CHAPTER 2: DEMAND, SUPPLY AND EQUILIBRIUM PRICES

OVERVIEW

This chapter introduces students to the
important concepts of demand and supply.
Demand is the relationship between price and the quantity demanded of a
good by consumers in a given period of time, all other factors held
constant. Supply is the relationship
between price and the quantity supplied of a good by producers in a given
period of time, all other factors held constant. The Wall
Street Journal article on the copper industry demonstrates how both demand
and supply factors influenced the price of copper as well as the surplus that
was forecasted for 2007, despite the loss of production from a series of
strikes in the preceding year. The
chapter also covers detailed verbal, graphical and mathematical analyses of
demand and supply.

OUTLINE OF TEXT MATERIAL

I.
Introduction

A.
Demand: Functional relationship between the price and quantity demanded of
goods and services by consumers in a given period of time, all else equal.

B.
Supply: Functional relationship between the price and quantity supplied of
goods and services by producers in a given period of time, all else equal.

C.
Managers need to understand
demand and supply to develop competitive strategies and respond to the actions
of competitors.

D.
The chapter covers verbal,
graphical and mathematical analyses of demand and supply.

II.
Case for Analysis: Copper
Surplus is Foreseen in 07

A.
The Wall Street Journal article illustrates how demand and supply factors
affected the copper industry in 2006 and 2007.

B.
The prices of copper had
remained high in 2006 due to the following reasons.

1.
Numerous strikes limited
production.

2.
China’s rapid economic growth, comparable to the U.S. industrial
revolution of the 1800s, resulted in a strong demand.

3.
Existing deposits of copper
could not be extracted easily.

4.
There was an increase in the
incidence of copper theft in the United States.

C.
Larger quantities of copper
were predicted to be available for 2007 due to supply and demand factors
outlined below.

1.
An increase in supply was
forecasted because of smooth production uninterrupted by strikes and
technological advances that decreased production costs.

2.
A decrease in demand was
forecasted because of the slowing U.S. housing market and increased
availability of substitutes (aluminum and plastic piping in home
construction). These followed a lower
demand from Southeast Asia in the aftermath of
the financial crisis.

3.
China’s
demand remains uncertain due to the lack of data.

D.
The interaction of all supply
and demand factors and their magnitudes affect the copper price.

III.
Demand

A.
Demand: Functional relationship between the price and quantity demanded of
goods and services by consumers in a given period of time, all else equal.

B.
Non-price factors influence
demand, causing either an increase or a decrease in demand. These factors are the following.

1.
Tastes and Preferences

(a)
A favorable change in the taste
for good X increases its demand.

Teaching Tip: The text has concrete examples of tastes
and preferences. For instance, after
September 11, 2001, airlines have used different marketing strategies to
encourage more people to fly. In another
example, to prevent a large drop in the demand for chicken stemming from fears
of the avian flu, the phrase “pandemic flu” has replaced “bird flu.”

2.
Income

(a)
Normal Good: A product whose demand will increase with an increase in income.
(b)
Inferior Good: A product whose demand will decrease with an increase in income.

Teaching Tip: Make sure the students understand the
difference between normal and inferior goods.
Good examples of inferior goods are second-hand clothing and food such
as Spam, ramen noodles, macaroni and cheese, and peanut butter and jelly. The example used in the text is a tooth
extraction. Ask the students to come up
with other examples of inferior goods as they have better and interesting
examples.

3.
Prices of Related Goods

(a)
Substitute Goods: Products that can be used in place of one another. An increase in the price of a substitute
good, Y, causes an increase in the demand for good X.
(b)
Complementary Goods: Products that are used together.
A decrease in the price of a complementary good, Y, causes an increase
in the demand for good X.
(c)
Changes in the price of a
necessity, such as gasoline, can have effects on the purchasing power. In 2008, people saw their real incomes
decline as gasoline prices jumped to over $4 per gallon.

Teaching Tip: Make sure the students understand the
difference between substitute goods and complementary goods. The examples used in the text are iPods and
laptops that serve as substitutes for wristwatches, palladium as a cheap
substitute for platinum and personal computers being complementary to printers
and printer cartridges. Ask the students
to come up with other examples of substitute goods and complementary goods.

4.
Future Expectations

An expected increase in the future price of good
X will increase its