Demand, Supply, and Equilibrium Microeconomics – Unit 2: Nature and Function of Product Markets

The Relationship Between Demand and Total/Marginal Utility Total Utility Marginal Utility The Law of Diminishing Marginal Utility

Demand Amounts of a product consumers are willing and able to buy Law of Demand = inverse or negative relationship between price and quantity demanded D Price D Quantity

Law of Demand Why? Price is an obstacle to buying Diminishing marginal utility

Determinants of Demand Consumer tastes/preferences # of buyers in the market Consumers’ incomes Income Effect Prices of related goods Substitute goods Substitution Effect Complementary goods Consumer expectations

Supply Amounts of a product that producers are willing and able to make available for sale Law of Supply = positive relationship between price and quantity supplied S Price S Quantity

Law of Supply Why? Price = incentive to sell more product Increases in marginal cost

Determinants of Supply Resource prices Technology Taxes and subsidies Prices of other goods Substitution in production Producer expectations # of sellers in the market

Market Equilibrium Equilibrium price = “market clearing price” Equilibrium price (Po) = A. Productive Efficiency B. Allocative Efficiency Market ensures MB ≥ MC Any price above equilibrium = surplus Any price below equilibrium = shortage

Producer and Consumer Surplus Consumer Surplus = the sum of the products of the prices and quantities consumers would have been willing to buy ABOVE the equilibrium price Producer Surplus = the sum of the products of the prices and quantities suppliers would have been willing to sell BELOW the equilibrium price

Producer and Consumer Surplus

Price Ceilings Gov’t sets a maximum price sellers may charge consumers EX: rent controls, usury laws D S Shortage Po Price Pc S D Qs Qo Qd Quantity

Price Floors Gov’t sets a minimum price buyers may pay sellers EX: crop price supports, minimum wages Surplus D S Pf Po Price S D Qd Qo Qs Quantity

Deadweight Loss A.K.A “allocative inefficiency” A loss of economic efficiency that can occur when equilibrium for a good or service is not achieved.

Consumer and Producer Surplus w/Deadweight Loss

Differences in Qd/Qs and Changes in Demand/Supply A change in QUANTITY demanded or supply is a MOVEMENT ALONG the demand or supply curve (a move from one point on the curve to another). Almost always caused by a change in price. A CHANGE in demand or supply is a shift of the ENTIRE demand or supply curve.

Fictional Product: Greebies

Changes in Supply/Demand/Equilibrium ∆’s in Demand Raises or reduces both equilibrium price (Price) and equilibrium quantity (Qty) ∆’s in Supply Increase in S = lower Price, higher Qty Decrease in S = higher Price, lower Qty

Graph Shift

Changes in Supply/Demand/Equilibrium S increases, D decreases Qty depends on relative increase in S vs. D S decreases, D increases S decreases, D decreases If decrease in S > decrease in D = Price will increase, Qty will decrease If decrease in S < decrease in D = Price will decrease, Qty will decrease

Changes in Supply/Demand/Equilibrium S increases, D increases If increase in S > increase in D = Price will decrease Qty will increase If increase in S < increase in D = Price will increase, Qty will increase

Graph Shift

Changes in Demand/Supply/Equilibrium If increase in S EQUALs the increase in D then Price will stay the same. If decrease in S EQUALs the decrease in D then Price will stay the same

Wrap it up! Supply and Demand Conclusion

Closure: Exit Ticket Activity Answer question on Socrative