattes demanded $0.00 16 1.00 14 2.00 12 3.00 10 4.00 8 5.00 6 6.00 4 THE MARKET FORCES OF SUPPLY AND DEMAND 5

Market Demand versus Individual Demand The quantity demanded in the market is the sum of the quantities demanded by all buyers at each price. 시장수요량은 각 가격에서 모든 구매자의 수요량을 합친 것이다. Suppose Helen and Ken are the only two buyers in the Latte market. (Qd = quantity demanded) $0.00 6.00 5.00 4.00 3.00 2.00 1.00 Price 4 6 8 10 12 14 16 Helen’s Qd 2 3 4 5 6 7 8 Ken’s Qd Market Qd + = 24 + = 21 This example violates the “many buyers” condition of perfect competition. Yet, we are merely trying to show here that, at each price, the quantity demanded in the market is the sum of the quantity demanded by each buyer in the market. This holds whether there are two buyers or two million buyers. But it would be harder to fit data for two million buyers on this slide, so we settle for two. + = 18 + = 6 9 12 15 6 6

The Market Demand Curve for Lattes 라떼의 시장수요곡선 P Qd (Market) $0.00 24 1.00 21 2.00 18 3.00 15 4.00 12 5.00 9 6.00 6 P Q THE MARKET FORCES OF SUPPLY AND DEMAND 7

Demand Curve Shifters수요곡선의 이동 The demand curve shows how price affects quantity demanded, other things being equal. 수요곡선은, 다른 모든 것이 일정할 때 , 가격이 어떻게 수요량에 영향을 미치는 지를 보여준다. These “other things” are non-price determinants of demand (i.e., things that determine buyers’ demand for a good, other than the good’s price). 이 “다른 모든 것”은 수요의 비가격 결정요소들(즉, 구매자의 수요를 결정하는 가격 이외의 것들)이다. Changes in them shift the D curve… 이러한 비가격 결정요소들이 변화하면 수요곡선이 이동한다. THE MARKET FORCES OF SUPPLY AND DEMAND 8

Demand Curve Shifters: number of Buyers Increase in number of buyers increases quantity demanded at each price, shifts D curve to the right. 구매자 수의 증가는 각 가격에서의 수요량을 증대시켜 수요곡선을 왼쪽으로 이동시킨다. Income is the first demand shifter discussed in this chapter of the textbook. I chose to start with a different one (number of buyers), for the following reason: In discussing the impact of changes in income on the demand curve, the textbook also introduces the concept of normal goods and inferior goods. Students may find it easier to learn about curve shifts if the presentation focuses solely on a curve shift (at least initially) without simultaneously introducing other concepts. If you wish to present the demand shifters in the same order as they appear in the book, simply reorder the slides in this presentation. THE MARKET FORCES OF SUPPLY AND DEMAND 9

Demand Curve Shifters: number of Buyers P Q Suppose the number of buyers increases. Then, at each P, Qd will increase (by 5 in this example). Beginning economics students often have trouble understanding the difference between a movement along the curve and a shift in the curve. Here, the animation has been carefully designed to help students see that a shift in the curve results from an increase in quantity at each price. (A more realistic scenario would involve a non-parallel shift, where the horizontal distance of the shift would be greater for lower prices than higher ones. However, to remain consistent with the textbook, and to keep things simple, this slide shows a parallel shift.) THE MARKET FORCES OF SUPPLY AND DEMAND 10

Demand Curve Shifters: Income Demand for a normal good is positively related to income.소득과 정상재의 수요는 정(+)의 관계에 있다. Increase in income causes increase in quantity demanded at each price, shifts D curve to the right. 소득의 증가는 각 가격에서 수요량을 증대시켜 수요곡선을 오른쪽으로 이동시킨다. (Demand for an inferior good is negatively related to income. An increase in income shifts D curves for inferior goods to the left.) 소득과 열등재의 수요는 부(-)의 관계에 있다. 소득의 증가는 열등재의 수요곡선을 왼쪽으로 이동시킨다. THE MARKET FORCES OF SUPPLY AND DEMAND 11

