Chapter 3
Demand, Supply,
and Market
Equilibrium
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Objectives
• Demand and its determinants
• Supply and 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
$5
Qd
10
4
20
3
35
2
55
1
80
Price (per bushel)
5
4
3
2
1
0
D
10
20
30
40
50
60
70
80
Q
Quantity Demanded (bushels per week)
3-6
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
3-7
Determinants of Demand
• Income
–Normal goods
–Inferior goods
• Price of related goods
–Substitute good
–Complementary good
–Unrelated goods
• Consumer expectations
3-8
Individual Demand
P
6
P
$5
Qd
10
4
20
3
35
2
55
1
80
Price (per bushel)
5
4
3
2
D2
1
D1
D3
0
2
4
6
8
10
12
14
16
18 Q
Quantity Demanded (bushels per week)
3-9
Individual Demand
P
6
Change in Demand
P
$5
Qd
10
4
20
3
35
2
55
1
80
Price (per bushel)
5
Change in Quantity
Demanded
4
3
2
D2
1
D1
D3
0
2
4
6
8
10
12
14
16
18 Q
Quantity Demanded (bushels per week)
3-10
Supply
• Schedule or curve
• Amount producers willing
and able to sell at a given
price
• Individual supply
• Market supply
3-11
Law of Supply
• Other things equal, as price
rises the quantity supplied
rises
• Explanations:
–Revenue implications
–Marginal cost
3-12
Individual Supply
P
6
S1
P
$5
Qs
60
4
50
3
35
2
20
1
5
Price (per bushel)
5
4
3
2
1
0
10
20
30
40
50
60
70
Q
Quantity Supplied (bushels per week)
3-13
Determinants of Supply
•
•
•
•
•
•
Resource prices
Technology
Taxes and subsidies
Prices of other goods
Producer expectations
Number of sellers
3-14
Individual Supply
P
6
S3
S1
P
$5
Qs
60
4
50
3
35
2
20
1
5
Price (per bushel)
5
S2
4
3
2
1
0
10
20
30
40
50
60
70
Q
Quantity Supplied (bushels per week)
3-15
Individual Supply
P
6
P
$5
Qs
60
4
50
3
35
2
20
1
5
Price (per bushel)
5
S3
S1
Change in Quantity
Supplied
S2
4
3
2
Change in Supply
1
0
10
20
30
40
50
60
70
Q
Quantity Supplied (bushels per week)
3-16
Market Equilibrium
• Equilibrium price and quantity
• Surplus and shortage
• Rationing function of price
• Efficient allocation
–Productive efficiency
–Allocative efficiency
3-17
Market Equilibrium
6
6,000 Bushel
Surplus
P
Qd
$5
2,000
4
4,000
3
7,000
2
11,000
1 16,000
Price (per bushel)
5
S
$4 Price Floor
4
3
$2 Price Ceiling
2
7,000 Bushel
Shortage
1
0
2
4
6 7 8
10
P
Qs
$5
12,000
4
10,000
3
7,000
2
4,000
1
1,000
D
12
14
16
18
Bushels of Corn (thousands per week)
3-18
Market Equilibrium
• Change in demand
–Shift of the demand curve
• Change in supply
–Shift of the supply curve
• Change in equilibrium price and
quantity
3-19
Market Equilibrium
Price Quantity
• Supply increase;
Demand decrease
• Supply decrease;
Demand increase
• Supply increase;
Demand increase
• Supply decrease;
Demand decrease
?
?
?
?
3-20
Government-Set Prices
• Price ceilings on gasoline
–Rationing problem
–Black markets
• Rent controls
• Price floors on wheat
–Optimal allocation of
resources
3-21
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?
3-22
A Market for Human Organs
S1
P
S2
Supply of Organs
P1
At Price P1 the
Shortage is Reduced
By Q1 – Q2
P0
Demand for Organs
D1
Q1
Q2
Q3
Q
3-23
Key Terms
•
•
•
•
•
•
•
•
•
•
•
•
•
•
demand
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
supply schedule
law of supply
supply curve
determinants of supply
change in supply
change in quantity
supplied
equilibrium price
equilibrium quantity
surplus
shortage
price ceiling
price floor
3-24
Next Chapter Preview…
The U.S. Economy:
Public and Private
Sectors
3-25