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Chap003

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Chap003

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

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