Demand Individual Demand

Determinants of Demand Supply

3

Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices Last Word Key Terms

Demand, Supply, and Market Equilibrium

End Show 3-1

Copyright 2008 The McGraw-Hill Companies

Chapter Objectives Demand Individual Demand

Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices Last Word Key Terms End Show 3-2

• Demand Defined and What Affects It • Supply Defined and What Affects It • How Supply & Demand Together Determine Market Equilibrium • How Changes in Supply and Demand Affect Equilibrium Prices and Quantities • Government-Set Prices and their Implications for Surpluses & Shortages Copyright 2008 The McGraw-Hill Companies

Demand Demand Individual Demand

Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices

• Demand Defined • Demand Schedule • Law of Demand

Key Terms End Show 3-3

3.2

–Diminishing Marginal Utility –Income Effect –Substitution Effect

3.3

• Demand Curve • Market Demand

Last Word

3.1

Copyright 2008 The McGraw-Hill Companies

3.4

Individual Demand Demand Individual Demand

P

Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices Last Word Key Terms

6

Individual Demand P $5

Qd 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

Quantity Demanded (bushels per week) End Show 3-4

Copyright 2008 The McGraw-Hill Companies

Q

Individual Demand Demand Individual Demand

Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices Last Word Key Terms

Determinants of Demand • Tastes • Number of Buyers • Income – Normal Goods – Inferior Goods

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

• Consumer Expectations

End Show 3-5

Copyright 2008 The McGraw-Hill Companies

Individual Demand Demand Can Increase or Decrease

Demand Individual Demand

P

Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices Last Word Key Terms

6

Individual Demand P $5

Qd 10

4

20

3

35

2

55

1

80

5

Price (per bushel)

Determinants of Demand

Increase in Demand

4

3

2

1

0

D2

Decrease in Demand 2

4

6

8

10

D1

D3 12

14

16

18 Q

Quantity Demanded (bushels per week) End Show 3-6

Copyright 2008 The McGraw-Hill Companies

Individual Demand Demand Can Increase or Decrease

Demand Individual Demand

An Increase in Demand Means a Movement of the Line

P

Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices Last Word Key Terms

6

Individual Demand P $5

Qd 10

4

20

3

35

2

55

1

80

5

Price (per bushel)

Determinants of Demand

A Movement Between Any Two Points on a Demand Curve is Called a Change in Quantity Demanded

4

3

2

1

0

D2

Decrease in Demand 2

4

6

8

10

D1

D3 12

14

16

18 Q

Quantity Demanded (bushels per week) End Show 3-7

Copyright 2008 The McGraw-Hill Companies

Supply Demand Individual Demand

Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices Last Word Key Terms End Show 3-8

• Supply Defined • Supply Schedule • Law of Supply –Revenue Implications –Marginal Cost

• Supply Curve • Market Supply Copyright 2008 The McGraw-Hill Companies

Individual Supply Demand Individual Demand

P

Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices Last Word Key Terms

6

Individual Supply P $5

Qs 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

70

Quantity Supplied (bushels per week) End Show 3-9

Copyright 2008 The McGraw-Hill Companies

Q

Individual Supply Determinants of Supply

Demand Individual Demand

Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices Last Word Key Terms

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

End Show 3-10

Copyright 2008 The McGraw-Hill Companies

Individual Supply Supply Can Increase or Decrease

Demand Individual Demand

P

Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices Last Word Key Terms

6

Individual Supply P $5

Qs 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

Quantity Supplied (bushels per week) End Show 3-11

Copyright 2008 The McGraw-Hill Companies

Q

Individual Supply Supply Can Increase or Decrease

Demand Individual Demand

P

Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices Last Word Key Terms

Individual Supply P $5

Qs 60

4

50

3

35

2

20

1

5

5

Price (per bushel)

Determinants of Demand

6

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 Movement of the Line

1

0

2

4

6

8

10

12

14

Quantity Supplied (bushels per week) End Show 3-12

Copyright 2008 The McGraw-Hill Companies

Q

Market Equilibrium • Equilibrium Price

Demand Individual Demand

Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices Last Word Key Terms End Show 3-13

3.1

• Equilibrium Quantity

• Surplus • Shortage • Rationing Function of Prices Copyright 2008 The McGraw-Hill Companies

Market Equilibrium 200 Buyers & 200 Sellers

Demand

Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices

Market Demand 200 Buyers

P

Qd

$5

2,000

4

4,000

3

7,000

2

11,000

1

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

Key Terms

S $4 Price Floor

7,000 Bushel Shortage

1

Last Word

Market Supply 200 Sellers

6

Price (per bushel)

Individual Demand

2

4

6 7 8

10

D 12

14

16

18

Bushels of Corn (thousands per week) End Show 3-14

Copyright 2008 The McGraw-Hill Companies

Market Equilibrium Demand Individual Demand

Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices Last Word Key Terms End Show 3-15

• Changes in Demand • Changes in Supply • Changes in Equilibrium • Efficient Allocation –Productive Efficiency –Allocative Efficiency Copyright 2008 The McGraw-Hill Companies

Market Equilibrium Price Quantity

Demand Individual Demand

Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices Last Word Key Terms End Show 3-16

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

Copyright 2008 The McGraw-Hill Companies

Government-Set Prices Demand Individual Demand

Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices Last Word Key Terms End Show 3-17

• Price Ceilings on Gasoline • Rationing Problem • Black Markets • Rent Controls • Price Floors on Wheat • Optimal Allocation of Resources Copyright 2008 The McGraw-Hill Companies

3.2

A Legal Market for Human Organs Demand Individual Demand

Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices Last Word Key Terms End Show 3-18

• • • • • • • • •

Waiting List for Transplants Demand for Organs Vertical Supply of Organs Incentive Role of Market and UpSloping Supply Increases Quantity Decreases Price Moral Objections Increase the Cost of Health Care Better to Legalize and Regulate?

Copyright 2008 The McGraw-Hill Companies

A Legal Market for Human Organs Demand Individual Demand

S1

P

Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices

Supply With Price Incentive S2 Supply of Organs Demand for Organs Shortage at Zero Price Q1 – Q3

P1 At Price P1 the Shortage is Reduced By Q1 – Q2

Last Word Key Terms

P0

End Show 3-19

Copyright 2008 The McGraw-Hill Companies

D1 Q1

Q2

Q3

Q

Key Terms Page Demand Individual Demand

Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices Last Word Key Terms End Show 3-20

• • • • • • • • • • • • • •

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

Copyright 2008 The McGraw-Hill Companies

• • • • • • • • • • • • •

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

Next Chapter Preview… Demand Individual Demand

Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium

GovernmentSet Prices

The U.S. Economy: Public and Private Sectors

Last Word Key Terms End Show 3-21

Copyright 2008 The McGraw-Hill Companies