Chapter 3 Demand,  Supply,  and  Market  

Equilibrium  Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  

3-­‐2  

Markets

•  Interac;on  between  buyers  and  sellers  •  Markets  may  be  •  Local  •  Na;onal  •  Interna;onal  

•  Price  is  discovered  in  the  interac;ons  of  buyers  and  sellers  

LO1  

3-­‐3  

Demand

•  Demand  •  Demand  schedule  or  demand  curve  •  Amount  consumers  are  willing  and  able  to  purchase  at  a  given  price  

•  Other  things  equal  •  Individual  demand  •  Market  demand  

LO2  

3-­‐4  

Law of Demand

•  Law  of  demand  • Other  things  equal,  as  price  falls,  the  quan;ty  demanded  rises,  and  as  price  rises,  the  quan;ty  demanded  falls  

•  Explana;ons    •  Price  acts  as  an  obstacle  to  buyers  •  Law  of  diminishing  marginal  u5lity  •  Income  effect  and  subs5tu5on  effect  

LO2  

3-­‐5  

The Demand Curve

LO2  

6 5

4

3 2

1

0 10 20 30 40 50 60 70 80

Quan5ty  demanded  (bushels  per  week)  

Price  (per  bushe

l)  P   Qd  

$5  

4  

3  

2  

1  

10  

20  

35  

55  

80  

P

Q

D

3-­‐6  

Market Demand

LO2  

Market  Demand  for  Corn,  Three  Buyers  

Price  per  bushel  

Quan5ty  Demanded   Total    Qd    

per  week  Joe   Jen   Jay  

$5   10   12   8   30  4   20   23   17   60  3   35   39   26   100  2   55   60   39   154  1   80   87   54   221  

3-­‐7  

Changes in Demand

6 5

4

3 2

1

0

Quan5ty  demanded  (thousands  of  bushels  per  week)  

Price  (per  bushe

l)  

P

Q

D1

2 4 6 8 10 12 14 16 18

D2

D3

LO2  

P   Qd  

$5  

4  

3  

2  

1  

2000  

4000  

7000  

11,000  

16,000  

Decrease  in  demand  

Increase  in  demand  

3-­‐8  

Changes in Demand

LO2  

6 5

4

3 2

1

0

Quan5ty  demanded  (thousands  of  bushels  per  week)  

Price  (per  bushe

l)  P

Q

D1

2 4 6 8 10 12 14 16 18

D2

D3

Change  in  demand  

Change  in  quan5ty  demanded  

3-­‐9  

Determinants of Demand

•  Determinants  of  demand  •  Change  in  consumer  tastes  and  preferences  •  Change  in  the  number  of  buyers  •  Change  in  income  • Normal  goods  •  Inferior  goods  

LO2  

3-­‐10  

Determinants of Demand

•  Change  in  prices  of  related  goods  •  Complementary  good  •  Subs5tute  good  

•  Change  in  consumer  expecta;ons  •  Future  prices  •  Future  income  

LO2  

3-­‐11  

Determinants of Demand Determinants  of  Demand:  Factors  That  ShiW  the  Demand  Curve  

Determinant   Examples  Change  in  buyers’  tastes   Physical  fitness  rises  in  popularity,  increasing  the  demand  for  

jogging  shoes  and  bicycles;  cell  phone  popularity  rises,  reducing  the  demand  for  land-­‐line  phones.  

Change  in  the  number  of  buyers   A  decline  in  the  birthrate  reduces  the  demand  for  children’s  toys.  

Change  in  income   A  rise  in  incomes  increases  the  demand  for  normal  goods  such  as  restaurant  meals,  sports  ;ckets,  and  necklaces  while  reducing  the  demand  for  inferior  goods  such  as  cabbage,  turnips,  and  inexpensive  wine.  

Change  in  the  prices  of  related  goods   A  reduc;on  in  airfares  reduces  the  demand  for  bus  transporta;on  (subs;tute  goods);  a  decline  in  the  price  of  DVD  players  increases  the  demand  for  DVD  movies  (complementary  goods).  

Change  in  consumer  expecta;ons   Inclement  weather  in  South  America  creates  an  expecta;on  of  higher  future  coffee  bean  prices,  thereby  increasing  today’s  demand  for  coffee  beans.  

3-­‐12  

Supply

•  Supply  •  Supply  schedule  or  a  supply  curve  •  Amount  producers  are  willing  and  able  to  sell  at  a  given  price  

•  Individual  supply  •  Market  supply  

LO3  

3-­‐13  

Law of Supply

•  Law  of  supply  • Other  things  equal,  as  the  price  rises,  the  quan;ty  supplied  rises  and  as  the  price  falls,  the  quan;ty  supplied  falls  

•  Explana;on  •  Price  acts  as  an  incen;ve  to  producers  •  At  some  point,  costs  will  rise  

LO3  

3-­‐14  

The Supply Curve

LO3  

5

4

3 2

1

0

Price  (per  bushe

l)  

Quan5ty  supplied  (bushels  per  week)  

S1

10          20          30          40          50          60          70          

P

Q

P   Qs  

$5  

4  

3  

2  

1  

60  

50  

35  

20  

5  

3-­‐15  

Changes in Supply

LO3  

$6    

 

   5  

             

   4  

 

   3  

 

   2  

 

   1  

 

   0  

Price  (per  bushe

l)  

S1  

Quan5ty  supplied  (thousands  of  bushels  per  week)  

2              4                  6                  8                10              12                  14          16              

P  

Q  

S2  

S3  

Increase  in  supply  

Decrease    in  supply  P   Qs  

$5  

4  

3  

2  

1  

12,000  

10,000  

7000  

4000  

1000  

3-­‐16  

Changes in Supply

$6 5

4

3 2

1

0

Price  (per  bushe

l)  

