Demand, Supply, and Market Equilibrium

Transcription

1 Demand, Supply, and Market Equilibrium

2 Markets Interaction between buyers and sellers Markets may be: Local National International rice is discovered in the interactions of buyers and sellers LO -

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

4 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 LO -

5 The Demand Curve 6 5 $5 Q d 5 rice (per bushel) Quantity Demanded (bushels per week) D Q LO -5

6 The Demand Curve 6 Q d $5 5 rice (per bushel) Quantity Demanded (bushels per week) D Q LO -5

7 The Demand Curve 6 $5 Q d 5 rice (per bushel) Quantity Demanded (bushels per week) D Q LO -5

8 The Demand Curve 6 $5 Q d 5 rice (per bushel) Quantity Demanded (bushels per week) D Q LO -5

9 The Demand Curve 6 5 $5 Q d 5 rice (per bushel) Quantity Demanded (bushels per week) D Q LO -5

10 The Demand Curve 6 5 $5 Q d 5 rice (per bushel) Quantity Demanded (bushels per week) D Q LO -5

11 The Demand Curve 6 5 $5 Q d 5 rice (per bushel) Quantity Demanded (bushels per week) D Q LO -5

12 Market Demand rice per bushel Market Demand for Corn, Three Buyers Quantity Demanded Joe Jen Jay Total Q d per week $ LO -6

13 Changes in Demand 6 5 rice (per bushel) D D D Quantity Demanded (bushels per week) Q LO -7

14 Changes in Demand 6 5 rice (per bushel) D D D Quantity Demanded (bushels per week) Q LO -7

15 Changes in Demand 6 5 rice (per bushel) D D D Quantity Demanded (bushels per week) Q LO -7

16 Changes in Demand 6 Change in Demand rice (per bushel) 5 Change in Quantity Demanded D D D Quantity Demanded (bushels per week) Q LO -8

17 Determinants of Demand Change in consumer tastes and preferences Change in number of buyers Change in income Normal goods Inferior goods LO -9

18 Determinants of Demand Change in prices of related goods Complements Substitutes Change in consumers expectations Future prices Future income LO -

19 LO Determinants of Demand Table. Determinants of Demand: Factors That Shift the Demand Curve Determinant Change in buyers tastes Change in the number of buyers Change in income Change in the prices of related goods Change in consumer expectations Examples hysical fitness rises in popularity, increasing the demand for jogging shoes and bicycles; cell phone popularity rises, reducing the demand for land-line phones. A decline in the birthrate reduces the demand for children s toys. A rise in incomes increases the demand for normal goods such as restaurant meals, sports tickets, and necklaces while reducing the demand for inferior goods such as cabbage, turnips, and inexpensive wine. A reduction in airfares reduces the demand for bus transportation (substitute goods); a decline in the price of DVD players increases the demand for DVD movies (complementary goods). Inclement weather in South America creates an expectation of higher future coffee bean prices, thereby increasing today s demand for coffee beans. -

20 Supply Schedule or curve Amount producers are willing and able to sell at a given price Individual supply Market supply LO -

21 Law of Supply Other things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls. Reason: rice acts as an incentive to producers At some point, costs will rise LO -

22 The Supply Curve Supply of Corn rice per Bushel Q s per Week $ rice (per bushel) S Quantity supplied (bushels per week) Q LO -

23 Changes in Supply $6 S S 5 rice (per bushel) Decrease in supply S Increase in supply Quantity supplied (thousands of bushels per week) Q LO -5

24 Changes in Supply $6 S S 5 rice (per bushel) Decrease in supply S Increase in supply Quantity supplied (thousands of bushels per week) Q LO -5

25 Changes in Supply $6 Change in Quantity Supplied p S S 5 rice (per bushel) S Change in Supply Quantity supplied (thousands of bushels per week) Q LO -6

