demand, supply, and market equilibrium · demand •schedule or curve •amount consumers are...
Post on 03-Apr-2018
225 Views
Preview:
TRANSCRIPT
Demand, Supply, and Market Equilibrium
03
McGraw-Hill/Irwin Copyright © 2012 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 purchase at a given price
• Other things equal
• Individual demand
• Market demand
LO1 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
6
5
4
3
2
1
0 10 20 30 40 50 60 70 80
Quantity Demanded (bushels per week)
Pri
ce (
per
bu
sh
el)
P Qd
$5
4
3
2
1
10
20
35
55
80
P
Q
D
The Demand Curve
LO1
The Demand Curve
3-5
Market Demand
LO1
Market Demand for Corn, Three Buyers
Price
per bushel
Quantity Demanded Total
Qd
per week Joe Jen Jay
$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
3-6
Changes in Demand
LO1
6
5
4
3
2
1
0
Quantity Demanded (bushels per week)
Pri
ce (
per
bu
sh
el)
P
Q
D1
2 4 6 8 10 12 14 16 18
D2
D3
3-7
Changes in Demand
LO1
6
5
4
3
2
1
0
Quantity Demanded (bushels per week)
Pri
ce (
per
bu
sh
el)
P
Q
D1
2 4 6 8 10 12 14 16 18
D2
D3
Change in Demand
Change in Quantity
Demanded
3-8
Determinants of Demand
• Change in consumer tastes and
preferences
• Change in number of buyers
• Change in income
• Normal goods
• Inferior goods
LO1 3-9
Determinants of Demand
• Change in prices of related goods
• Complements
• Substitutes
• Change in consumers’ expectations
• Future prices
• Future income
LO1 3-10
Determinants of Demand
LO1
Table 3.1 Determinants of Demand: Factors That Shift the Demand Curve
Determinant Examples
Change in buyers’ tastes Physical fitness rises in popularity, increasing the
demand for jogging shoes and bicycles; cell phone
popularity rises, reducing the demand for land-line
phones.
Change in the number of buyers A decline in the birthrate reduces the demand for
children’s toys.
Change in income 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.
Change in the prices of related
goods
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).
Change in consumer expectations Inclement weather in South America creates an
expectation of higher future coffee bean prices,
thereby increasing today’s demand for coffee beans. 3-11
Supply
• Schedule or curve
• Amount producers are willing and
able to sell at a given price
• Individual supply
• Market supply
LO2 3-12
Law of Supply
• Other things equal, as the price rises,
the 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
LO2 3-13
The Supply Curve
LO2
5
4
3
2
1
0
Pri
ce (
per
bu
sh
el)
Quantity supplied (bushels per week)
S
10 20 30 40 50 60 70
Supply of Corn
Price
per
Bushel
Qs
per
Week
$5 60
4 50
3 35
2 20
1 5
P
Q
3-14
Changes in Supply
LO2
$6
5
4
3
2
1
0
Pri
ce (
per
bu
sh
el)
S1
Quantity supplied (thousands of bushels per week)
2 4 6 8 10 12 14 16
P
Q
S2
S3
Increase
in supply
Decrease
in supply
3-15
Changes in Supply
LO2
$6
5
4
3
2
1
0
Pri
ce (
per
bu
sh
el)
S1
Quantity supplied (thousands of bushels per week)
2 4 6 8 10 12 14 16
P
Q
S2
S3
Change in Quantity
Supplied
Change in Supply
3-16
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
LO2 3-17
Determinants of Supply
LO2
Table 3.2 Determinants of Supply: Factors That Shift the Supply Curve
Determinant Examples
Change in resource prices 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.
Change in technology The development of more effective wireless
technology increases the supply of cell phones.
Change in taxes and subsidies 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.
Change in prices of other goods An increase in the price of cucumbers decreases the
supply of watermelons.
Change in producer expectations An expectation of a substantial rise in future log prices
decreases the supply of logs today.
Change in the number of suppliers 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.
3-18
Market Equilibrium
• Equilibrium occurs where the demand
curve and supply curve intersect.
• Surplus and shortage
• Rationing function of prices
• Efficient allocation
• Productive efficiency
• Allocative efficiency
LO3 3-19
Market Equilibrium
LO3
6
5
4
3
2
1
0 2 4 6 8 10 12 14 16 18
Bushels of Corn (thousands per week)
Pri
ce (
per
bu
sh
el)
P Qd
$5
4
3
2
1
2,000
4,000
7,000
11,000
16,000
P Qs
$5
4
3
2
1
12,000
10,000
7,000
4,000
1,000
7
3
D
S 6,000 Bushel
Surplus
7,000 Bushel
Shortage
3-20
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 3-21
Efficient Allocation
• Productive efficiency
• Producing goods in the least costly way
• Using the best technology
• Using the right mix of resources
• Allocative Efficiency
• Producing the right mix of goods
• The combination of goods most highly
valued by society
LO3 3-22
` Changes in Demand and Equilibrium
LO4
0
P
D4
D3
` Changes in Demand and Equilibrium
LO4
0
P
D1
D2
S
Increase in demand
D increase:
P, Q
D decrease:
P, Q
Decrease in demand
S
3-23
` Changes in Demand and Equilibrium
LO4
0
P
D
S4
` Changes in Supply and Equilibrium
LO4
S3
0
P
D
S2 S1
Increase in supply
S increase:
P, Q
S decrease:
P, Q
Decrease in supply
3-24
Complex Cases
LO4
TABLE 3.3 Effects of Changes in Both Supply and Demand
Change in Supply Change in Demand
Effect on
Equilibrium Price
Effect on
Equilibrium
Quantity
1. Increase Decrease Decrease Indeterminate
2. Decrease Increase Increase Indeterminate
3. Increase Increase Indeterminate Increase
4. Decrease Decrease Indeterminate Decrease
3-25
Government Set Prices
• Price Ceilings
• Set below equilibrium price
• Rationing problem
• Black markets
• Example: Rent control
LO5 3-26
Government Set Prices
LO5
S P
Q
D
P0
PC
Q0
Shortage
Qd Qs
ceiling $3.50
3.00
3-27
Government Set Prices
• Price Floors
• Prices are set above the market
price
• Chronic surpluses
• Example: Minimum wage laws
LO5 3-28
Government Set Prices
LO5
S
P
Q
D
P0
Pf
Q0
Surplus
Qs Qd
floor
2.00
$3.00
3-29
Legal Market for Human Organs
• What if we created a legal market for
human organs?
• Positive effects
• Increase the incentive to donate
• Eliminate the persistent shortage of
eyes, livers, hearts, kidneys, etc.
3-30
Legal Market for Human Organs
• Negative effects
• Increases the cost of medical care
• Diminishes the special nature of life
by commercializing it
3-31
top related