3 Demand, Supply, and Market Equilibrium McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc All rights reserved Markets • Any institution where buyers and • LO1 sellers interact Price is determined in the interactions of buyers and sellers Demand • Schedule or curve • Amount consumers are willing and • • LO1 able to purchase at a given price Other things equal Market demand 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 • LO2 curve to left or right Cause: Change in determinants of demand Demand vs Quantity Demanded • Change in quantity demanded • Refers to movement from one point • LO2 to another on fixed demand curve Cause: Change in price of good under consideration Supply • Schedule or curve • Amount producers are willing and • • LO2 able to sell at a given price Other things equal Market supply Law of Supply • Other things equal, as price rises • LO2 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 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 • LO2 to left or right Cause: Change in determinants of supply Supply vs Quantity Supplied • Change in quantity supplied • Refers to movement from one point • LO2 to another on fixed supply curve Cause: Change in price of good under consideration Market Shortage • Occurs when current price is too low • Quantity demanded exceeds quantity • LO3 supplied at the current price Current price will rise Market Surplus • Occurs when current price is too high • Quantity supplied exceeds quantity • LO3 demanded at the current price Current price will fall Market Equilibrium • Price which equates quantity • • LO3 demanded and quantity supplied No reason for price to change Crisis Government Set Prices • Price Ceilings • Good is necessity, equilibrium price • LO5 is too high • Set below equilibrium price • Rationing problem • Black markets Example: Rent control Government Set Prices • Price Floors • Good is necessity, equilibrium price • LO5 is too low • Prices are set above the market price • Chronic surpluses Example: Minimum wage laws