Supply Individual Supply Determinants of Supply Market Equilibrium
Demand, Supply, and Market Equilibrium
GovernmentSet Prices Last Word
3-1
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
3-2
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
3-3
Copyright 2008 The McGraw-Hill Companies
1
Chapter 3
Demand • Law of Demand.
Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium GovernmentSet Prices Last Word
3-4
– 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
3-5
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
6
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
2
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
Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium GovernmentSet Prices Last Word
3-10
– 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
3-11
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
3-12
Copyright 2008 The McGraw-Hill Companies
4
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
3-14
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
5
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
3-17
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
6
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
3-19
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
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
3-21
Copyright 2008 The McGraw-Hill Companies
7
Chapter 3
Key Terms Page
Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium GovernmentSet Prices Last Word
3-22
• • • • • • • • • • • • • •
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
