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Demand, Supply, and Market Equilibrium

Demand, Supply, and Market Equilibrium. Chapter 03. Topics. Demand Supply Market Equilibrium Changes in Demand, Supply, and Market Equilibrium Government-Set Prices. Demand. Demand The demand curve Law of demand Market demand. Demand. Changes in demand Tastes Number of buyers

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Demand, Supply, and Market Equilibrium

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  1. Demand, Supply, and Market Equilibrium Chapter 03

  2. Topics • Demand • Supply • Market Equilibrium • Changes in Demand, Supply, and Market Equilibrium • Government-Set Prices

  3. Demand • Demand • The demand curve • Law of demand • Market demand

  4. Demand • Changes in demand • Tastes • Number of buyers • Income • Prices of related goods • Expectations • Changes in quantity demanded

  5. Demand • Demand • A schedule or curve that shows the various amounts of a product that consumers will buy at each of several possible prices during a specific period of time. • Demand shows consumers’ plans, or intentions, with respect to the purchase of a product.

  6. Demand The demand curve A curve illustrates the inverse (or negative) relationship between the price (P) of a product and the quantity of it demanded (Qd), other things equal. 8/14/2014 6

  7. Demand-Schedule & Curve P($) $5 $4 $3 $2 $1 Qd/month 10 20 35 55 80 P($) 5 4 3 2 1 D 8/14/2014 7 10 20 30 40 50 60 70 80 Qd/month

  8. Demand Law of demand Other things equal, as price (P) falls, the quantity demanded (Qd) rises, and as P rises, Qd falls. There is an inverse relationship between P and Qd. 8/14/2014 8

  9. Demand Market demand Sum of individuals’ demands Qd (market) = S Qd (individuals) 30 60 100 154 221 8/14/2014 9

  10. Graphs-Individual & Market Demands Joe Joe Sarah Market Mike Mike Joe Sarah Joe Sarah

  11. Demand Determinants of demand Other things Factors other than price that locate the position of the demand curve Also called demand shifters 8/14/2014 11

  12. Demand • Other things, or determinants of demand, or demand shifters • Consumers’ tastes (preferences) • Number of buyers in the market • Consumers’ incomes • The prices of related goods • Expectations • Changes in other things cause changes in demand (i.e. shifts in the demand curve).

  13. Changes in D (Shifts in D curve) A decrease in demand (leftward shift) A decrease in demand (leftward shift) A decrease in demand (leftward shift) A decrease in demand (leftward shift) A decrease in demand (leftward shift) A decrease in demand (leftward shift) A decrease in demand (leftward shift) A decrease in demand (leftward shift) A decrease in demand (leftward shift) An increase in demand (rightward shift) An increase in demand (rightward shift) An increase in demand (rightward shift) An increase in demand (rightward shift) An increase in demand (rightward shift) An increase in demand (rightward shift) An increase in demand (rightward shift) An increase in demand (rightward shift) P($) 5 4 3 D2 2 1 D1 D3 8/14/2014 13 10 20 30 40 50 60 70 80 Qd/month

  14. Demand Changes in demand (Shifts in demand curve) are due to changes in other things (determinants of demand). Consumers’ tastes (preferences) A favorable change causes an increase in D. An unfavorable change causes a decrease in D. 8/14/2014 14

  15. Demand Number of buyers in the market More buyers cause an increase in D. Fewer buyers cause a decrease in D. 8/14/2014 15

  16. Demand Consumers’ incomes An increase in incomes increases the demand for normal (superior) goods and decreases the demand for inferior goods. A decrease in incomes decreases the demand for normal goods and Increases the demand for inferior goods. 8/14/2014 16

  17. Demand Prices of related goods When two products are substitutes, an increase in the price of one will increase the demand for the other. When two products are complements, an increase in the price of one will decrease the demand for the other. 8/14/2014 17

  18. Demand Consumers’ expectations Favorable expectations increase the demand for goods and services. Unfavorable expectations decrease the demand for goods and services. 8/14/2014 18

  19. Demand Changes in quantity demanded A movement from one point to another point on the same, fixed demand curve. The movement is caused by a change in the price of the specific product being considered. 8/14/2014 19

  20. Supply • Supply • The supply curve • The law of supply • Market supply • Determinants of supply

  21. Supply • Changes in supply • Resource prices • Technology • Taxes and subsidies • Prices of other goods • Expected prices • Number of sellers • Changes in quantity supplied

  22. Supply • Supply • A schedule or curve that shows the various amounts of a product that producers are willing to make available for sale at each of several possible prices during a specific period of time. • Supply shows producers’ plans, or intentions, with respect to the sale of a product.

