Chapter 03: Demand, Supply and Market Equilibrium

Demand, Supply and Market Equilibrium03McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.MarketsInteraction between buyers and sellersMarkets may beLocalNationalInternationalPrice is discovered in the interactions of buyers and sellersLO13-*DemandSchedule or curveAmount consumers are willing and able to purchase at a given priceOther things equalIndividual demandMarket demandLO13-*Law of DemandOther things equal, as price falls the quantity demanded rises, and as price rises the quantity demanded fallsReasonsCommon senseLaw of diminishing marginal utilityIncome effect and substitution effectsLO13-* 6 5 4 3 2 1 010 20 30 40 50 60 70 80 Quantity Demanded (bushels per week)Price (per bushel)PQd$543211020355580PQDThe Demand CurveLO1The Demand Curve3-*Changes in DemandLO1 6 5 4 3 2 1 0Quantity Demanded (bushels per week)Price (per bushel)PQD12 4 6 8 10 12 14 16 18D2D3Change in DemandChange in Quantity Demanded3-*Determinants of DemandLO1Determinants of Demand: Factors That Shift the Demand CurveDeterminantExamplesChange in buyers’ tastesPhysical fitness rises in popularity, increasing the demand for jogging shoes and bicycles; cell phone popularity rises, reducing the demand for land-line phones.Change in the number of buyersA decline in the birthrate reduces the demand for children’s toys.Change in incomeA rise in incomes increases the demand for normal goods such as restaurant meals, sports tickets, and necklaces while reducing the demand for inferior goods such as cabbage, turnips, and inexpensive wine.Change in the prices of related goodsA reduction in airfares reduces the demand for bus transportation (substitute goods); a decline in the price of DVD players increases the demand for DVD movies (complementary goods).Change in consumer expectationsInclement weather in South America creates an expectation of higher future coffee bean prices, thereby increasing today’s demand for coffee beans.3-*SupplySchedule or curveAmount producers are willing and able to sell at a given priceIndividual supplyMarket supplyLO23-*Law of SupplyOther things equal, as the price rises the quantity supplied rises, and as the price falls the quantity supplied fallsReasonsPrice acts as an incentive to producersAt some point, costs will riseLO23-*The Supply CurveLO2 5 4 3 2 1 0Price (per bushel)Quantity supplied (bushels per week)S10 20 30 40 50 60 70 Supply of CornPrice per BushelQs per Week$56045033522015PQ3-*Changes in SupplyLO2$6 5 4 3 2 1 0Price (per bushel)S1Quantity supplied (thousands of bushels per week)2 4 6 8 10 12 14 16 PQS2S3Change in Quantity SuppliedChange in Supply3-*Determinants of SupplyLO2Determinants of Supply: Factors That Shift the Supply CurveDeterminantExamplesChange in resource pricesA decrease in the price of microchips increases the supply of computers; an increase in the price of crude oil reduces the supply of gasoline.Change in technologyThe development of more effective wireless technology increases the supply of cell phones.Change in taxes and subsidiesAn increase in the excise tax on cigarettes reduces the supply of cigarettes; a decline in subsidies to state universities reduces the supply of higher education.Change in prices of other goodsAn increase in the price of cucumbers decreases the supply of watermelons.Change in producer expectationsAn expectation of a substantial rise in future log prices decreases the supply of logs today.Change in the number of suppliersAn increase in the number of tattoo parlors increases the supply of tattoos; the formation of women’s professional basketball leagues increases the supply of women’s professional basketball games.3-*Market EquilibriumEquilibrium occurs where the demand curve and supply curve intersectSurplus and shortageRationing functions of pricesThe ability of the competitive forces of demand and supply to establish a price at which selling and buying decisions are consistentLO33-*Market EquilibriumLO3 6 5 4 3 2 1 02 4 6 8 10 12 14 16 18Bushels of Corn (thousands per week)Price (per bushel)PQd$543212,0004,0007,000 11,00016,000PQs$5432112,00010,0007,0004,0001,00073DS6,000 BushelSurplus7,000 BushelShortage3-*`Changes in Demand and EquilibriumLO40PD4D3`Changes in Demand and EquilibriumLO40PD1D2SIncrease in demandD increase:P, QD decrease:P, QDecrease in demandS3-*`Changes in Demand and EquilibriumLO40PDS4`Changes in Supply and EquilibriumLO4S30PDS2S1Increase in supplyS increase:P, QS decrease:P, QDecrease in supply3-*Government-Set PricesPrice CeilingsSet below equilibrium priceRationing problemBlack marketsExample: Rent controlLO53-*Government-Set PricesLO5SPQDP0PCQ0ShortageQdQsCeiling$3.50 3.003-*Government-Set PricesPrice FloorsPrices are set above the market priceChronic surplusesExample: Minimum wage lawsLO53-*Government-Set PricesLO5SPQDP0PfQ0SurplusQsQdFloor2.00 $3.003-*