#3
Demand, Supply, and Market
Equilibrium
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Markets
• Interaction between buyers and sellers
• Markets may be:
• Local
• National
• International
• Price is discovered in the interactions of
buyers and sellers
LO1
3-2
Demand
• Schedule or curve
• Amount consumers are willing and able to
•
•
•
LO1
purchase at a given price
Other things equal
Individual demand
Market demand
3-3
Law of Demand
• Other things equal, as price falls, the
•
quantity demanded rises, and as price
rises, the quantity demanded falls.
Reasons:
• Common sense
• Law of diminishing marginal utility
• Income effect and substitution effects
LO1
3-4
The Demand Curve
P6
Individual
Demand
4 20
3 35
Price (per latte)
P Qd
$5 10
5
4
3
2
2 55
1
1 80
0
D
10
20
30
40
50
60
70
80
Q
Quantity Demanded (latte per month)
LO1
3-5
Market Demand
Market Demand for Lattes, Three Buyers
Price
per Latte
Joe
Java
Sarah
Coffee
Mike
Cappuccino
Total
Qd
per week
$5
10
12
8
30
4
20
23
17
60
3
35
39
26
100
2
55
60
39
154
1
80
87
54
221
Quantity Demanded
LO1
3-6
Market Demand
P
P
+
Joe
$3
P
$3
35
39
Market
$3
D2
Q
=
Mike
$3
D1
LO1
+
Sarah
P
D
D3
Q
26
Q
100
(= 35 + 39 + 26)
Q
3-7
Changes in Demand
P
6
Price (per latte)
5
4
Increase in demand
3
2
D2
1
0
Decrease in
demand
2
4
6
8
D1
D3
10
12
14
16
18 Q
Quantity Demanded (thousands of lattes per month)
LO1
3-8
Changes in Demand
• Change in consumer tastes and
•
•
LO1
preferences
Change in number of buyers
Change in income
• Normal goods
• Inferior goods
3-9
Changes in Demand
• Change in prices of related goods
• Complements
• Substitutes
• Change in consumers’ expectations
• Future prices
• Future income
LO1
3-10
Changes in Quantity Demanded
• Change in demand is a shift of the
•
LO1
demand curve
Change in quantity demanded is a
movement from one point to another point
on a fixed demand curve
3-11
Supply
• Schedule or curve
• The amount producers are willing and able
•
•
LO2
to sell at a given price
Individual supply
Market supply
3-12
Law of Supply
• Other things equal, as the price rises, the
•
LO2
quantity supplied rises and as the price
falls, the quantity supplied falls.
Reason:
• Price acts as an incentive to producers
• At some point, costs will rise
3-13
The Supply Curve
P
Market Supply of
Lattes
Qs
per
Month
$5
60
4
50
3
35
2
20
1
5
4
Price (per latte)
Price
per
Latte
S
5
3
2
1
0
10
20
30
40
50
60
70
Q
Quantity Supplied (lattes per month)
LO2
3-14
Changes in Supply
P
$6
S3
S1
5
Price (per latte)
4
Decrease
in supply
S2
3
2
Increase
in supply
1
0
2
4
6
8
10
12
14
16 Q
Quantity Supplied (thousands of lattes per month)
LO2
3-15
Determinants of Supply
•
•
•
•
•
•
LO2
A change in resource prices
A change in technology
A change in the number of sellers
A change in taxes and subsidies
A change in prices of other goods
A change in producer expectations
3-16
Changes in Quantity Supplied
• Change in supply is a shift in the supply
•
LO2
curve
Change in the quantity supplied
represents a movement along a supply
curve
3-17
Market Equilibrium
• Equilibrium occurs where the demand
•
•
•
LO3
curve and supply curve intersect
Surplus and shortage
Rationing function of prices
Efficient allocation
• Productive efficiency
• Allocative efficiency
3-18
Market Equilibrium
6
6,000 latte
surplus
5
Qd
$5
2,000
4
4,000
3
7,000
2
11,000
1
16,000
Price (per latte)
P
S
4
3
2
7,000 latte
shortage
1
0
2
4
67
8
P
Qs
$5
12,000
4
10,000
3
7,000
2
4,000
1
1,000
D
10
12
14
16
18
Quantity of lattes (thousands per month)
LO3
3-19
Rationing Functions of Prices
• The ability of the competitive forces of
demand and supply to establish a price at
which selling and buying decisions are
consistent.
LO3
3-20
`
Changes in Demand
and Equilibrium
and Equilibrium
D decrease:
D increase:
P, Q
P, Q
P
P
S
S
D3
D2
D4
D1
0
0
Increase in demand
LO4
Decrease in demand
3-21
Changes in Supply and Equilibrium
S increase:
P, Q
S decrease:
P, Q
P
P
S1
S2
D
S3
D
0
0
Increase in supply
LO4
S4
Decrease in supply
3-22
Government-Set Prices
• Price ceilings
• Set below equilibrium price
• Rationing problem
• Black markets
• Example: Rent control
LO5
3-23
Government-Set Prices
P
$3.50 P0
S
Ceiling
3.00 PC
D
Shortage
Qs
LO5
Q0
Qd
Q
3-24
Government-Set Prices
• Price floors
• Prices are set above the market price
• Chronic surpluses
• Example: Minimum wage laws
LO5
3-25
Government-Set Prices
P
S
Surplus
Floor
$3.00 Pf
2.00 P0
D
Qd
LO5
Q0
Qs
Q
3-26