Chapter 3 Demand Supply and Market Equilibrium Mc

Chapter Objectives • Demand its determinants • Supply, demand, & market equilibrium • Changes in supply and demand • Government-set prices 3 -2

A Market • Interaction between buyers and sellers • Buyers demand goods • Sellers supply goods • Assumptions – Standardized good – Competitive market 3 -3

Demand • Schedule or curve • Amount consumers willing and able to purchase at a given price • Other things equal • Individual demand • Market demand 3 -4

Law of Demand • Other things equal, as price falls quantity demanded rises • Explanations: – Diminishing marginal utility – Income effect – Substitution effect 3 -5

Individual Demand P 6 P Qd $5 10 4 20 3 35 2 55 1 80 5 Price (per bushel) Individual Demand 4 3 2 1 0 D 10 20 30 40 50 60 70 80 Q Quantity Demanded (bushels per week) 3 -6

Individual Demand Price P 0 D Quantity Demanded of Chicken Raised to 45% from 14% Q 3 -7

Individual Demand Price P 0 D Quantity Demanded of Meat fall to 18% from 51% Q 3 -8

Determinants of Demand • Factors that shift the demand curve • Cause more or less to be bought at any possible price • Increase or decrease in demand • Tastes • Number of buyers 3 -9

Determinants of Demand • Income – Normal goods – Inferior goods • Price of related goods – Substitute good – Complementary good – Unrelated goods • Consumer expectations 3 -10

Individual Demand Can Increase or Decrease P 6 P Qd $5 10 4 20 3 35 2 55 1 80 5 Price (per bushel) Individual Demand Increase in Demand 4 3 2 1 0 D 2 Decrease in Demand 2 4 6 8 10 D 1 D 3 12 14 16 18 Q Quantity Demanded (bushels per week) 3 -11

Individual Demand Can Increase or Decrease P Change in Demand 6 P Qd $5 10 4 20 3 35 2 55 1 80 5 Price (per bushel) Individual Demand Change in Quantity Demanded 4 3 2 1 0 D 2 Decrease in Demand 2 4 6 8 10 D 1 D 3 12 14 16 18 Q Quantity Demanded (bushels per week) 3 -12

Supply • Schedule or curve • Amount producers willing and able to sell at a given price • Individual supply • Market supply 3 -13

Law of Supply • Other things equal, as price rises the quantity supplied rises • Explanations: – Revenue implications – Marginal cost 3 -14

Individual Demand P Price S 0 Quantity Supplied Q

Individual Supply P 6 P Qs $5 60 4 50 3 35 2 20 1 5 S 1 5 Price (per bushel) Individual Supply 4 3 2 1 0 10 20 30 40 50 60 70 Quantity Supplied (bushels per week) Q 3 -16

Determinants of Supply • • • Resource prices Technology Taxes and subsidies Prices of other goods Producer expectations Number of sellers 3 -17

Individual Supply Can Increase or Decrease P 6 P Qs $5 60 4 50 3 35 2 20 1 5 5 Price (per bushel) Individual Supply S 3 S 1 S 2 4 3 2 1 0 10 20 30 40 50 60 70 Q Quantity Supplied (bushels per week) 3 -18

Individual Supply Can Increase or Decrease P 6 P Qs $5 60 4 50 3 35 2 20 1 5 5 Price (per bushel) Individual Supply S 3 Change in Quantity Supplied S 1 S 2 4 3 2 Change in Supply 1 0 10 20 30 40 50 60 70 Q Quantity Supplied (bushels per week) 3 -19

Market Equilibrium • Equilibrium price and quantity • Surplus and shortage • Rationing function of price • Efficient allocation – Productive efficiency – Allocative efficiency 3 -20

Market Equilibrium 200 Buyers & 200 Sellers Equilibrium Price S D Equilibrium Quantity 3 -21

Market Equilibrium 200 Buyers & 200 Sellers Market Demand 200 Buyers Qd $5 2, 000 4 4, 000 3 7, 000 2 11, 000 1 16, 000 Bushel Surplus 5 Price (per bushel) P Market Supply 200 Sellers 6 S $4 Price Floor 4 3 $2 Price Ceiling 2 7, 000 Bushel Shortage 1 0 2 4 6 7 8 10 D 12 14 16 P Qs $5 12, 000 4 10, 000 3 7, 000 2 4, 000 1 1, 000 18 Bushels of Corn (thousands per week) 3 -22

Market Equilibrium • Change in demand – Shift of the demand curve • Change in supply – Shift of the supply curve • Change in equilibrium price and quantity 3 -23

Market Equilibrium Price Quantity • Supply increase; Demand decrease • Supply decrease; Demand increase • Supply increase; Demand increase • Supply decrease; Demand decrease ? ? 3 -24

Government-Set Prices • Price ceilings on gasoline – Rationing problem – Black markets • Rent controls • Price floors on wheat – Optimal allocation of resources 3 -25

A Market for Human Organs • Waiting list for transplants • Demand for organs • Supply of organs—two possibilities • Market eliminates shortage • Moral objections • Legalize and regulate? 3 -26

A Market for Human Organs S 1 P S 2 Supply of Organs Shortage at Zero Price Q 1 – Q 3 P 1 At Price P 1 the Shortage is Reduced By Q 1 – Q 2 P 0 Demand for Organs D 1 Q 2 Q 3 -27

Key Terms • • • • 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 change in quantity demanded • • • • supply schedule law of supply curve determinants of supply change in quantity supplied equilibrium price equilibrium quantity surplus shortage price ceiling price floor 3 -28

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