Demand, Supply, and Market Equilibrium

Chapter 3 Demand Individual Demand Determinants of Demand 3 Supply Individual Supply Determinants of Supply Market Equilibrium Demand, Supply, and...
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Chapter 3

Demand Individual Demand Determinants of Demand

3

Supply Individual Supply Determinants of Supply Market Equilibrium

Demand, Supply, and Market Equilibrium

GovernmentSet Prices Last Word

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Copyright 2008 The McGraw-Hill Companies

Chapter 3

Chapter Objectives

Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium

• Demand Defined and What Affects It. • Supply Defined and What Affects It. • How Supply and Demand Together Determine Market Equilibrium. • How Changes in Supply and Demand Affect Equilibrium Prices and Quantities. • Government-Set Prices and their Implications for Surpluses and Shortages.

GovernmentSet Prices Last Word

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Copyright 2008 The McGraw-Hill Companies

Chapter 3

Demand • Demand Defined.

Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium GovernmentSet Prices

– Demand is a schedule that shows the various amounts of a product that consumers are willing and able to buy at each specific price in a series of possible prices during a specified time period.

• Demand Schedule. – The schedule shows how much buyers are willing and able to purchase at five possible prices.

Last Word

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Copyright 2008 The McGraw-Hill Companies

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Chapter 3

Demand • Law of Demand.

Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium GovernmentSet Prices Last Word

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– Law of demand is a fundamental characteristic of demand behavior. – Other things being equal, as price increases, the corresponding quantity demanded falls.

• Explanation of the law of demand. – Diminishing Marginal Utility. – Income Effect. – Substitution Effect.

Copyright 2008 The McGraw-Hill Companies

Chapter 3

Demand • Demand Curve.

Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium GovernmentSet Prices

– Illustrates the inverse relationship between price and quantity. – The downward slope indicates lower quantity (horizontal axis) at higher price (vertical axis), higher quantity at lower price, reflecting the Law of Demand.

• Market Demand. – Market demand curve is horizontal sum of individual demand curves.

Last Word

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Copyright 2008 The McGraw-Hill Companies

Chapter 3

Individual Demand

Demand Individual Demand

P

Supply Individual Supply Determinants of Supply Market Equilibrium GovernmentSet Prices Last Word

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Individual Demand P

Qd

$5

10

4

20

3

35

2

55

1

80

5

Price (per bushel)

Determinants of Demand

4

3

2

1

0

D 10

20

30

40

50

60

70

80

Q

Quantity Demanded (bushels per week) 3-6

Copyright 2008 The McGraw-Hill Companies

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Chapter 3

Individual Demand Determinants of Demand

Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium GovernmentSet Prices Last Word

• Tastes. • Number of Buyers. • Income. – Normal Goods. – Inferior Goods.

• Price of Related Goods. – Substitute Good. – Complementary Good. – Unrelated Goods.

• Consumer Expectations. 3-7

Copyright 2008 The McGraw-Hill Companies

Chapter 3

Individual Demand Demand Can Increase or Decrease

Demand Individual Demand

P

Supply Individual Supply Determinants of Supply Market Equilibrium GovernmentSet Prices Last Word

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6

Individual Demand P

Qd

$5

10

4

20

3

35

2

55

1

80

5

Price (per bushel)

Determinants of Demand

4

Increase in Demand

3

2

1

0

D2

Decrease in Demand

D3

D1

2 4 6 8 10 12 14 16 18 Q Quantity Demanded (bushels per week)

Copyright 2008 The McGraw-Hill Companies

Chapter 3

Individual Demand Demand Can Increase or Decrease

Demand Individual Demand

P

Supply Individual Supply Determinants of Supply Market Equilibrium GovernmentSet Prices Last Word

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6

Individual Demand P

Qd

$5

10

4

20

3

35

2

55

1

80

5

Price (per bushel)

Determinants of Demand

4

3

An Increase in Demand Means a Shift of the Line A Movement Between Any Two Points on a Demand Curve is Called a Change in Quantity Demanded

2

1

0

D2

Decrease in Demand

D3

D1

2 4 6 8 10 12 14 16 18 Q Quantity Demanded (bushels per week)

Copyright 2008 The McGraw-Hill Companies

3

Chapter 3

Supply • Supply Defined.

Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium GovernmentSet Prices Last Word

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– Supply is a schedule that shows amounts of a product a producer is willing and able to produce and sell at each specific price in a series of possible prices during a specified time period.

• Supply Schedule. – Schedule shows what quantities will be offered at various prices or what price will be required to induce various quantities to be offered.

Copyright 2008 The McGraw-Hill Companies

Chapter 3

Supply • Law of Supply.

Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium GovernmentSet Prices

– Producers will produce and sell more of their product at a high price than at a low price. – Restated: There is a direct relationship between price and quantity supplied.

• Explanation of the Law of Supply. – Revenue Implications. – Marginal Cost.

Last Word

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Copyright 2008 The McGraw-Hill Companies

Chapter 3

Supply • Supply Curve.

Demand Individual Demand Determinants of Demand Supply

– It shows a direct relationship between price and quantity supplied in an upward sloping curve.

• Market Supply.

Individual Supply Determinants of Supply

– Market supply curve is horizontal sum of individual supply curves.