  23. Supply-Schedule & Curve P($) $5 $4 $3 $2 $1 Qs/month 60 50 35 20 5 P($) S 5 4 3 2 1 8/14/2014 23 10 20 30 40 50 60 70 80 Qs/month

  24. Supply The supply curve A curve illustrates the direct (or positive) relationship between the price (P) of a product and the quantity of it supplied (Qs), other things equal. 8/14/2014 24

  25. Supply Law of supply Other things equal, as price (P) rises, the quantity supplied (Qs) rises, and as P falls, Qs falls. There is an direct (or positive) relationship between P and Qs. 8/14/2014 25

  26. Supply Market supply Sum of individuals’ supplies Qs (market) = S Qs (individuals) 8/14/2014 26

  27. Supply Determinants of supply Other things Factors other than price that locate the position of the supply curve Also called supply shifters 8/14/2014 27

  28. Changes in S (Shifts in S curve) A decrease in supply (leftward shift) An increase in supply (rightward shift) P($) S3 S1 5 S2 4 3 2 1 8/14/2014 28 10 20 30 40 50 60 70 80 Qs/month

  29. Supply • Other things, or determinants of supply, or supply shifters • Resource prices • Higher resource prices decrease S. • Lower resource prices increase S. • Technology • Better technology increases S.

  30. Supply Taxes and subsidies Taxes, considered as increases in costs, decrease S. Subsidies, considered as decreases in costs, increase S. Prices of other goods When two products are both produced by a firm, an increase in the price of one decreases the supply of the other. 8/14/2014 30

  31. Supply Expected prices If firms expect the price of their product to rise, they increase S. If firms expect the price of their product to fall, they reduce S. Number of sellers in the market More sellers increase S. Fewer sellers decrease S. 8/14/2014 31

  32. Supply Changes in quantity supplied A movement from one point to another point on the same, fixed supply curve. The movement is caused by a change in the price of the specific product being considered. 8/14/2014 32

  33. Market Equilibrium • Equilibrium price (Pe) and quantity (Qe) Qs/month P/per unit Qd/month Surplus (+) or Shortage (-) 12,000 $5 2,000 +10,000 10,000 $4 4,000 +6,000 7,000 $3 7,000 0 4,000 $2 11,000 -7,000 1,000 $1 16,000 -15,000

  34. Market Equilibrium -- Diagram At any price lower than Pe, Qd > Qs, there exists a shortage in the market; price will rise. E = equilibrium, Pe = equilibrium price,Qe = Qd = Qs = equilibrium quantity At any price higher than Pe, Qs > Qd, there exists a surplus in the market; price will fall. P($) S 5 Surplus 4 E 3 Pe 2 Shortage 1 D Qe 8/14/2014 34 2 4 6 8 10 12 14 16 Qs/month

  35. Market Equilibrium Rationing function of prices The market is cleared at the equilibrium price Pe. There is neither a surplus nor a shortage at Pe. Those buyers who are willing to pay Pe will be able to obtain the product. Those sellers who are willing to receive Pe will be able to sell the product. 8/14/2014 35

  36. Market Equilibrium Ticket scalping Ticket scalping is not undesirable on economic grounds. It is an entirely voluntary activity that benefits both sellers and buyers. 8/14/2014 36

  37. Changes in Demand, Supply, and Equilibrium • Changes in demand • Changes in supply • Complex cases • Supply increase; demand decrease • Supply decrease; demand increase • Supply increase; demand increase • Supply decrease; demand decrease

  38. Government-Set Prices • Price ceilings on gasoline • Rent control • Price floor on wheat

  39. Price Ceiling (Pc)(e.g. gasoline, rent controls) A (binding) price ceiling Pc is lower than Pe,Pc < Pe,resulting in a shortage in the market. P($) S 5 4 E 3 Pe 2 Pc Shortage 1 D 8/14/2014 39 2 4 6 8 10 12 14 16 Q (units)

  40. Price Floor (Pf)(e.g. wheat, milk, minimum wages) A (binding) price floor Pf is higher than Pe,Pf > Pe,resulting in a surplus in the market. P($) S 5 Surplus 4 Pf 3 Pe 2 1 D Qe 8/14/2014 40 2 4 6 8 10 12 14 16 Q (units)

  41. See You! Take Care!

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