Chapter 3 Supply and demand, after reading this chapter, you should be able to: Explain why people participate in markets, describe what market demand and supply measure, depict how and why a market equilibrium is found, illustrate how and why demand and supply curves sometimes shift, explain how market shortages and surpluses occur.
Chapter3 SupplyandDemand Copyrightâ2014McGrawưHillEducation.Allrightsreserved.NoreproductionordistributionwithoutthepriorwrittenconsentofMcGrawưHillEducation MarketandInteractions A market is any place where goods are bought and sold and includes the interaction of all buyers and sellers • We must interact because we have a limited amount of time, energy, and resources, so we can’t produce everything we desire 32 The Two Markets • Factor Market: – Any place where factors of production (land, labor, capital, and entrepreneurship) are bought and sold • Product Market: – Any place where finished goods and services (products) are bought and sold 33 Figure 3.1 34 Product Market • Consumers buy and producers sell in the product market • Imports and exports are also a part of the product market • Governments supply goods and services in product markets 35 Locating Markets • A market exists wherever and whenever an exchange takes place 36 Supply and Demand • Market transactions require two sides: • Supply – People supply labor in the factor market – Firms supply goods and services in the product market • Demand – People demand goods and services in the product market – Firms demand factors of production in the factor market 37 Supply and Demand • Supply – The ability and willingness to sell (produce) specific quantities of a good at alternative prices in a given time period, ceteris paribus (other things being equal) 38 Supply and Demand • Demand – The ability and willingness to buy specific quantities of a good at alternative prices in a given time period, ceteris paribus (other things being equal) 39 Demand Curve • A curve describing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period, ceteris paribus • The demand curve does not state actual purchases, rather only what consumers are willing and able to purchase 310 Equilibrium • Supply interacts with demand to determine the market price • Only one price and quantity are compatible with the existing intentions of both buyers and sellers • It is the price at which the quantity of a good demanded in a given time period equals the quantity supplied 328 Figure 3.6 329 Invisible Hand • The market behaves as if it is directed by some unseen force Adam Smith (1776) called this the invisible hand – It means that the equilibrium price is determined by the collective behavior of many buyers and sellers 330 Equilibrium Price • The equilibrium price occurs at the intersection of the supply and demand curves • There is only one equilibrium price • The market will naturally move toward this price 331 Market Shortage • The amount by which the quantity demanded exceeds the quantity supplied at a given price – Occurs when the selling price is lower than the equilibrium price – Sellers supply less than buyers demand at that price – Unsatisfied consumers bid up the price to the equilibrium price 332 Market Surplus • The amount by which the quantity supplied exceeds the quantity demanded at a given price – Occurs when the selling price is higher than the equilibrium price – Sellers supply more than buyers demand at the current price – Unsatisfied sellers mark the price down to the equilibrium price 333 Changes in Equilibrium • No equilibrium price is permanent • Equilibrium price and quantity change whenever the supply or demand curves shift • This happens when the determinants of supply or demand change 334 Figure 3.7 335 Disequilibrium Pricing • The following are imposed by government and cause disequilibrium pricing • Price Ceiling: – Maximum price imposed on a good or service • Price Floor: – Minimum price imposed on a good or service 336 Price Ceilings • Price ceilings have three predictable effects: – They increase quantity demanded – They decrease quantity supplied – They create a market shortage • Rent controls on housing are an example • There will be less housing for everyone when rent controls are imposed 337 Figure 3.8 338 Price Floors • Price floors have three predictable effects: – They increase quantity supplied – They decrease quantity demanded – They create a market surplus • Minimum wages and price supports for agriculture are examples 339 Figure 3.9 340 Price Floors • A government imposed price floor may create: – A wrong mix of output – An increased tax burden – An altered distribution of income – Political favoritism • Government failure – a government intervention that fails to improve economic outcomes 341 Market Mechanism in Action • WHAT? – Produce what consumers are willing to buy • HOW? – Profitably; at the most efficient consumption of resources • FOR WHOM? – For those willing and able to pay the market price 342 ... sum of individual supplies 3 21 Market Supply • Market supply is an expression of sellers’ intentions – of their ability and willingness to sell – not a statement of actual sales 3 22 Figure 3. 5... Figure 3. 5 3 23 Determinants of Supply • • • • • • Technology Factor (or resource) costs Other goods Taxes and subsidies Expectations Number of sellers 3 24 Law of Supply • The quantity of a good... left 3 17 Figure 3. 3 3 18 Movement versus Shifts • Movements along a demand curve are a response to price changes for that good • Shifts of the demand curve occur only when the determinants of