Demand Curve Shifters: Prices of Related Goods Two goods are substitutes if an increase in the price of one causes an increase in demand for the other. 한 재화의 가격 상승이 다른 한 재화의 수요를 증대시킬 때 두 재화는 대체재 관계에 있다. Example: pizza and hamburgers. 예: 피자와 햄버거 An increase in the price of pizza increases demand for hamburgers, shifting hamburger demand curve to the right. 피자가격이 오르면 햄버거 수요가 증가하여 햄버거의 수요곡선이 오른쪽으로 이동한다. Other examples: Coke and Pepsi, laptops and desktop computers, CDs and music downloads If you are willing to spend a couple extra minutes on substitutes and complements, and have a blackboard or whiteboard to draw on, here’s an idea: Before (or instead of) showing this slide, draw the demand curve for hamburgers. Pick a price, say $5, and draw a horizontal line at that price, extending from the vertical axis through the D curve and continuing to the right. Suppose Q = 1000 when P = $5. Label this on the horizontal axis. Now ask your students: If pizza becomes more expensive, but price of hamburgers does not change, what would happen to the quantity of hamburgers demanded? Would it remain at 1000, would it increase, or would it decrease? Explain. Some and perhaps most students will see right away that people will want more hamburgers when the price of pizza rises. After establishing this, note that the increase in the price of pizza caused an increase in the quantity demanded of hamburgers. Then state the term “substitutes” and give the definition. Before giving the other examples (listed in the 3rd bullet of this slide), do a similar exercise to develop the concept of complements. Finally, give the examples of substitutes and complements from the 3rd bullet point of this and the following slides, but mix up the order and ask students to identify whether each example is complements or substitutes. THE MARKET FORCES OF SUPPLY AND DEMAND 12

Demand Curve Shifters: Prices of Related Goods Two goods are complements if an increase in the price of one causes a fall in demand for the other. 한 재화 가격의 상승이 다른 재화에 대한 수요 하락을 가져온다면 이 두 재화는 보완재이다. Example: computers and software. If price of computers rises, people buy fewer computers, and therefore less software. Software demand curve shifts left. 만약 컴퓨터 가격이 오르면 사람들은 컴퓨터를 적게 살 것이고, 이에 따라 소프트웨어도 적게 사게 된다. 소프트웨어에 대한 수요곡선이 왼쪽으로 이동한다. Other examples: college tuition and textbooks, bagels and cream cheese, eggs and bacon THE MARKET FORCES OF SUPPLY AND DEMAND 13

Demand Curve Shifters: Tastes Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right. 어떤 재화에 대한 기호의 증대는 그 재화에 대한 수요를 증대시켜 수요곡선을 오른쪽으로 이동시킨다. Example: The Atkins diet became popular in the ’90s, caused an increase in demand for eggs, shifted the egg demand curve to the right. 90년대에 엣킨스 다이어트가 인기를 끌면서 계란에 대한 수요 증대를 가져왔고, 이는 계란 수요곡선을 오른쪽으로 이동시켰다. THE MARKET FORCES OF SUPPLY AND DEMAND 14

Demand Curve Shifters: Expectations Expectations affect consumers’ buying decisions. 기대는 소비자의 구매결정에 영향을 미친다. Examples: If people expect their incomes to rise, their demand for meals at expensive restaurants may increase now. 만약 사람들이 자신의 소득이 오를 것으로 기대한다면 비싼 음식점에서 하는 식사에 대한 수요는 지금 증가할 것이다. If the economy sours and people worry about their future job security, demand for new autos may fall now. 만약 경제가 좋지 않아 사람들이 자신의 미래 직업 안정성을 걱정한다면 새로운 자동차에 대한 수요는 지금 하락할 것이다. THE MARKET FORCES OF SUPPLY AND DEMAND 15

Summary: Variables That Influence Buyers Variable A change in this variable… Price …causes a movement along the D curve # of buyers …shifts the D curve Income …shifts the D curve Price of related goods …shifts the D curve Tastes …shifts the D curve Expectations …shifts the D curve Students should notice that the only determinant of quantity demanded that causes a movement along the curve is price. Also notice: price is one of the variables measured along the axes of the graph. Here’s a handy “rule of thumb” to help students remember whether the curve shifts: If the variable causing demand to change is measured on one of the axes, you move along the curve. If the variable that’s causing demand to change is NOT measured on either axis, then the curve shifts. This rule of thumb works with all curves in economics that involve an X-Y relationship. (I.e., it works for the supply curve, the marginal cost curve, the IS and LM curves, among many others, but it does not apply to curves drawn on time series graphs.) THE MARKET FORCES OF SUPPLY AND DEMAND 16