S1

Quan5ty  supplied  (thousands  of  bushels  per  week)  

2              4                  6                  8                10              12                  14          16              

P

Q

S2

S3

Change  in  quan5ty  supplied  

Change  in  supply  

LO3  

3-­‐17  

Determinants of Supply

•  Determinants  of  supply  •  A  change  in  resource  prices  •  A  change  in  technology  •  A  change  in  the  number  of  sellers  •  A  change  in  taxes  and  subsidies  •  A  change  in  prices  of  other  goods  •  A  change  in  producer  expecta;ons  

LO3  

3-­‐18  

Determinants of Supply Determinants  of  Supply:  Factors  That  ShiW  the  Supply  Curve  

Determinant   Examples  Change  in  resource  prices   A  decrease  in  the  price  of  microchips  increases  the  supply  

of  computers;  an  increase  in  the  price  of  crude  oil  reduces  the  supply  of  gasoline.  

Change  in  technology   The  development  of  more  effec;ve  wireless  technology  increases  the  supply  of  cell  phones.  

Change  in  taxes  and  subsidies   An  increase  in  the  excise  tax  on  cigare\es  reduces  the  supply  of  cigare\es;  a  decline  in  subsidies  to  state  universi;es  reduces  the  supply  of  higher  educa;on.  

Change  in  prices  of  other  goods   An  increase  in  the  price  of  cucumbers  decreases  the  supply  of  watermelons.  

Change  in  producer  expecta;ons   An  expecta;on  of  a  substan;al  rise  in  future  log  prices  decreases  the  supply  of  logs  today.  

Change  in  the  number  of  suppliers   An  increase  in  the  number  of  ta\oo  parlors  increases  the  supply  of  ta\oos;  the  forma;on  of  women’s  professional  basketball  leagues  increases  the  supply  of  women’s  professional  basketball  games.  

3-­‐19  

Market Equilibrium

•  Equilibrium  occurs  where  the  demand  curve  and  supply  curve  intersect  

•  Equilibrium  price  and  equilibrium  quan5ty  •  Surplus  and  shortage  •  Ra;oning  func;on  of  prices  •  Efficient  alloca;on  

LO4  

3-­‐20  

Efficient Allocation

•  Produc5ve  efficiency  •  Producing  goods  in  the  least  costly  way  •  Using  the  best  technology  •  Using  the  right  mix  of  resources  

•  Alloca5ve  efficiency  •  Producing  the  right  mix  of  goods  •  The  combina;on  of  goods  most  highly  valued  by  society  

LO4  

3-­‐21  

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  bushe

l)  

P   Qd  

$5  

4  

3  

2  

1  

2000  

4000  

7000  

       11,000  

16,000  

P Qs  

$5  

4  

3  

2  

1  

12,000  

10,000  

7000  

4000  

1000  

7

3

D

S 6,000  bushel  surplus  

7,000  bushel  shortage  

LO4  

3-­‐22  

Rationing Function of Prices

•  The  ability  of  the  compe;;ve  forces  of  demand  and  supply  to  establish  a  price  at  which  selling  and  buying  decisions  are  consistent  

LO4  

3-­‐23  

Changes in Demand and Equilibrium

LO5  

0

P

D4

D3

0

P

D1

D2

S

Increase  in  demand  

D  increase:  P,  Q  

D  decrease:  P,  Q  

Decrease  in  demand  

S

3-­‐24  

Changes in Supply and Equilibrium

0

P

D

S4 S3

0

P

D

S2 S1

Increase  in  supply  

S  increase:  P,  Q  

S  decrease:  P,  Q  

Decrease  in  supply  

LO5  

3-­‐25  

Complex Cases

LO5  

Effects  of  Changes  in  Both  Supply  and  Demand  

Change  in  Supply   Change  in  Demand  Effect  on  Equilibrium  

Price  Effect  on  Equilibrium  

Quan5ty  

1.  Increase   Decrease   Decrease   Indeterminate  

2.  Decrease   Increase   Increase   Indeterminate  

3.  Increase   Increase   Indeterminate   Increase  

4.  Decrease   Decrease   Indeterminate   Decrease  

3-­‐26  

Government Set Prices

•  Price  ceiling  •  Set  below  equilibrium  price  •  Ra;oning  problem  •  Black  markets  

•  Example  is  rent  control  

LO6  

3-­‐27  

Government Set Prices

S P

Q

D

P0  

PC  

Q0  

Shortage  

Qd  Qs  

Ceiling  $3.50  

3.00  

LO6  

3-­‐28  

Government Set Prices

•  Price  floor  •  Prices  are  set  above  the  market  price  •  Chronic  surpluses  

•  Example  is  the  minimum  wage  law  

LO6  

3-­‐29  

Government Set Prices

LO6  

S P

Q

D

P0  

Pf  

Q0  

Surplus  

Qs  Qd  

Floor  

2.00  

$3.00  

3-­‐30  

Legal Market for Human Organs

•  What  if  we  created  a  legal  market  for  human  organs?  

•  Posi;ve  effects  •  Increase  the  incen;ve  to  donate  •  Eliminate  the  persistent  shortage  of  eyes,  livers,  hearts,  kidneys,  etc.  

3-­‐31  

Legal Market for Human Organs

•  Nega;ve  effects  •  Diminishes  the  special  nature  of  life  by  commercializing  it  •  The  market  would  leave  out  the  poor  and  uninsured  •  Increases  the  cost  of  medical  care  

•  Prohibi;on  on  market  solu;on  has  resulted  in  a  $1  billion  illegal  market