Demand, Supply, and Market Equilibrium

3

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Markets

• Any institution where buyers and sellers interact

• Price is determined in the interactions of buyers and sellers

LO1

Demand

• Schedule or curve

• Amount consumers are willing and able to purchase at a given price

• Other things equal

• Market demand

LO1

Law of Demand

• Other things equal, as price falls, quantity demanded rises, and as price rises, quantity demanded falls.

• Reasons:• Common sense

• Law of diminishing marginal utility

• Income effect and substitution effects

LO1

Determinants of Demand

• Factors other than price

• Usually assumed to be constant

• When a determinant changes, demand shifts

LO1

Determinants of Demand

• Change in buyer’s tastes

• Change in number of buyers

• Change in income

• Normal Goods

• Inferior Goods

LO1

Determinants of Demand

• Change in prices of related goods

• Complements

• Substitutes

• Chris Rock

• Change in consumers’ expectations

• Future prices

• Future income

• Future product availability

LO1

Demand vs. Quantity Demanded

• Change in demand

• Refers to shift of entire demand curve to left or right

• Cause: Change in determinants of demand

LO2

Demand vs. Quantity Demanded

• Change in quantity demanded

• Refers to movement from one point to another on fixed demand curve

• Cause: Change in price of good under consideration

LO2

Supply

• Schedule or curve

• Amount producers are willing and able to sell at a given price

• Other things equal

• Market supply

LO2

Law of Supply

• Other things equal, as price rises quantity supplied rises and as price falls quantity supplied falls.

• Reason:

• Higher prices act as an incentive to producers

• At some point costs will rise

LO2

Determinants of Supply

• Factors other than price

• Usually assumed to be constant

• When a determinant changes, supply shifts

LO1

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 expectations

LO2

Supply vs. Quantity Supplied

• Change in supply

• Refers to shift of entire supply curve to left or right

• Cause: Change in determinants of supply

LO2

Supply vs. Quantity Supplied

• Change in quantity supplied

• Refers to movement from one point to another on fixed supply curve

• Cause: Change in price of good under consideration

LO2

Market Shortage

• Occurs when current price is too low

• Quantity demanded exceeds quantity supplied at the current price

• Current price will rise.

LO3

Market Surplus

• Occurs when current price is too high

• Quantity supplied exceeds quantity demanded at the current price

• Current price will fall

LO3

Market Equilibrium

• Price which equates quantity demanded and quantity supplied

• No reason for price to change

• Crisis

LO3

Government Set Prices

• Price Ceilings

• Good is necessity, equilibrium price is too high

• Set below equilibrium price

• Rationing problem

• Black markets

• Example: Rent control

LO5

Government Set Prices

• Price Floors

• Good is necessity, equilibrium price is too low

• Prices are set above the market price

• Chronic surpluses

• Example: Minimum wage laws

LO5