A C T I V E L E A R N I N G 1 Demand Curve Draw a demand curve for music downloads. What happens to it in each of the following scenarios? Why? A. The price of iPods falls B. The price of music downloads falls C. The price of CDs falls In each case, there are only three possible answers: - The curve shifts to the right - The curve shifts to the left - The curve does not shift (though there may be a movement along the curve) 17

A C T I V E L E A R N I N G 1 A. Price of iPods falls Music downloads and iPods are complements. A fall in price of iPods shifts the demand curve for music downloads to the right. Price of music down-loads Quantity of music downloads D1 D2 P1 Q1 Q2 Point out to your students that there are no numbers or units on either axis, and we are using “P1” and “Q1” to represent the initial price and quantity, rather than specific numerical values. Tell them that this is common, because in much economic analysis, the goal is only to see the direction of changes, not specific amounts. (Besides, if we put numbers on this graph, they’d just have been made up, so why bother?) Also point out the following: The price of music downloads is the same, but the quantity demanded is now higher. In fact, this is the nature of a shift in a curve: at any given price, the quantity is different than before. 18

A C T I V E L E A R N I N G 1 B. Price of music downloads falls The D curve does not shift. Move down along curve to a point with lower P, higher Q. P1 Q2 P2 D1 Q1 Quantity of music downloads 19

A C T I V E L E A R N I N G 1 C. Price of CDs falls CDs and music downloads are substitutes. A fall in price of CDs shifts demand for music downloads to the left. Price of music down-loads D1 D2 P1 Q1 Q2 Quantity of music downloads 20

Supply The quantity supplied of any good is the amount that sellers are willing and able to sell. 어떤 재화의 공급량은 판매자가 팔 의사와 능력이 있는 수량이다. Law of supply: the claim that the quantity supplied of a good rises when the price of the good rises, other things equal 공급의 법칙 : 다른 조건이 불변일 때 어떤 재화의 가격이 상승하면 그 재화의 공급량이 증가하는 법칙 Supply comes from the behavior of sellers. THE MARKET FORCES OF SUPPLY AND DEMAND 21

The Supply Schedule 공급표 Price of lattes Quantity of lattes supplied $0.00 1.00 3 2.00 6 3.00 9 4.00 12 5.00 15 6.00 18 Supply schedule: A table that shows the relationship between the price of a good and the quantity supplied. 어떤 재화의 가격과 공급량의 관계를 나타내는 표 Example: Starbucks’ supply of lattes. 스타벅스의 라떼 공급 Notice that Starbucks’ supply schedule obeys the Law of Supply. 스타벅스의 라떼 공급표는 공급의 법칙을 따름 THE MARKET FORCES OF SUPPLY AND DEMAND 22

Starbucks’ Supply Schedule & Curve 스타벅스의 라떼 공급표와 공급곡선 Price of lattes Quantity of lattes supplied $0.00 1.00 3 2.00 6 3.00 9 4.00 12 5.00 15 6.00 18 P Q THE MARKET FORCES OF SUPPLY AND DEMAND 23

Market Supply versus Individual Supply 시장공급과 개별공급 The quantity supplied in the market is the sum of the quantities supplied by all sellers at each price. 시장에서의 공급량은 각 가격에서 모든 판매자가 공급하는 양의 합이다. Suppose Starbucks and Jitters are the only two sellers in this market. (Qs = quantity supplied) $0.00 6.00 5.00 4.00 3.00 2.00 1.00 Price 18 15 12 9 6 3 Starbucks 12 10 8 6 4 2 Jitters Market Qs + = + = 5 + = 10 Again, the assumption of only two sellers is a clear violation of perfect competition. However, it’s much easier for students to learn how the market supply curve relates to individual supplies in the two-seller case. + = 30 25 20 15 24 24

The Market Supply Curve P QS (Market) $0.00 1.00 5 2.00 10 3.00 15 4.00 20 5.00 25 6.00 30 P Q THE MARKET FORCES OF SUPPLY AND DEMAND 25

