Demand
Individual
Demand
Determinants
of Demand
Supply
3
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Last Word
Key Terms
End Show
3-1
Demand, Supply,
and Market
Equilibrium
Copyright 2011 The McGraw-Hill Companies
Chapter Objectives
Demand
Individual
Demand
Determinants
of Demand
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Last Word
Key Terms
End Show
3-2
• Demand Defined and What
Affects It
• Supply Defined and What
Affects It
• How Supply & Demand Together
Determine Market Equilibrium
• How Changes in Supply and
Demand Affect Equilibrium
Prices and Quantities
• Government-Set Prices and
their Implications for Surpluses
& Shortages
Copyright 2011 The McGraw-Hill Companies
Demand
Demand
Individual
Demand
Determinants
of Demand
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
• Demand Defined
• Demand Schedule
• Law of Demand
–Diminishing Marginal Utility
–Income Effect
–Substitution Effect
• Demand Curve
• Market Demand
Last Word
Key Terms
End Show
3-3
Copyright 2011 The McGraw-Hill Companies
Individual Demand
Demand
Individual
Demand
P
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Last Word
Key Terms
60
Individual
Demand
P
R50
Qd
2
50
Price (per /kg)
Determinants
of Demand
40
30
40
3
30
4
20
20
5
10
10
6
0
D
1
2
3
4
5
6
7
Quantity Demanded (kg per week)
End Show
3-4
Copyright 2011 The McGraw-Hill Companies
8
Q
Individual Demand
Demand
Individual
Demand
Determinants
of Demand
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Last Word
Key Terms
Determinants of Demand
• Tastes
• Number of Buyers
• Income
– Normal Goods
– Inferior Goods
• Price of Related Goods
– Substitute Good
– Complementary Good
– Unrelated Goods
• Consumer Expectations
End Show
3-5
Copyright 2011 The McGraw-Hill Companies
Individual Demand
Demand Can Increase or Decrease
Demand
Individual
Demand
P
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Last Word
Key Terms
6
Individual
Demand
P
R5
Qd
10
5
Increase in Demand
4
Price
Determinants
of Demand
3
4
20
3
35
2
2
55
1
1
80
0
D2
Decrease in Demand
2
4
6
8
10
D3
12
Quantity Demanded
End Show
3-6
Copyright 2011 The McGraw-Hill Companies
D1
14
16
18 Q
Individual Demand
Demand Can Increase or Decrease
Demand
Individual
Demand
An Increase in Demand
Means a Movement
of the Line
P
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Last Word
Key Terms
6
Individual
Demand
P
R5
Qd
10
5
A Movement Between
Any Two Points on a
Demand Curve is
Called a Change in
Quantity
Demanded
4
Price
Determinants
of Demand
3
4
20
3
35
2
2
55
1
1
80
0
D2
Decrease in Demand
2
4
6
8
Quantity Demanded
End Show
3-7
Copyright 2011 The McGraw-Hill Companies
10
D1
D3
12
14
16
18 Q
Supply
Demand
Individual
Demand
Determinants
of Demand
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Last Word
Key Terms
End Show
3-8
• Supply Defined
• Supply Schedule
• Law of Supply
–Revenue Implications
–Marginal Cost
• Supply Curve
• Market Supply
Copyright 2011 The McGraw-Hill Companies
Individual Supply
Demand
Individual
Demand
P
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Last Word
Key Terms
60
Individual
Supply
P
R50
Qs
6
40
5
30
4
20
3
10
2
S1
50
Price (kg per week)
Determinants
of Demand
40
30
20
10
0
1
2
3
4
5
6
Quantity Supplied (kg per week)
End Show
3-9
Copyright 2011 The McGraw-Hill Companies
7
Q
Individual Supply
Determinants of Supply
Demand
Individual
Demand
Determinants
of Demand
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Last Word
Key Terms
• Resource Prices
• Technology
• Taxes and Subsidies
• Prices of Other Goods
• Producer Expectations
• Number of Sellers
End Show
3-10
Copyright 2011 The McGraw-Hill Companies
Individual Supply
Supply Can Increase or Decrease
Demand
Individual
Demand
P
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Last Word
Key Terms
6
Individual
Supply
P
R5
Qs
60
S3
S1
5
S2
4
Price
Determinants
of Demand
3
4
50
3
35
2
2
20
1
1
5
0
2
4
6
8
10
