Demand, Supply, and Market Equilibrium

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1 03 Demand, Supply, and Market Equilibrium McGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2 LO1 3-2 Markets Interaction between buyers and sellers Markets may be Local National International rice is discovered in the interactions of buyers and sellers

3 LO1 3-3 Demand Schedule or curve Amount consumers are willing and able to purchase at a given price Other things equal Individual demand Market demand

4 LO1 3-4 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

5 LO1 rice (per bushel) 3-5 The Demand Curve 6 5 $5 Q d Quantity Demanded (bushels per week) D Q

6 LO1 rice (per bushel) 3-6 Changes in Demand 6 Change in Demand Change in Quantity Demanded D 2 D 1 D Q Quantity Demanded (bushels per week)

7 LO1 Determinants of Demand 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. 3-7

8 LO2 3-8 Supply Schedule or curve Amount producers are willing and able to sell at a given price Individual supply Market supply

9 LO2 3-9 Law of Supply Other things equal, as the price rises the quantity supplied rises, and as the price falls the quantity supplied falls Reasons rice acts as an incentive to producers At some point, costs will rise

10 LO2 rice (per bushel) 3-10 The Supply Curve Supply of Corn rice per Bushel Q s per Week $ Quantity supplied (bushels per week) S Q

11 LO2 rice (per bushel) 3-11 Changes in Supply $6 Change in Quantity Supplied S 3 S S Change in Supply Quantity supplied (thousands of bushels per week) Q

12 LO Determinants of Supply 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 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.

13 LO Market Equilibrium Equilibrium occurs where the demand curve and supply curve intersect Surplus and shortage 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

14 LO3 rice (per bushel) 3-14 Market Equilibrium 6 Q d 5 6,000 Bushel Surplus S Q s $5 2,000 4 $5 12, ,000 7, ,000 7, , , , ,000 Bushel Shortage D 1 1, Bushels of Corn (thousands per week)

15 LO Changes in Demand ` and Equilibrium D increase:, Q D decrease:, Q S S D 2 D 3 D 1 D Increase in demand Decrease in demand

16 LO Changes in in Demand Supply ` and Equilibrium S increase:, Q S decrease:, Q S 1 S 2 S 4 S 3 D D 0 0 Increase in supply Decrease in supply

17 LO Government-Set rices rice Ceilings Set below equilibrium price Rationing problem Black markets Example: Rent control

18 LO Government-Set rices S $ Ceiling 3.00 C Shortage D Q s Q 0 Q d Q

19 LO Government-Set rices rice Floors rices are set above the market price Chronic surpluses Example: Minimum wage laws

20 LO Government-Set rices Floor Surplus S $3.00 f D Q Q d Q 0 Q s