Supply Curve Shifters 공급곡선의 이동 The supply curve shows how price affects quantity supplied, other things being equal. 공급곡선은, 다른 모든 것이 일정할 때, 가격이 공급량에 미치는 효과를 보여준다. These “other things” are non-price determinants of supply. 이 “다른 모든 것”은 공급의 비가격 결정요소들이다. Changes in them shift the S curve… 이 요소들이 변화하면 공급곡선이 이동한다. “Non-price determinants of supply” simply means the things – other than the price of a good – that determine sellers’ supply of the good. THE MARKET FORCES OF SUPPLY AND DEMAND 26

Supply Curve Shifters: Input Prices Examples of input prices: 요소가격의 예 wages, prices of raw materials. 임금, 원료가격 A fall in input prices makes production more profitable at each output price, 요소가격의 하락은 각 산출물가격에서 생산의 수익성을 증대시킨다. so firms supply a larger quantity at each price, and the S curve shifts to the right. 따라서 기업들은 각 가격에서 더 많은 양을 공급하게 되며, 공급곡선은 오른쪽으로 이동한다. In the second bullet point, “output price” just means the price of the good that firms are producing and selling. I have used “output price” here to distinguish it from “input prices.” THE MARKET FORCES OF SUPPLY AND DEMAND 27

Supply Curve Shifters: Input Prices P Q Suppose the price of milk falls. At each price, the quantity of Lattes supplied will increase (by 5 in this example). Again, the animation here is carefully designed to help make clear that a shift in the supply curve means that there is a change in the quantity supplied at each possible price. If it seems tedious, you can turn it off. In any case, be assured that, by the end of this chapter, the animation of curve shifts will be streamlined and simplified. THE MARKET FORCES OF SUPPLY AND DEMAND 28

Supply Curve Shifters: Technology Technology determines how much inputs are required to produce a unit of output. 기술은 한 단위의 산출물을 생산하기 위해 얼마나 많은 투입이 필요한지를 결정한다. A cost-saving technological improvement has the same effect as a fall in input prices, shifts S curve to the right. 비용절약적 기술 개선은 요소가격의 하락과 동일한 효과를 가지며, 이 경우 공급곡선은 오른쪽으로 이동한다. THE MARKET FORCES OF SUPPLY AND DEMAND 29

Supply Curve Shifters: # of Sellers An increase in the number of sellers increases the quantity supplied at each price, shifts S curve to the right. 판매자 수의 증가는 각 가격에서의 공급량을 증가시켜 공급곡선을 오른쪽으로 이동시킨다. THE MARKET FORCES OF SUPPLY AND DEMAND 30

Supply Curve Shifters: Expectations Example: Events in the Middle East lead to expectations of higher oil prices. 중동에서의 사건은 유가 인상에 대한 기대를 불러왔다. In response, owners of Texas oilfields reduce supply now, save some inventory to sell later at the higher price. 이에 대응하여 텍사스 유전의 소유주들은 나중에 더 높은 가격에 팔기 위하여 현재의 공급을 축소하고 재고를 비축한다. S curve shifts left. 공급곡선이 왼쪽으로 이동한다. In general, sellers may adjust supply* when their expectations of future prices change. (*If good not perishable) 일반적으로 판매자들은 미래가격에 대한 기대가 변할 때 공급을 조절한다.(*재화가 상하는 것이 아닐 경우) THE MARKET FORCES OF SUPPLY AND DEMAND 31

Summary: Variables that Influence Sellers Variable A change in this variable… Price …causes a movement along the S curve Input Prices …shifts the S curve Technology …shifts the S curve # of Sellers …shifts the S curve Expectations …shifts the S curve THE MARKET FORCES OF SUPPLY AND DEMAND 32

A C T I V E L E A R N I N G 2 Supply Curve Draw a supply curve for tax return preparation software. What happens to it in each of the following scenarios? 소득공제 계산 소프트웨어 공급곡선을 그리고 다음 각 경우에 어떤 일이 일어날지에 대해 답하라 A. Retailers cut the price of the software. 가격인하 B. A technological advance allows the software to be produced at lower cost. 소프트웨어를 더 낮은 비용으로 생산할 수 있는 기술 진보 C. Professional tax return preparers raise the price of the services they provide. 전문회계사의 서비스 가격인상 “Tax return preparation software” means programs like TurboTax by Quicken and TaxCut by H&R Block. 33

A C T I V E L E A R N I N G 2 A. Fall in price of tax return software Quantity of tax return software S curve does not shift. Move down along the curve to a lower P and lower Q. S1 P1 Q1 Q2 P2 34