Quantity Supplied
End Show
3-11
Copyright 2011 The McGraw-Hill Companies
12
14
Q
Individual Supply
Supply Can Increase or Decrease
Demand
Individual
Demand
P
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Last Word
Key Terms
Individual
Supply
P
R5
Qs
60
4
50
3
35
2
20
1
5
5
A Movement Between
Any Two Points on a
Supply Curve is Called
a Change in Quantity
Supplied
S3
S1
S2
4
Price
Determinants
of Demand
6
3
2
An Increase in Supply
Means a Movement
of the Line
1
0
2
4
6
8
10
Quantity Supplied
End Show
3-12
Copyright 2011 The McGraw-Hill Companies
12
14
Q
Market Equilibrium
• Equilibrium Price
Demand
Individual
Demand
Determinants
of Demand
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Last Word
Key Terms
End Show
3-13
3.1
• Equilibrium Quantity
• Surplus
• Shortage
• Rationing Function of
Prices
Copyright 2011 The McGraw-Hill Companies
Market Equilibrium
200 Buyers & 200 Sellers
Demand
Determinants
of Demand
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Market
Demand
200 Buyers
P
400
40
600
30
800
20
1000
10
S
Qd
R50
1200
400 kg
Surplus
50
1200
40
1000
30
800
R20 Price Ceiling 20
600
10
400
20
400 kg
Shortage
2
4
6
8
10
D
12
14
16
Meat per kg (hundreds per week)
End Show
3-14
Copyright 2011 The McGraw-Hill Companies
Qs
R40 Price Floor R50
30
0
Key Terms
P
40
10
Last Word
Market
Supply
200 Sellers
60
Price
Individual
Demand
18
Market Equilibrium
Demand
Individual
Demand
Determinants
of Demand
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Last Word
Key Terms
End Show
3-15
• Changes in Demand
• Changes in Supply
• Changes in
Equilibrium
• Efficient Allocation
–Productive Efficiency
–Allocative Efficiency
Copyright 2011 The McGraw-Hill Companies
Market Equilibrium
Price Quantity
Demand
Individual
Demand
Determinants
of Demand
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Last Word
Key Terms
End Show
3-16
• Supply Increase;
?
Demand Decrease
• Supply Decrease;
?
Demand Increase
• Supply Increase;
?
Demand Increase
• Supply Decrease;
?
Demand Decrease
Copyright 2011 The McGraw-Hill Companies
Government-Set Prices
Demand
Individual
Demand
Determinants
of Demand
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Last Word
Key Terms
End Show
3-17
• Price Ceilings on Fuel
• Rationing Problem
• Black Markets
• Rent Controls
• Price Floors on Minimum
Wage
• Optimal Allocation of
Resources
Copyright 2011 The McGraw-Hill Companies
A Legal Market for Human
Organs
Demand
Individual
Demand
Determinants
of Demand
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Last Word
Key Terms
End Show
3-18
•
•
•
•
•
•
•
•
•
Waiting List for Transplants
Demand for Organs
Vertical Supply of Organs
Incentive Role of Market and UpSloping Supply
Increases Quantity
Decreases Price
Moral Objections
Increase the Cost of Health Care
Better to Legalize and Regulate?
Copyright 2011 The McGraw-Hill Companies
A Legal Market for Human
Organs
Demand
Individual
Demand
S1
P
Determinants
of Demand
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Supply With Price Incentive
S2
Supply of Organs
Demand for Organs
Shortage at Zero Price
Q1 – Q3
P1
At Price P1 the
Shortage is Reduced
By Q1 – Q2
Last Word
Key Terms
P0
End Show
3-19
Copyright 2011 The McGraw-Hill Companies
D1
Q1
Q2
Q3
Q
Key Terms Page
Demand
Individual
Demand
Determinants
of Demand
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Last Word
Key Terms
End Show
3-20
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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
Copyright 2011 The McGraw-Hill Companies
•
•
•
•
•
•
•
•
•
•
•
•
•
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
Next Chapter Preview…
Demand
Individual
Demand
Determinants
of Demand
Supply
Individual
Supply
Determinants
of Supply
Market
Equilibrium
GovernmentSet Prices
Extensions of
Demand And Supply
Analysis
Last Word
Key Terms
End Show
3-21
Copyright 2011 The McGraw-Hill Companies