26 Determinants of Supply 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 LO -7

27 Determinants of Supply Table. Determinants of Supply: Factors That Shift the Supply Curve Determinant Change in resource prices Change in technology Change in taxes and subsidies Change in prices of other goods Change in producer expectations Change in the number of suppliers LO Examples A decrease in the price of microchips increases the supply of computers; an increase in the price of crude oil reduces the supply of gasoline. The development of more effective wireless technology increases the supply of cell phones. An increase in the excise tax on cigarettes reduces the supply of cigarettes; a decline in subsidies to state universities reduces the supply of higher education. An increase in the price of cucumbers decreases the supply of watermelons. An expectation of a substantial rise in future log prices decreases the supply of logs today. An increase in the number of tattoo parlors increases the supply of tattoos; the formation of women s professional basketball leagues increases the supply of women s professional basketball games. -8

28 Market Equilibrium Equilibrium occurs where the demand curve and supply curve intersect. Surplus and shortage Rationing function of prices Efficient allocation roductive efficiency Allocative efficiency LO -9

29 Market Equilibrium 6 $5 Q d,, 7,, rice (per bushel) 5 6, Bushel Surplus S $5 Q s,, 7,, 6, 7, Bushel Shortage D, Bushels of Corn (thousands per week) LO -

30 Market Equilibrium 6 $5 Q d,, 7,, rice (per bushel) 5 6, Bushel Surplus S $5 Q s,, 7,, 6, 7, Bushel Shortage D, Bushels of Corn (thousands per week) LO -

31 Rationing Functions of rices The ability of the competitive forces of demand and supply to establish a price at which selling and buying decisions are consistent. LO -

32 Efficient Allocation roductive efficiency roducing goods in the least costly way Using the best technology Using the right mix of resources Allocative Efficiency roducing the right mix of goods The combination of goods most highly valued by society LO -

33 Changes in Demand ` and Equilibrium D increase:, Q D decrease:, Q S S D D D D LO -

34 Changes in Demand ` and Equilibrium D increase:, Q D decrease:, Q S S D D D D Increase in demand LO -

35 Changes in Demand ` and Equilibrium D increase:, Q D decrease:, Q S S D D D D Increase in demand LO -

36 Changes in Demand ` and Equilibrium D increase:, Q D decrease:, Q S S D D D D Increase in demand Decrease in demand LO -

37 Changes in in Demand Supply ` and Equilibrium S increase:, Q S decrease:, Q S S S S D D LO -

38 Changes in in Demand Supply ` and Equilibrium S increase:, Q S decrease:, Q S S S S D D Increase in supply LO -

39 Changes in in Demand Supply ` and Equilibrium S increase:, Q S decrease:, Q S S S S D D Increase in supply LO -

40 Changes in in Demand Supply ` and Equilibrium S increase:, Q S decrease:, Q S S S S D D Increase in supply Decrease in supply LO -

41 Complex Cases TABLE. Effects of Changes in Both Supply and Demand Change in Supply Change in Demand Effect on Equilibrium rice Effect on Equilibrium Quantity. Increase Decrease Decrease Indeterminate. Decrease Increase Increase Indeterminate. Increase Increase Indeterminate Increase. Decrease Decrease Indeterminate Decrease LO -5

42 Government Set rices rice Ceilings Set below equilibrium price Rationing problem Black markets Example: Rent control LO5-6

43 Government Set rices S $.5 ceiling C Shortage D Q s Q Q d Q LO5-7

44 Government Set rices S $.5 ceiling. C Shortage D Q s Q Q d Q LO5-7

45 Government Set rices rice Floors rices are set above the market price Chronic surpluses Example: Minimum wage laws LO5-8

46 Government Set rices floor Surplus S f. D Q Q d Q Q s LO5-9

47 Government Set rices floor Surplus S $. f. D Q Q d Q Q s LO5-9

48 Legal Market for Human Organs What if we created a legal market for human organs? ositive effects Increase the incentive to donate Eliminate the persistent shortage of eyes, livers, hearts, kidneys, etc. -

49 Legal Market for Human Organs Negative effects Increases the cost of medical care Diminishes the special nature of life by commercializing it -