Chap03

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Chap03

  1. 1. Individual Markets: Demand & Supply 3 C H A P T E R
  2. 2. MARKETS DEFINED MARKETS POTENTIAL SELLERS POTENTIAL BUYERS
  3. 3. DEMAND DEFINED $5 4 3 2 1 DEMAND SCHEDULE Various Amounts A Series of Possible Prices … a specified time period … other things being equal 10 20 35 55 80 P Q D
  4. 4. LAW OF DEMAND <ul><li>As Price Falls… </li></ul><ul><li>… Quantity Demanded Rises </li></ul><ul><li>As Price Rises… </li></ul><ul><li>… Quantity Demanded Falls </li></ul>An inverse relationship exists between price and quantity demanded
  5. 5. <ul><li>Diminishing Marginal Utility </li></ul>LAW OF DEMAND
  6. 6. <ul><li>Diminishing Marginal Utility </li></ul>LAW OF DEMAND <ul><li>Income Effect </li></ul>
  7. 7. <ul><li>Diminishing Marginal Utility </li></ul>LAW OF DEMAND <ul><li>Income Effect </li></ul><ul><li>Substitution Effect </li></ul>
  8. 8. <ul><li>Diminishing Marginal Utility </li></ul><ul><li>Income Effect </li></ul><ul><li>Substitution Effect </li></ul>LAW OF DEMAND <ul><li>Demand Curve </li></ul><ul><li>Individual and Market Demand </li></ul>
  9. 9. GRAPHING DEMAND P Q o $5 4 3 2 1 $5 4 3 2 1 10 20 35 55 80 Price of Corn Quantity of Corn CORN Plot the Points 10 20 30 40 50 60 70 80 P Q D
  10. 10. GRAPHING DEMAND 55 P Q o $5 4 3 2 1 $5 4 3 2 1 10 20 35 55 80 Price of Corn Quantity of Corn CORN Plot the Points 10 20 30 40 50 60 70 80 P Q D
  11. 11. GRAPHING DEMAND 35 P Q o $5 4 3 2 1 $5 4 3 2 1 10 20 35 55 80 Price of Corn Quantity of Corn CORN Plot the Points 10 20 30 40 50 60 70 80 P Q D
  12. 12. GRAPHING DEMAND P Q o $5 4 3 2 1 $5 4 3 2 1 10 20 35 55 80 Price of Corn Quantity of Corn CORN Plot the Points 10 20 30 40 50 60 70 80 P Q D
  13. 13. GRAPHING DEMAND P Q o $5 4 3 2 1 $5 4 3 2 1 10 20 35 55 80 Price of Corn Quantity of Corn CORN Plot the Points 10 20 30 40 50 60 70 80 P Q D
  14. 14. GRAPHING DEMAND P Q o $5 4 3 2 1 $5 4 3 2 1 10 20 35 55 80 D Price of Corn Quantity of Corn CORN Connect the Points 10 20 30 40 50 60 70 80 P Q D
  15. 15. GRAPHING DEMAND P Q o $5 4 3 2 1 $5 4 3 2 1 10 20 35 55 80 D Price of Corn Quantity of Corn CORN 10 20 30 40 50 60 70 80 What if Demand Increases? P Q D
  16. 16. GRAPHING DEMAND P Q o $5 4 3 2 1 $5 4 3 2 1 D Price of Corn Quantity of Corn CORN 10 20 30 40 50 60 70 80 D’ Increase in Demand Increase in Quantity Demanded 10 20 35 55 80 30 40 60 80 + P Q D
  17. 17. GRAPHING DEMAND P Q o $5 4 3 2 1 $5 4 3 2 1 10 20 35 55 80 D Price of Corn Quantity of Corn CORN 10 20 30 40 50 60 70 80 What if Demand Decreases? P Q D
  18. 18. GRAPHING DEMAND P Q o $5 4 3 2 1 $5 4 3 2 1 10 20 35 55 80 D Price of Corn Quantity of Corn CORN 10 20 30 40 50 60 70 80 -- 10 20 40 60 D’ Decrease in Demand Decrease in Quantity Demanded P Q D
  19. 19. DETERMINANTS OF DEMAND <ul><li>Tastes </li></ul><ul><li>Number of Buyers </li></ul><ul><li>Income </li></ul><ul><ul><li>Normal (Superior) & Inferior Goods </li></ul></ul><ul><li>Prices of Related Goods </li></ul><ul><ul><li>Substitutes & Complements </li></ul></ul><ul><ul><li>Unrelated Goods </li></ul></ul><ul><li>Expectations </li></ul>
  20. 20. SUPPLY DEFINED SUPPLY SCHEDULE $1 2 3 4 5 CORN Various Amounts 5 20 35 50 60 P Q S
