03 Demand, Supply and Market Equilibrium McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc All rights reserved Chapter Objectives Markets Demand Defined Demand Graphed Changes in Deman d Supply Defined Supply Graphed Changes in Supply Equilibrium Surpluses Shortages Key Terms Previous Slide Next Slide • Demand and its determinants • Supply and its determinants • Supply, demand, & market equilibrium • Changes in supply and demand • Government-set prices End Show 3-2 Copyright McGraw-Hill/Irwin, 2005 3-2 MARKETS DEFINED Markets Demand Defined Demand Graphed Changes in Deman d Supply Defined Supply Graphed Changes in Supply Equilibrium Surpluses POTENTIAL BUYERS Shortages Key Terms Previous Slide End Show 3-3 Next Slide POTENTIAL SELLERS MARKETS Copyright McGraw-Hill/Irwin, 2005 A Market Markets Demand Defined Demand Graphed Changes in Deman d Supply Defined Supply Graphed Changes in Supply Equilibrium Surpluses Shortages Key Terms Previous Slide Next Slide • Interaction between buyers and sellers • Buyers demand goods • Sellers supply goods • Assumptions – Standardized good – Competitive market End Show 3-4 Copyright McGraw-Hill/Irwin, 2005 3-4 DEMAND DEFINED Markets DEMAND SCHEDULE Demand Defined Demand Graphed Changes in Deman d Supply Defined Supply Graphed Changes in Supply Equilibrium Surpluses Shortages Key Terms Previous Slide End Show 3-5 Next Slide P $5 QD 10 20 35 55 80 Various Amounts A Series of Possible Prices …a specified time period …other things being equal Copyright McGraw-Hill/Irwin, 2005 LAW OF DEMAND Markets Demand Defined Demand Graphed Changes in Deman d Supply Defined Supply Graphed Changes in Supply Equilibrium Surpluses Shortages Key Terms Previous Slide End Show 3-6 Next Slide An inverse relationship exists between price and quantity demanded • As Price Falls… …Quantity Demanded Rises • As Price Rises… …Quantity Demanded Falls Copyright McGraw-Hill/Irwin, 2005 LAW OF DEMAND Markets Demand Defined Demand Graphed Changes in Deman d • Diminishing Marginal Utility Supply Defined Supply Graphed Changes in Supply Equilibrium Surpluses Shortages Key Terms Previous Slide Next Slide End Show 3-7 Copyright McGraw-Hill/Irwin, 2005 LAW OF DEMAND Markets Demand Defined Demand Graphed Changes in Deman d Supply Defined Supply Graphed • Diminishing Marginal Utility • Income Effect Changes in Supply Equilibrium Surpluses Shortages Key Terms Previous Slide Next Slide End Show 3-8 Copyright McGraw-Hill/Irwin, 2005 LAW OF DEMAND Markets Demand Defined Demand Graphed Changes in Deman d Supply Defined Supply Graphed Changes in Supply Equilibrium • Diminishing Marginal Utility • Income Effect • Substitution Effect Surpluses Shortages Key Terms Previous Slide Next Slide End Show 3-9 Copyright McGraw-Hill/Irwin, 2005 LAW OF DEMAND Markets Demand Defined Demand Graphed Changes in Deman d Supply Defined Supply Graphed Changes in Supply Equilibrium Surpluses Shortages Key Terms Previous Slide End Show - 10 Next Slide • • • • • Diminishing Marginal Utility Income Effect Substitution Effect Demand Curve Individual and Market Demand Copyright McGraw-Hill/Irwin, 2005 MARKET EQUILIBRIUM Markets Demand Defined Demand Graphed Changes in Deman d Supply Defined Supply Graphed Changes in Supply Equilibrium Surpluses Shortages Key Terms Previous Slide End Show - 46 Next Slide • • • • Equilibrium Price & Quantity Rationing Function of Prices Changes in Demand Changes in Quantity Demanded • Changes in Supply • Changes in Quantity Supplied Copyright McGraw-Hill/Irwin, 2005 Rationing Functions of Prices • The ability of the competitive forces of demand and supply to establish a price at which selling and buying decisions are consistent LO3 