Chapter 3 - Demand, supply, and market equilibrium. This chapter provides an introduction to demand and supply concepts. Both demand and supply are defined and illustrated; determinants of demand and supply are listed and explained.
Chapter Demand, Supply, and Market Equilibrium McGrawHill/Irwin Copyright © 2014 by The McGrawHill Companies, Inc. All rights reserved 11 Markets • • Interaction between buyers and sellers Markets may be: • Local • National • International • LO1 Price is discovered in the interactions of buyers and sellers 32 Demand • • • • • LO1 Schedule or curve Amount consumers are willing and able to purchase at a given price Other things equal Individual demand Market demand 33 Law of Demand • • Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls Reasons: • Common sense • Law of diminishing marginal utility • Income effect and substitution effects LO1 34 The Demand Curve P6 Individual Demand Qd $5 10 20 35 Price (per latte) P 2 55 80 D 10 20 30 40 50 60 70 80 Q Quantity Demanded (latte per month) LO1 35 Market Demand Market Demand for Lattes, Three Buyers Quantity Demanded LO1 Total Qd per week Price per Latte Joe Sarah Mike Java Coffee Cappuccino $5 10 12 30 20 23 17 60 35 39 26 100 55 60 39 154 80 87 54 221 36 Market Demand P P + Joe $3 P $3 35 39 Market $3 D2 Q = Mike $3 D1 LO1 + Sarah P D D3 Q 26 Q 100 (= 35 + 39 + 26) Q 37 Changes in Demand P Price (per latte) Increase in demand D2 Decrease in demand D1 D3 10 12 14 16 18 Q Quantity Demanded (thousands of lattes per month) LO1 38 Changes in Demand • • • LO1 Change in consumer tastes and preferences Change in number of buyers Change in income • Normal goods • Inferior goods 39 Changes in Demand • • LO1 Change in prices of related goods • Complements • Substitutes Change in consumers’ expectations • Future prices • Future income 310 Supply • • • • LO2 Schedule or curve The amount producers are willing and able to sell at a given price Individual supply Market supply 312 Law of Supply • • LO2 Other things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls Reason: • Price acts as an incentive to producers • At some point, costs will rise 313 The Supply Curve P Market Supply of Lattes Qs per Month $5 60 50 35 20 Price (per latte) Price per Latte S 10 20 30 40 50 60 70 Q Quantity Supplied (lattes per month) LO2 314 Changes in Supply P $6 S3 S1 Price (per latte) Decrease in supply S2 Increase in supply 10 12 14 16 Q Quantity Supplied (thousands of lattes per month) LO2 315 Determinants of Supply • • • • • • LO2 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 316 Changes in Quantity Supplied • • LO2 Change in supply is a shift in the supply curve Change in the quantity supplied represents a movement along a supply curve 317 Market Equilibrium • • • • LO3 Equilibrium occurs where the demand curve and supply curve intersect Surplus and shortage Rationing function of prices Efficient allocation • Productive efficiency • Allocative efficiency 318 Market Equilibrium Qd $5 2,000 4,000 7,000 11,000 16,000 Price (per latte) P 6,000 latte surplus S 33 7,000 latte shortage 67 D 10 12 14 16 P Qs $5 12,000 10,000 7,000 4,000 1,000 18 Quantity of lattes (thousands per month) LO3 319 Rationing Functions of Prices • LO3 The ability of the competitive forces of demand and supply to establish a price at which selling and buying decisions are consistent 320 Changes in Demand and Equilibrium D increase: P ,Q D decrease: P ,Q P P S S D3 D2 D4 D1 0 Increase in demand LO4 Decrease in demand 321 Changes in Supply and Equilibrium S increase: P ,Q S decrease: P ,Q P S1 P S2 D S3 D 0 Increase in supply LO4 S4 Decrease in supply 322 GovernmentSet Prices • • LO5 Price ceilings • Set below equilibrium price • Rationing problem • Black markets Example: Rent control 323 GovernmentSet Prices P $3.50 P0 S Ceiling 3.00 PC D Shortage Qs LO5 Q0 Qd Q 324 GovernmentSet Prices • • LO5 Price floors • Prices are set above the market price • Chronic surpluses Example: Minimum wage laws 325 GovernmentSet Prices P S Surplus Floor $3.00 Pf 2.00 P0 D Qd LO5 Q0 Qs Q 326 ... Coffee Cappuccino $5 10 12 30 20 23 17 60 35 39 26 100 55 60 39 154 80 87 54 221 3 6 Market Demand P P + Joe $3 P $3 35 39 Market $3 D2 Q = Mike $3 D1 LO1 + Sarah P D D3 Q 26 Q 100 (= 35 + 39 ... 12,000 10,000 7,000 4,000 1,000 18 Quantity of lattes (thousands per month) LO3 3 19 Rationing Functions of Prices • LO3 The ability of the competitive forces of demand and supply to establish a price... will rise 3 13 The Supply Curve P Market Supply of Lattes Qs per Month $5 60 50 35 20 Price (per latte) Price per Latte S 10 20 30 40 50 60 70 Q Quantity Supplied (lattes per month) LO2 3 14 Changes in Supply