demand, supply, and equilibrium - lcps.org · demand, supply, and equilibrium microeconomics...
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Demand, Supply, and EquilibriumMicroeconomics – Unit 2: Nature and Function of
Product Markets
The Relationship Between Demand
and Total/Marginal Utility Total Utility
Marginal Utility
The Law of Diminishing Marginal Utility
Demand
Amounts of a product consumers are
willing and able to buy
Law of Demand = inverse or negative
relationship between price and quantity
demanded
Pri
ce
Quantity
D
D
Law of Demand
Why?
◦ Price is an obstacle to buying
◦ Diminishing marginal utility
Determinants of Demand
Consumer tastes/preferences
# of buyers in the market
Consumers’ incomes
◦ Income Effect
Prices of related goods
◦ Substitute goods
Substitution Effect
◦ Complementary goods
Consumer expectations
Supply
Amounts of a product that producers are
willing and able to make available for sale
Law of Supply = positive relationship
between price and quantity supplied
Pri
ce
Quantity
S
S
Law of Supply
Why?
◦ Price = incentive to sell more product
◦ Increases in marginal cost
Determinants of Supply
Resource prices
Technology
Taxes and subsidies
Prices of other goods
◦ Substitution in production
Producer expectations
# of sellers in the market
Market Equilibrium
Equilibrium price = “market clearing
price”
Equilibrium price (Po) =
◦ A. Productive Efficiency
◦ B. Allocative Efficiency
Market ensures MB ≥ MC
Any price above equilibrium = surplus
Any price below equilibrium = shortage
Producer and Consumer Surplus
Consumer Surplus = the sum of the
products of the prices and quantities
consumers would have been willing to
buy ABOVE the equilibrium price
Producer Surplus = the sum of the
products of the prices and quantities
suppliers would have been willing to sell
BELOW the equilibrium price
Producer and Consumer Surplus
Calculating Producer and Consumer
Surplus Calculating Producer and Consumer
Surplus
Price Ceilings
Gov’t sets a maximum price sellers may
charge consumers
EX: rent controls, usury lawsPri
ce
Quantity
S
S
D
D
Po
Pc
QoQs Qd
Shortage
Price Floors
Gov’t sets a minimum price buyers may
pay sellers
EX: crop price supports, minimum wagesPri
ce
Quantity
S
S
D
D
Po
Pf
QoQd Qs
Surplus
Crash Course Economics
Pay particular attention to the
explanation of “deadweight loss” (or in
your reading “efficiency loss”).
Crash Course - Price Controls, Subsidies
and the Problem with Good Intentions
Greebies
Changes in
Supply/Demand/Equilibrium ∆’s in Demand
◦ Raises or reduces both equilibrium price
(Price) and equilibrium quantity (Qty)
∆’s in Supply
◦ Increase in S = lower Price, higher Qty
◦ Decrease in S = higher Price, lower Qty
Graph Shift
Changes in
Supply/Demand/Equilibrium S increases, D decreases
◦ Qty depends on relative increase in S vs. D
S decreases, D increases
◦ Qty depends on relative increase in S vs. D
S decreases, D decreases
◦ If decrease in S > decrease in D = Price will
increase, Qty will decrease
◦ If decrease in S < decrease in D = Price will
decrease, Qty will decrease
Changes in
Supply/Demand/Equilibrium S increases, D increases
◦ If increase in S > increase in D = Price will
decrease Qty will increase
◦ If increase in S < increase in D = Price will
increase, Qty will increase
Graph Shift
Changes in
Demand/Supply/Equilibrium If increase in S EQUALs the increase in D
then Price will stay the same.
If decrease in S EQUALs the decrease in
D then Price will stay the same
Closure: Exit Ticket Activity
Answer question on Socrative