3-47 Efficient Allocation • Productive efficiency • Producing goods in the least costly way • Using the best technology • Using the right mix of resources • Allocative Efficiency • Producing the right mix of goods • The combination of goods most highly valued by society LO3 3-48 Changes in Demand and ` Equilibrium D increase: P↑, Q↑ D decrease: P↓, Q↓ P P S S D2 D3 D1 0 Increase in demand LO4 D4 Decrease in demand 3-49 Changes Changesin inDemand Supply and and ` Equilibrium S increase: P↓, Q↑ S decrease: P↑, Q↓ P P S1 S4 S2 D D 0 Increase in supply LO4 S3 Decrease in supply 3-50 Complex Cases Markets Demand Defined Demand Graphed Changes in Deman d Supply Defined Supply Graphed Changes in Supply Equilibrium Shortages Key Terms End Show - 51 • Supply Increases; Demand Decreases – Prices Decrease – Quantity Indeterminate • Supply Decreases; Demand Increases Surpluses Previous Slide Multiple Shifts… Next Slide – Price Increases – Quantity Indeterminate Copyright McGraw-Hill/Irwin, 2005 Complex Cases Markets Demand Defined Demand Graphed Changes in Deman d Supply Defined Supply Graphed Changes in Supply Equilibrium Shortages Key Terms End Show - 52 • Supply Increases; Demand Increases – Prices Indeterminate – Quantity Increases • Supply Decreases; Demand Decreases Surpluses Previous Slide Multiple Shifts… Next Slide – Price Indeterminate – Quantity Decreases Copyright McGraw-Hill/Irwin, 2005 Markets Demand Defined Demand Graphed Changes in Deman d Supply Defined Supply Graphed Changes in Supply Equilibrium Surpluses Shortages Key Terms Previous Slide End Show - 53 Next Slide Government Set Prices • Price Ceilings –Shortages –Rationing Problem –Black Markets –Rent Controls • Price Floors –Surpluses Copyright McGraw-Hill/Irwin, 2005 Government Set Prices • Price Ceilings • Set below equilibrium price • Rationing problem • Black markets • Example: Rent control LO5 3-54 Government Set Prices P $3.50 P0 S ceiling 3.00 PC D Shortage Qs LO5 Q0 Qd Q 3-55 Government Set Prices • Price Floors • Prices are set above the market • LO5 price • Chronic surpluses Example: Minimum wage laws 3-56 Government Set Prices P S Surplus floor $3.00 Pf 2.00 P0 D Q Qd LO5 Q0 Qs 3-57 Legal Market for Human Organs • What if we created a legal market for • human organs? Positive effects • Increase the incentive to donate • Eliminate the persistent shortage of eyes, livers, hearts, kidneys, etc 3-58 Legal Market for Human Organs • Negative effects • Increases the cost of medical care • Diminishes the special nature of life by commercializing it 3-59 Key Terms market demand demand schedule law of demand diminishing marginal utility income effect substitution effect demand curve determinants of demand normal goods inferior goods substitute good complementary good change in demand Copyright McGraw-Hill/Irwin, 2005 change in quantity demanded supply supply schedule law of supply supply curve determinants of supply change in supply change in quantity supplied surplus shortage equilibrium price equilibrium quantity rationing function of prices price ceiling and floor BACK END ... Qd per week $5 10 12 30 20 23 17 60 35 39 26 100 55 60 39 154 80 87 54 221 Quantity Demanded LO1 3- 11 GRAPHING DEMAND Price of Corn Markets P Demand Defined Demand Graphed Changes in Deman d Supply... Graphed Changes in Deman d Supply Defined P $5 CORN P QS $5 60 50 35 20 Supply Graphed Changes in Supply Equilibrium Surpluses Shortages Key Terms Previous Slide End Show - 30 Next Slide o 10 20 30 35... Graphed Changes in Deman d Supply Defined Supply Graphed Changes in Supply Equilibrium Surpluses Shortages Key Terms Previous Slide End Show - 19 Next Slide CORN P $5 $5 QD 1 030 204 03 3560 Increase