S curve shifts to the right: at each price, Q increases. A C T I V E L E A R N I N G 2 B. Fall in cost of producing the software Price of tax return software S curve shifts to the right: at each price, Q increases. S2 S1 P1 Q2 Q1 Quantity of tax return software 35

A C T I V E L E A R N I N G 3 C. Professional preparers raise their price Price of tax return software Quantity of tax return software S1 This shifts the demand curve for tax preparation software, not the supply curve. 36

Supply and Demand Together 수요와 공급의 결합 P Q Equilibrium: 균형 P has reached the level where quantity supplied equals quantity demanded 공급량과 수요량이 같아지는 수준에서 가격이 결정된다. S D We now return to the latte example to illustrate the concepts of equilibrium, shortage and surplus. THE MARKET FORCES OF SUPPLY AND DEMAND 37

Equilibrium price: 균형가격 the price that equates quantity supplied with quantity demanded 공급량이 수요량과 같아지는 가격 P Q S D P QD QS $0 24 1 21 5 2 18 10 3 15 4 12 20 9 25 6 30 THE MARKET FORCES OF SUPPLY AND DEMAND 38

Equilibrium quantity: 균형거래량 the quantity supplied and quantity demanded at the equilibrium price 균형가격에서의 공급량과 수요량 P Q S D P QD QS $0 24 1 21 5 2 18 10 3 15 4 12 20 9 25 6 30 THE MARKET FORCES OF SUPPLY AND DEMAND 39

Surplus (a.k.a. excess supply): 공급과잉(초과공급) when quantity supplied is greater than quantity demanded 공급량이 수요량을 초과하는 상태 P Q Example: If P = $5, S D Surplus then QD = 9 lattes and QS = 25 lattes resulting in a surplus of 16 lattes THE MARKET FORCES OF SUPPLY AND DEMAND 40

Surplus (a.k.a. excess supply): when quantity supplied is greater than quantity demanded P Q Facing a surplus, sellers try to increase sales by cutting price. 공급과잉이 발생하면 판매자들은 가격을 깍아서 판매를 늘이려고 한다. S D Surplus This causes QD to rise and QS to fall… …which reduces the surplus. 이는 수요량을 증대시키고 공급량을 떨어뜨려서 …공급과잉이 줄어들게 된다. THE MARKET FORCES OF SUPPLY AND DEMAND 41

Surplus (a.k.a. excess supply): when quantity supplied is greater than quantity demanded P Q Facing a surplus, sellers try to increase sales by cutting price. S D Surplus This causes QD to rise and QS to fall. Prices continue to fall until market reaches equilibrium. 가격은 시장이 균형에 도달할 때까지 지속적으로 떨어진다. THE MARKET FORCES OF SUPPLY AND DEMAND 42

Shortage (a.k.a. excess demand): 물량부족(초과수요) when quantity demanded is greater than quantity supplied 수요량이 공급량을 초과하는 상태 P Q Example: If P = $1, S D then QD = 21 lattes and QS = 5 lattes resulting in a shortage of 16 lattes Shortage THE MARKET FORCES OF SUPPLY AND DEMAND 43

Shortage (a.k.a. excess demand): when quantity demanded is greater than quantity supplied P Q Facing a shortage, sellers raise the price, S D causing QD to fall and QS to rise, …which reduces the shortage. 물량부족에 직면하면 판매자들은 가격을 올리고, 이는 수요량을 떨어뜨리고 공급량을 증가시켜, 물량부족을 줄어들게 한다. Shortage THE MARKET FORCES OF SUPPLY AND DEMAND 44

Shortage (a.k.a. excess demand): when quantity demanded is greater than quantity supplied P Q Facing a shortage, sellers raise the price, S D causing QD to fall and QS to rise. Prices continue to rise until market reaches equilibrium. 가격은 시장이 균형에 도달할 때 까지 지속적으로 상승한다. Shortage THE MARKET FORCES OF SUPPLY AND DEMAND 45