Market Equilibrium GovernmentSet Prices Last Word

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Copyright 2008 The McGraw-Hill Companies

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Chapter 3

Individual Supply

Demand Individual Demand

P

Supply

6

Individual Supply

Individual Supply Determinants of Supply Market Equilibrium GovernmentSet Prices Last Word

P

Qs

$5

60

4

50

3

35

2

20

1

5

S1

5

Price (per bushel)

Determinants of Demand

4

3

2

1

0

10

20

30

40

50

60

Q

70

Quantity Supplied (bushels per week) 3-13

Copyright 2008 The McGraw-Hill Companies

Chapter 3

Individual Supply

Demand

Determinants of Supply

Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium GovernmentSet Prices

• • • • • •

Resource Prices. Technology. Taxes and Subsidies. Prices of Other Goods. Producer Expectations. Number of Sellers.

Last Word

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Copyright 2008 The McGraw-Hill Companies

Chapter 3

Individual Supply Supply Can Increase or Decrease

Demand Individual Demand

P

Supply Individual Supply Determinants of Supply Market Equilibrium GovernmentSet Prices Last Word

6

Individual Supply P

Qs

$5

60

4

50

3

35

2

20

1

5

S3 S1

5

Price (per bushel)

Determinants of Demand

S2

4

3

2

1

0

2

4

6

8

10

12

14

Q

Quantity Supplied (bushels per week) 3-15

Copyright 2008 The McGraw-Hill Companies

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Chapter 3

Individual Supply Supply Can Increase or Decrease

Demand Individual Demand

P

Supply

6

Individual Supply

Individual Supply Determinants of Supply Market Equilibrium GovernmentSet Prices Last Word

P

Qs

$5

60

4

50

3

35

2

20

1

5

5

Price (per bushel)

Determinants of Demand

A Movement Between Any Two Points on a Supply Curve is Called a Change in Quantity Supplied

S3 S1 S2

4

3

2

An Increase in Supply Means a Shift of the Line

1

0

2

4

6

8

10

12

Q

14

Quantity Supplied (bushels per week) 3-16

Copyright 2008 The McGraw-Hill Companies

Chapter 3

Market Equilibrium

Demand

• Equilibrium Price.

Individual Demand

• Equilibrium Quantity.

Determinants of Demand

• Surplus.

Supply

• Shortage.

Individual Supply Determinants of Supply

• Rationing Function of Prices.

Market Equilibrium GovernmentSet Prices Last Word

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Copyright 2008 The McGraw-Hill Companies

Chapter 3

Market Equilibrium 200 Buyers & 200 Sellers

Demand

Determinants of Demand Supply Individual Supply

Market Demand 200 Buyers

P

Qd

$5

2,000

4

4,000

3

7,000

Market Equilibrium

2

11,000

GovernmentSet Prices

1

Determinants of Supply

6,000 Bushel Surplus

5

P

Qs

$5

12,000

4

10,000

3

7,000

$2 Price Ceiling 2

4,000

1

1,000

4 3 2

16,000

0

3-18

S $4 Price Floor

7,000 Bushel Shortage

1

Last Word

Market Supply 200 Sellers

6

Price (per bushel)

Individual Demand

D

2 4 6 7 8 10 12 14 16 18 Bushels of Corn (thousands per week)

Copyright 2008 The McGraw-Hill Companies

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Chapter 3

Market Equilibrium

Demand Individual Demand Determinants of Demand Supply

• • • •

Individual Supply Determinants of Supply

Changes in Demand. Changes in Supply. Changes in Equilibrium. Efficient Allocation. – Productive Efficiency. – Allocative Efficiency.

Market Equilibrium GovernmentSet Prices Last Word

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Copyright 2008 The McGraw-Hill Companies

Chapter 3

Market Equilibrium Price Quantity

Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium GovernmentSet Prices

• Supply Increase; Demand Decrease • Supply Decrease; Demand Increase • Supply Increase; Demand Increase • Supply Decrease; Demand Decrease

? ? ? ?

Last Word

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Copyright 2008 The McGraw-Hill Companies

Chapter 3

Government-Set Prices

Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply

• • • • • •

Price Ceilings on Gasoline. Rationing Problem. Black Markets. Rent Controls. Price Floors on Wheat. Optimal Allocation of Resources.

Market Equilibrium GovernmentSet Prices Last Word

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Copyright 2008 The McGraw-Hill Companies

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Chapter 3

Key Terms Page

Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium GovernmentSet Prices Last Word

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• • • • • • • • • • • • • •

Demand Demand schedule Law of demand Diminishing marginal utility Income effect Substitution effect Demand curve Determinants of demand Normal goods Inferior goods Substitute good Complementary good Change in demand Change in quantity demanded

• • • • • • • • • • • • •

Supply Supply schedule Law of supply Supply curve Determinants of supply Change in supply Change in quantity supplied Equilibrium price Equilibrium quantity Surplus Shortage Price ceiling Price floor

Copyright 2008 The McGraw-Hill Companies

Chapter 3

Next Chapter Preview…

Demand Individual Demand Determinants of Demand Supply Individual Supply

The U.S. Economy: Public and Private Sectors

Determinants of Supply Market Equilibrium

Chapter 4

GovernmentSet Prices Last Word

3-23

Copyright 2008 The McGraw-Hill Companies

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