Ch 3. Demand, Supply, & Market Equilibrium

A. Market – institution or mechanism that A. Market – institution or mechanism that brings together buyers (demanders) & sellers (suppliers) of goods, services, or resources. -- Examples of a Market: are an open-air market, stock market, auctions, labor markets, etc.

B. Demand – what consumers are willing & able to purchase; amoral. 1. Quantity demanded. P = Qd P = Qd A generalization DEMAND SCHEDULE An individual Buyer’s Demand for Corn Price per Bushel Quantity Demanded per Week $5 10 4 20 3 35 2 55 1 80 -- Inverse relationship with Supply. -- Quantity demanded is the amount of a good/service that consumers want.

C. Law of Demand – all else equal, as price C. Law of Demand – all else equal, as price falls, the quantity demanded rises; as the price rises, the demand falls. -- There is a negative, or inverse, effect. -- Two explanations for down slope: income & substitution effects and the law of diminishing marginal utility.

D. The Demand Curve -- Consumers buy more of a product as the price falls. -- Inverse relation.

Individual Demand Individual Demand P Qd $5 4 3 2 1 10 20 35 55 80 6 5 4 3 2 1 10 20 30 40 50 60 70 80 Quantity Demanded (bushels per week) Price (per bushel) Individual Demand P Qd $5 4 3 2 1 10 20 35 55 80 D Q -- A Demand Schedule (on left) and its Demand Curve.

2. Income Effect – lower price increases purchasing power. 1. Diminishing Marginal Utility – less satisfaction (utility) from each successive unit. 2. Income Effect – lower price increases purchasing power. -- Diminishing Marginal Utility: customer gets less satisfied with each additional unit (donuts).

D = F (Tc, Yc, Po, Nc, Ec) E. Determinants of Demand 1. Consumer taste 2. “ income 3. Other products (complimentary/substitutes) 4. # of consumers 5. Consumer expectations D = F (Tc, Yc, Po, Nc, Ec) Function  Any of these demand shifters can move the demand curve to the left or right.

Demand Curve is Called a Change in Quantity Individual Demand Demand Can Increase or Decrease An Increase in Demand Means a Movement of the Line P 6 5 4 3 2 1 Individual Demand A Movement Between Any Two Points on a Demand Curve is Called a Change in Quantity Demanded P Qd $5 4 3 2 1 10 20 35 55 80 Price (per bushel) D2 Decrease in Demand D1 D3 Q 2 4 6 8 10 12 14 16 18 Quantity Demanded (bushels per week)

Change in Demand -- Change in Demand due to tastes, number of buyers, income, prices of goods, substitutes, etc.

F. Supply – amounts of a product that F. Supply – amounts of a product that producers are willing & able to make available for sale in a given period. 1. Law of Supply - P↑=Qs↑ SUPPLY SCHEDULE An individual Producer’s Supply of Corn Price per Bushel Quantity Supplied per Week $5 60 4 50 3 35 2 20 1 5 -- Law of Supply: Other things being constant, as prices rise, the quantity supplied rises; as prices fall, the quantity supplied falls.

Supply Curve -- Notice the Demand curve sloped down, and the Supply curve slopes up.

Individual Supply Individual Supply P Qs $5 4 3 2 1 60 50 35 20 5 Individual Supply S1 P Qs $5 4 3 2 1 60 50 35 20 5 Price (per bushel) 10 20 30 40 50 60 70 Q Quantity Supplied (bushels per week) -- A Supply Schedule and its Supply Curve.

S = F (Po, Pf, I, Es, Ns) 1. Determinants of Supply: a) Resource prices b) taxes & subsidies c) Tech d) $ of other goods e) producer expectations f) # of sellers S = F (Po, Pf, I, Es, Ns)

Supply Curve is Called a Change in Quantity Individual Supply Supply Can Increase or Decrease A Movement Between Any Two Points on a Supply Curve is Called a Change in Quantity Supplied P 6 5 4 3 2 1 S3 Individual Supply S1 S2 P Qs $5 4 3 2 1 60 50 35 20 5 Price (per bushel) An Increase in Supply Means a Movement of the Line 2 4 6 8 10 12 14 Q Quantity Supplied (bushels per week)

Changes in Supply ( - ) -3 -2 -1 0 +1 +2 +3 ( + )

G. Market Equilibrium – balance of supply & demand

Market Equilibrium 200 Buyers & 200 Sellers P Qd P Qs Market Demand Supply 200 Sellers 6 5 4 3 2 1 6,000 Bushel Surplus S P Qd P Qs $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 $4 Price Floor Price (per bushel) 3 $2 Price Ceiling 7,000 Bushel Shortage D 2 4 6 8 10 12 14 16 18 7 Bushels of Corn (thousands per week)

Market Equilibrium

Equilibrium Price level

Changes in Demand & Supply and the effects on price & quantity

H. Price Floor – min. price Price floor is a minimum legal price such as Pf which results in a persistent Product surplus, shown here by the horizontal distance between Qs and Qd.

I. Price Ceiling – max. price -- Maximum legal price such as Pc that’s below the equilibrium. -- Results in a persistent product shortage, shown in the distance between Qd & Qs.

Normal/Superior vs. Inferior Goods In consumer theory, an inferior good is a good that decreases in demand when consumer income rises, unlike normal goods, for which the opposite is observed. Normal goods are those for which consumers' demand increases when their income increases. Good Y is a normal good since the amount purchased increases from Y1 to Y2 as the budget constraint shifts from BC1 to the higher income BC2. Good X is an inferior good since the amount bought decreases from X1 to X2 as income increases.