Three Steps to Analyzing Changes in Eq’m 균형의 변화를 분석하는 세가지 단계 To determine the effects of any event, 어떤 사건의 효과를 판단하기 위해서는 1. Decide whether event shifts S curve, D curve, or both. 그 사건이 공급곡선을 이동시키는지, 수요곡선을 이동시키는지 혹은 둘 다를 이동시키는지 판단 2. Decide in which direction curve shifts. 곡선이동의 방향을 판단 3. Use supply-demand diagram to see how the shift changes eq’m P and Q. 수요공급곡선을 이용하여 이러한 이동이 어떻게 균형가격과 균형거래량을 변화시키는지 알아본다. Step one requires knowing all of the things that can shift D and S – the non-price determinants of demand and of supply. THE MARKET FORCES OF SUPPLY AND DEMAND 46

EXAMPLE: The Market for Hybrid Cars Q price of hybrid cars S1 D1 P1 Q1 quantity of hybrid cars THE MARKET FORCES OF SUPPLY AND DEMAND 47

EXAMPLE 1: A Shift in Demand EVENT TO BE ANALYZED: Increase in price of gas. P Q S1 D2 D1 STEP 1: D curve shifts because price of gas affects demand for hybrids. S curve does not shift, because price of gas does not affect cost of producing hybrids. P2 Q2 STEP 2: D shifts right because high gas price makes hybrids more attractive relative to other cars. P1 Q1 STEP 3: The shift causes an increase in price and quantity of hybrid cars. THE MARKET FORCES OF SUPPLY AND DEMAND 48

EXAMPLE 1: A Shift in Demand Notice: When P rises, producers supply a larger quantity of hybrids, even though the S curve has not shifted. 주의 : 가격이 오를 때, 생산자들은 더 많은 양을 공급하지만, 공급곡선은 이동하지 않는다. P Q S1 D2 D1 P2 P1 Q1 Always be careful to distinguish b/w a shift in a curve and a movement along the curve. 항상 곡선의 이동인지 곡선상의 운동인지 여부를 구분하는데 주의하라 Q2 THE MARKET FORCES OF SUPPLY AND DEMAND 49

Terms for Shift vs. Movement Along Curve 곡선의 이동과 곡선상의 운동을 구분하기 위한 용어법 Change in supply(공급의 변화): a shift in the S curve(공급곡선의 이동) occurs when a non-price determinant of supply changes (like technology or costs) 공급의 비가격 결정요소가 변화할 때 발생 Change in the quantity supplied: 공급량의 변화 a movement along a fixed S curve 고정된 공급곡선 상의 운동 occurs when P changes 가격이 변화할 때 발생 Change in demand(수요의 변화): a shift in the D curve(수요곡선의 이동) occurs when a non-price determinant of demand changes (like income or # of buyers) 수요의 비가격 결정요소가 변화할 때 발생 Change in the quantity demanded: 수요량의 변화 a movement along a fixed D curve 고정된 수요곡선상의 변화 “Supply” refers to the position of the supply curve, while “quantity supplied” refers to the specific amount that producers are willing and able to sell. Similarly, “demand” refers to the position of the demand curve, while “quantity demanded” refers to the specific amount that consumers are willing and able to buy. If you’d like to be a rebel, delete this slide and all references to the jargon it contains, and just use the terms “movement along a curve” and “shift in a curve.” Note, however, that this is not the official recommendation of Cengage/South-Western or Dr. Mankiw. If you’d like to cover this slide but make it move more quickly, delete the text next to each second-level bullet (starting with “occurs when”). Instead, give the information to your students verbally or rely on them to read it in the textbook. 50 50

EXAMPLE 2: A Shift in Supply EVENT: New technology reduces cost of producing hybrid cars. P Q S1 S2 D1 STEP 1: S curve shifts because event affects cost of production. D curve does not shift, because production technology is not one of the factors that affect demand. STEP 2: S shifts right because event reduces cost, makes production more profitable at any given price. P1 Q1 P2 Q2 STEP 3: The shift causes price to fall and quantity to rise. THE MARKET FORCES OF SUPPLY AND DEMAND 51

EXAMPLE 3: A Shift in Both Supply and Demand EVENTS: price of gas rises AND new technology reduces production costs P Q S1 S2 D2 D1 STEP 1: Both curves shift. P2 Q2 P1 Q1 STEP 2: Both shift to the right. STEP 3: Q rises, but effect on P is ambiguous: If demand increases more than supply, P rises. THE MARKET FORCES OF SUPPLY AND DEMAND 52

