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Demand, Supply, and Market Equilibrium
3
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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Markets
• Any institution where buyers and sellers interact
• Price is determined in the interactions of buyers and sellers
LO1
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Demand
• Schedule or curve
• Amount consumers are willing and able to purchase at a given price
• Other things equal
• Market demand
LO1
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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
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Determinants of Demand
• Factors other than price
• Usually assumed to be constant
• When a determinant changes, demand shifts
LO1
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Determinants of Demand
• Change in buyer’s tastes
• Change in number of buyers
• Change in income
• Normal Goods
• Inferior Goods
LO1
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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
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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
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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
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Supply
• Schedule or curve
• Amount producers are willing and able to sell at a given price
• Other things equal
• Market supply
LO2
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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
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Determinants of Supply
• Factors other than price
• Usually assumed to be constant
• When a determinant changes, supply shifts
LO1
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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
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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
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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
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Market Shortage
• Occurs when current price is too low
• Quantity demanded exceeds quantity supplied at the current price
• Current price will rise.
LO3
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Market Surplus
• Occurs when current price is too high
• Quantity supplied exceeds quantity demanded at the current price
• Current price will fall
LO3
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Market Equilibrium
• Price which equates quantity demanded and quantity supplied
• No reason for price to change
• Crisis
LO3
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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
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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