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Chap003
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Chap003

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  • 1. Demand, Supply, and Market Equilibrium Chapter 3 Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
  • 2. Chapter Objectives
    • Demand and its determinants
    • Supply and its determinants
    • Supply, demand, & market equilibrium
    • Changes in supply and demand
    • Government-set prices
    3-
  • 3. A Market
    • Interaction between buyers and sellers
    • Buyers demand goods
    • Sellers supply goods
    • Assumptions
      • Standardized good
      • Competitive market
    3-
  • 4. Demand
    • Schedule or curve
    • Amount consumers willing and able to purchase at a given price
    • Other things equal
    • Individual demand
    • Market demand
    3-
  • 5. Law of Demand
    • Other things equal, as price falls quantity demanded rises
    • Explanations:
      • Diminishing marginal utility
      • Income effect
      • Substitution effect
    3-
  • 6. Individual Demand P Q d $5 4 3 2 1 10 20 35 55 80 P Q D 3- 6 5 4 3 2 1 0 10 20 30 40 50 60 70 80 Quantity Demanded (bushels per week) Price (per bushel)
  • 7. Determinants of Demand
    • Factors that shift the demand curve
    • Cause more or less to be bought at any possible price
    • Increase or decrease in demand
    • Tastes
    • Number of buyers
    3-
  • 8. Determinants of Demand
    • Income
      • Normal goods
      • Inferior goods
    • Price of related goods
      • Substitute good
      • Complementary good
      • Unrelated goods
    • Consumer expectations
    3-
  • 9. Individual Demand 6 5 4 3 2 1 0 Quantity Demanded (bushels per week) Price (per bushel) P Q d $5 4 3 2 1 10 20 35 55 80 P Q D 1 2 4 6 8 10 12 14 16 18 D 2 D 3 3-
  • 10. Individual Demand 6 5 4 3 2 1 0 Quantity Demanded (bushels per week) Price (per bushel) P Q d $5 4 3 2 1 10 20 35 55 80 P Q D 1 2 4 6 8 10 12 14 16 18 D 2 D 3 Change in Demand Change in Quantity Demanded 3-
  • 11. Supply
    • Schedule or curve
    • Amount producers willing and able to sell at a given price
    • Individual supply
    • Market supply
    3-
  • 12. Law of Supply
    • Other things equal, as price rises the quantity supplied rises
    • Explanations:
      • Revenue implications
      • Marginal cost
    3-
  • 13. Individual Supply 6 5 4 3 2 1 0 Quantity Supplied (bushels per week) Price (per bushel) P Q s $5 4 3 2 1 60 50 35 20 5 P Q S 1 10 20 30 40 50 60 70 3-
  • 14. Determinants of Supply
    • Resource prices
    • Technology
    • Taxes and subsidies
    • Prices of other goods
    • Producer expectations
    • Number of sellers
    3-
  • 15. Individual Supply 6 5 4 3 2 1 0 Quantity Supplied (bushels per week) Price (per bushel) P Q s $5 4 3 2 1 60 50 35 20 5 P Q S 1 S 2 S 3 10 20 30 40 50 60 70 3-
  • 16. Individual Supply 6 5 4 3 2 1 0 Quantity Supplied (bushels per week) Price (per bushel) P Q s $5 4 3 2 1 60 50 35 20 5 P Q S 1 S 2 S 3 10 20 30 40 50 60 70 Change in Quantity Supplied Change in Supply 3-
  • 17. Market Equilibrium
    • Equilibrium price and quantity
    • Surplus and shortage
    • Rationing function of price
    • Efficient allocation
      • Productive efficiency
      • Allocative efficiency
    3-
  • 18. Market Equilibrium 6 5 4 3 2 1 0 2 4 6 8 10 12 14 16 18 Bushels of Corn (thousands per week) Price (per bushel) P Q d $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 P Q s $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 7 3 D S $4 Price Floor 6,000 Bushel Surplus $2 Price Ceiling 7,000 Bushel Shortage 3-
  • 19. Market Equilibrium
    • Change in demand
      • Shift of the demand curve
    • Change in supply
      • Shift of the supply curve
    • Change in equilibrium price and quantity
    3-
  • 20. Market Equilibrium
    • Supply increase; Demand decrease
    • Supply decrease; Demand increase
    • Supply increase; Demand increase
    • Supply decrease; Demand decrease
    Price Quantity ? ? ? ? 3-
  • 21. Government-Set Prices
    • Price ceilings on gasoline
      • Rationing problem
      • Black markets
    • Rent controls
    • Price floors on wheat
      • Optimal allocation of resources
    3-
  • 22. A Market for Human Organs
    • Waiting list for transplants
    • Demand for organs
    • Supply of organs—two possibilities
    • Market eliminates shortage
    • Moral objections
    • Legalize and regulate?
    3-
  • 23. A Market for Human Organs P Q S 2 S 1 D 1 P 1 P 0 Q 1 Q 2 Q 3 Supply of Organs At Price P 1 the Shortage is Reduced By Q 1 – Q 2 Demand for Organs 3-
  • 24. Key Terms
    • 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
    3-
  • 25. Next Chapter Preview… The U.S. Economy: Public and Private Sectors 3-

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