EXAMPLE 3: A Shift in Both Supply and Demand EVENTS: price of gas rises AND new technology reduces production costs P Q S1 S2 D2 D1 STEP 3, cont. P1 Q1 But if supply increases more than demand, P falls. P2 Q2 THE MARKET FORCES OF SUPPLY AND DEMAND 53

A C T I V E L E A R N I N G 3 Shifts in supply and demand Use the three-step method to analyze the effects of each event on the equilibrium price and quantity of music downloads. 음원 다운로드시장의 분석 Event A: A fall in the price of CDs Event B: Sellers of music downloads negotiate a reduction in the royalties they must pay for each song they sell. 판매자가 곡을 팔 때마다 지불해야 하는 저작권료 인하 협상에 성공 Event C: Events A and B both occur. Important note about Event B: The royalties that sellers must pay the artists are part of sellers’ “costs of production.” Typically, this royalty is a fixed amount each time one of the artist’s songs is downloaded. Event B, therefore, describes a reduction in sellers’ “costs of production.” 54

A C T I V E L E A R N I N G 3 A. Fall in price of CDs The market for music downloads STEPS P Q 1. D curve shifts S1 D2 D1 2. D shifts left P1 Q1 3. P and Q both fall. P2 Q2 This is an extension of Active Learning exercise 1C, where we saw that a fall in the price of compact discs would cause a fall in demand for music downloads, because the two goods are substitutes. 55

A C T I V E L E A R N I N G 3 B. Fall in cost of royalties The market for music downloads STEPS 1. S curve shifts P Q (Royalties are part of sellers’ costs) S1 S2 D1 P1 Q1 2. S shifts right Q2 P2 3. P falls, Q rises. NOTE: Don’t worry that the text on this slide looks garbled in “Normal view” (i.e., edit mode). It works fine in “Slide Show” (i.e., presentation mode). Event B: Sellers of music downloads negotiate a reduction in the royalties they must pay for each song they sell. This event causes a fall in “costs of production” for sellers of music downloads. Hence, the S curve shifts to the right. 56

1. Both curves shift (see parts A & B). A C T I V E L E A R N I N G 3 C. Fall in price of CDs and fall in cost of royalties STEPS 1. Both curves shift (see parts A & B). 2. D shifts left, S shifts right. 3. P unambiguously falls. Effect on Q is ambiguous: The fall in demand reduces Q, the increase in supply increases Q. It’s not necessary to draw a graph here. The answers to steps 1 and 2 should be clear from parts A and B. The answer to step 3 is a combination of the results from A and B. 57

CONCLUSION: 결론 How Prices Allocate Resources 가격기구에 의한 자원배분 One of the Ten Principles from Chapter 1: Markets are usually a good way to organize economic activity. In market economies, prices adjust to balance supply and demand. These equilibrium prices are the signals that guide economic decisions and thereby allocate scarce resources. 시장경제에서 가격은 수요와 공급이 일치하도록 조정된다. 이러한 균형가격은 경제적 의사결정을 이끌어 자원을 배분하는 신호로서 기능한다. In the textbook, the conclusion of this chapter offers some very nice elaboration on the second bullet point. There is also an “In the News” box with a very nice article titled “In Praise of Price Gouging.” THE MARKET FORCES OF SUPPLY AND DEMAND 58

CHAPTER SUMMARY A competitive market has many buyers and sellers, each of whom has little or no influence on the market price. Economists use the supply and demand model to analyze competitive markets. The downward-sloping demand curve reflects the Law of Demand, which states that the quantity buyers demand of a good depends negatively on the good’s price. 59

CHAPTER SUMMARY Besides price, demand depends on buyers’ incomes, tastes, expectations, the prices of substitutes and complements, and number of buyers. If one of these factors changes, the D curve shifts. The upward-sloping supply curve reflects the Law of Supply, which states that the quantity sellers supply depends positively on the good’s price. Other determinants of supply include input prices, technology, expectations, and the # of sellers. Changes in these factors shift the S curve. 60

CHAPTER SUMMARY The intersection of S and D curves determines the market equilibrium. At the equilibrium price, quantity supplied equals quantity demanded. If the market price is above equilibrium, a surplus results, which causes the price to fall. If the market price is below equilibrium, a shortage results, causing the price to rise. 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. In market economies, prices are the signals that guide economic decisions and allocate scarce resources. 62