Chapter 3. Demand, Supply, and Market Equilibrium

Transcription

1 Chapter 3 Demand, Supply, and Market Equilibrium Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2 Markets Interac;on between buyers and sellers Markets may be Local Na;onal Interna;onal rice is discovered in the interac;ons of buyers and sellers LO1 3-2

3 Demand Demand Demand schedule or demand curve Amount consumers are willing and able to purchase at a given price Other things equal Individual demand Market demand LO2 3-3

4 Law of Demand Law of demand Other things equal, as price falls, the quan;ty demanded rises, and as price rises, the quan;ty demanded falls Explana;ons rice acts as an obstacle to buyers Law of diminishing marginal u5lity Income effect and subs5tu5on effect LO2 3-4

5 The Demand Curve 6 5 $5 4 3 Q d rice (per bushel) D Q 80 Quan5ty demanded (bushels per week) LO2 3-5

6 Market Demand rice per bushel Market Demand for Corn, Three Buyers Quan5ty Demanded Joe Jen Jay Total Q d per week $ LO2 3-6

7 Changes in Demand 6 $ Q d ,000 16,000 rice (per bushel) Decrease in demand Increase in demand Q Quan5ty demanded (thousands of bushels per week) D 3 D 1 D 2 LO2 3-7

8 Changes in Demand 6 Change in demand 5 rice (per bushel) Change in quan5ty demanded D Q Quan5ty demanded (thousands of bushels per week) D 3 D 1 LO2 3-8

9 Determinants of Demand Determinants of demand Change in consumer tastes and preferences Change in the number of buyers Change in income Normal goods Inferior goods LO2 3-9

10 Determinants of Demand Change in prices of related goods Complementary good Subs5tute good Change in consumer expecta;ons Future prices Future income LO2 3-10

11 Determinants of Demand Determinants of Demand: Factors That ShiW 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 expecta;ons 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 ;ckets, and necklaces while reducing the demand for inferior goods such as cabbage, turnips, and inexpensive wine. A reduc;on in airfares reduces the demand for bus transporta;on (subs;tute goods); a decline in the price of DVD players increases the demand for DVD movies (complementary goods). Inclement weather in South America creates an expecta;on of higher future coffee bean prices, thereby increasing today s demand for coffee beans. 3-11

12 Supply Supply Supply schedule or a supply curve Amount producers are willing and able to sell at a given price Individual supply Market supply LO3 3-12

13 Law of Supply Law of supply Other things equal, as the price rises, the quan;ty supplied rises and as the price falls, the quan;ty supplied falls Explana;on rice acts as an incen;ve to producers At some point, costs will rise LO3 3-13

14 The Supply Curve S 1 5 $5 4 3 Q s rice (per bushel) Q Quan5ty supplied (bushels per week) LO3 3-14

15 Changes in Supply $6 S 3 S 1 $5 4 3 Q s 12,000 10, rice (per bushel) Decrease in supply S Increase in supply Q LO3 Quan5ty supplied (thousands of bushels per week) 3-15

16 Changes in Supply $6 Change in quan5ty supplied S 3 S 1 5 rice (per bushel) Change in supply S Q LO3 Quan5ty supplied (thousands of bushels per week) 3-16

17 Determinants of Supply 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 expecta;ons LO3 3-17

18 Determinants of Supply Determinants of Supply: Factors That ShiW 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 expecta;ons 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 effec;ve wireless technology increases the supply of cell phones. An increase in the excise tax on cigare\es reduces the supply of cigare\es; a decline in subsidies to state universi;es reduces the supply of higher educa;on. An increase in the price of cucumbers decreases the supply of watermelons. An expecta;on of a substan;al rise in future log prices decreases the supply of logs today. An increase in the number of ta\oo parlors increases the supply of ta\oos; the forma;on of women s professional basketball leagues increases the supply of women s professional basketball games. 3-18

19 Market Equilibrium Equilibrium occurs where the demand curve and supply curve intersect Equilibrium price and equilibrium quan5ty Surplus and shortage Ra;oning func;on of prices Efficient alloca;on LO4 3-19

20 Efficient Allocation roduc5ve efficiency roducing goods in the least costly way Using the best technology Using the right mix of resources Alloca5ve efficiency roducing the right mix of goods The combina;on of goods most highly valued by society LO4 3-20

21 Market Equilibrium 6 Q d 5 6,000 bushel surplus S Q s $ ,000 rice (per bushel) $ ,000 10, , ,000 bushel shortage D LO4 Bushels of corn (thousands per week) 3-21

22 Rationing Function of rices The ability of the compe;;ve forces of demand and supply to establish a price at which selling and buying decisions are consistent LO4 3-22

23 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 LO5 3-23

24 Changes in 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 LO5 3-24

25 Complex Cases Effects of Changes in Both Supply and Demand Change in Supply Change in Demand Effect on Equilibrium rice Effect on Equilibrium Quan5ty 1. Increase Decrease Decrease Indeterminate 2. Decrease Increase Increase Indeterminate 3. Increase Increase Indeterminate Increase 4. Decrease Decrease Indeterminate Decrease LO5 3-25

26 Government Set rices rice ceiling Set below equilibrium price Ra;oning problem Black markets Example is rent control LO6 3-26

27 Government Set rices S $ Ceiling 3.00 C Shortage D Q s Q 0 Q d Q LO6 3-27

28 Government Set rices rice floor rices are set above the market price Chronic surpluses Example is the minimum wage law LO6 3-28

29 Government Set rices Floor Surplus S $3.00 f D Q LO6 Q d Q 0 Q s 3-29

30 Legal Market for Human Organs What if we created a legal market for human organs? osi;ve effects Increase the incen;ve to donate Eliminate the persistent shortage of eyes, livers, hearts, kidneys, etc. 3-30

31 Legal Market for Human Organs Nega;ve effects Diminishes the special nature of life by commercializing it The market would leave out the poor and uninsured Increases the cost of medical care rohibi;on on market solu;on has resulted in a $1 billion illegal market 3-31