  21. 21. SUPPLY DEFINED SUPPLY SCHEDULE $1 2 3 4 5 CORN Various Amounts A Series of Possible Prices … a specified time period … other things being equal 5 20 35 50 60 P Q S
  22. 22. LAW OF SUPPLY <ul><li>As Price Rises… </li></ul><ul><li>… Quantity Supplied Rises </li></ul><ul><li>As Price Falls… </li></ul><ul><li>… Quantity Supplied Falls </li></ul>A direct relationship exists between price and quantity supplied
  23. 23. GRAPHING SUPPLY 5 P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 Price of Corn Quantity of Corn CORN Plot the Points P Q S
  24. 24. GRAPHING SUPPLY P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 Price of Corn Quantity of Corn CORN Plot the Points P Q S
  25. 25. GRAPHING SUPPLY 35 P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 Price of Corn Quantity of Corn CORN Plot the Points P Q S
  26. 26. GRAPHING SUPPLY P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 Price of Corn Quantity of Corn CORN Plot the Points P Q S
  27. 27. GRAPHING SUPPLY P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 Price of Corn Quantity of Corn CORN Plot the Points P Q S
  28. 28. GRAPHING SUPPLY S P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 Price of Corn Quantity of Corn CORN Connect the Points P Q S
  29. 29. GRAPHING SUPPLY S P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 Price of Corn Quantity of Corn CORN What if Supply Increases? P Q S
  30. 30. GRAPHING SUPPLY S P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 Price of Corn Quantity of Corn $5 4 3 2 1 60 50 35 20 5 CORN 80 70 60 45 30 S’ Increase in Supply Increase in Quantity Supplied P Q S
  31. 31. GRAPHING SUPPLY S P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 Price of Corn Quantity of Corn CORN What if Supply Decreases? P Q S
  32. 32. GRAPHING SUPPLY S P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 Price of Corn Quantity of Corn CORN S’ 45 30 20 0 -- Decrease in Supply Decrease in Quantity Supplied P Q S
  33. 33. DETERMINANTS OF SUPPLY <ul><li>Resource Prices </li></ul><ul><li>Technology </li></ul><ul><li>Taxes & Subsidies </li></ul><ul><li>Prices of Other Goods </li></ul><ul><li>Price Expectations </li></ul><ul><li>Number of Sellers </li></ul>
  34. 34. DETERMINANTS OF SUPPLY <ul><li>Resource Prices </li></ul><ul><li>Technology </li></ul><ul><li>Taxes & Subsidies </li></ul><ul><li>Prices of Other Goods </li></ul><ul><li>Price Expectations </li></ul><ul><li>Number of Sellers </li></ul>Combining with Demand
  35. 35. MARKET DEMAND & SUPPLY $5 4 3 2 1 10 20 35 55 80 $5 4 3 2 1 60 50 35 20 5 200 B U Y E R S MARKET DEMAND 2,000 4,000 7,000 11,000 16,000 200 S E L L E R S 12,000 10,000 7,000 4,000 1,000 MARKET SUPPLY EQUILIBRIUM Graphically… x x P Q D BUSHELS OF CORN P Q S BUSHELS OF CORN
  36. 36. MARKET DEMAND & SUPPLY 7 S P Q o $5 4 3 2 1 2 4 6 8 10 12 14 16 $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D Price of Corn Quantity of Corn CORN MARKET CORN MARKET Market Clearing Equilibrium P Q D P Q S
  37. 37. MARKET DEMAND & SUPPLY 7 S P Q o $5 4 3 2 1 2 4 6 8 10 12 14 16 $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D Price of Corn Quantity of Corn CORN MARKET CORN MARKET Surplus At a $4 price more is being supplied than demanded P Q D P Q S
  38. 38. MARKET DEMAND & SUPPLY 11 7 S P Q o $5 4 3 2 1 2 4 6 8 10 12 14 16 $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D Price of Corn Quantity of Corn CORN MARKET CORN MARKET At a $2 price more is being demanded than supplied Shortage P Q D P Q S
  39. 39. MARKET DEMAND & SUPPLY 11 7 S P Q o $5 4 3 2 1 2 4 6 8 10 12 14 16 $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D Price of Corn Quantity of Corn CORN MARKET CORN MARKET Shortage Surplus P Q D P Q S
  40. 40. MARKET EQUILIBRIUM <ul><li>Equilibrium Price & Quantity </li></ul><ul><li>Rationing Function of Prices </li></ul><ul><li>Changes in Demand </li></ul><ul><li>Changes in Quantity Demanded </li></ul><ul><li>Changes in Supply </li></ul><ul><li>Changes in Quantity Supplied </li></ul>
  41. 41. Complex Cases <ul><li>Supply Increases; Demand Decreases </li></ul><ul><ul><li>Prices Decrease </li></ul></ul><ul><ul><li>Quantity Indeterminate </li></ul></ul><ul><li>Supply Decreases; Demand Increases </li></ul><ul><ul><li>Price Increases </li></ul></ul><ul><ul><li>Quantity Indeterminate </li></ul></ul>Multiple Shifts…
  42. 42. Complex Cases <ul><li>Supply Increases; Demand Increases </li></ul><ul><ul><li>Prices Indeterminate </li></ul></ul><ul><ul><li>Quantity Increases </li></ul></ul><ul><li>Supply Decreases; Demand Decreases </li></ul><ul><ul><li>Price Indeterminate </li></ul></ul><ul><ul><li>Quantity Decreases </li></ul></ul>Multiple Shifts…
  43. 43. Government Set Prices <ul><li>Price Ceilings </li></ul><ul><ul><li>Shortages </li></ul></ul><ul><ul><li>Rationing Problem </li></ul></ul><ul><ul><li>Black Markets </li></ul></ul><ul><ul><li>Rent Controls </li></ul></ul><ul><li>Price Floors </li></ul><ul><ul><li>Surpluses </li></ul></ul>
  44. 44. Government Set Prices <ul><li>Price Ceilings </li></ul><ul><ul><li>Shortages </li></ul></ul><ul><ul><li>Rationing Problem </li></ul></ul><ul><ul><li>Black Markets </li></ul></ul><ul><ul><li>Rent Controls </li></ul></ul><ul><li>Price Floors </li></ul><ul><ul><li>Surpluses </li></ul></ul>
  45. 45. Key Terms <ul><li>market </li></ul><ul><li>demand </li></ul><ul><li>demand schedule </li></ul><ul><li>law of demand </li></ul><ul><li>diminishing marginal utility </li></ul><ul><li>income effect </li></ul><ul><li>substitution effect </li></ul><ul><li>demand curve </li></ul><ul><li>determinants of demand </li></ul><ul><li>normal goods </li></ul><ul><li>inferior goods </li></ul><ul><li>substitute good </li></ul><ul><li>complementary good </li></ul><ul><li>change in demand </li></ul><ul><li>change in quantity demanded </li></ul><ul><li>supply </li></ul><ul><li>supply schedule </li></ul><ul><li>law of supply </li></ul><ul><li>supply curve </li></ul><ul><li>determinants of supply </li></ul><ul><li>change in supply </li></ul><ul><li>change in quantity supplied </li></ul><ul><li>surplus </li></ul><ul><li>shortage </li></ul><ul><li>equilibrium price </li></ul><ul><li>equilibrium quantity </li></ul><ul><li>rationing function of prices </li></ul><ul><li>price ceiling and floor </li></ul>Copyright McGraw-Hill/Irwin, 2005 BACK END
  46. 46. Next: The Market System Chapter 4

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