3 Demand, Supply, and Market Equilibrium

Chapter Objectives Demand Defined and What Affects It Supply Defined and What Affects It How Supply & Demand Together Determine Market Equilibrium How Changes in Supply and Demand Affect Equilibrium Prices and Quantities Government-Set Prices and their Implications for Surpluses & Shortages

Demand Demand Defined Demand Schedule Law of Demand Demand Curve Diminishing Marginal Utility Income Effect Substitution Effect Demand Curve Market Demand 3.1 3.2 3.3 3.4

Individual Demand Individual Demand P Qd $5 4 3 2 1 10 20 35 55 80 P 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

Individual Demand Determinants of Demand Tastes Number of Buyers Income Normal Goods Inferior Goods Price of Related Goods Substitute Good Complementary Good Unrelated Goods Consumer Expectations

Individual Demand Demand Can Increase or Decrease Individual Demand P 6 5 4 3 2 1 Individual Demand P Qd Increase in Demand $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)

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)

Supply Supply Defined Supply Schedule Law of Supply Supply Curve Revenue Implications Marginal Cost Supply Curve Market Supply

Individual Supply Individual Supply P Qs $5 4 3 2 1 60 50 35 20 5 P S1 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)

Individual Supply Resource Prices Technology Taxes and Subsidies Determinants of Supply Resource Prices Technology Taxes and Subsidies Prices of Other Goods Producer Expectations Number of Sellers

Individual Supply Supply Can Increase or Decrease Individual Supply 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) 2 4 6 8 10 12 14 Q Quantity Supplied (bushels per week)

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)

Market Equilibrium Equilibrium Price Equilibrium Quantity Surplus Shortage Rationing Function of Prices 3.1

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 Changes in Demand Changes in Supply Changes in Equilibrium Efficient Allocation Productive Efficiency Allocative Efficiency

Market Equilibrium ? ? ? ? Supply Increase; Demand Decrease Price Quantity Supply Increase; Demand Decrease Supply Decrease; Demand Increase Supply Increase; Demand Increase Supply Decrease; Demand Decrease ? ? ? ?

Government-Set Prices Price Ceilings on Gasoline Rationing Problem Black Markets Rent Controls Price Floors on Wheat Optimal Allocation of Resources 3.2

A Legal Market for Human Organs Last Word Waiting List for Transplants Demand for Organs Vertical Supply of Organs Incentive Role of Market and Up-Sloping Supply Increases Quantity Decreases Price Moral Objections Increase the Cost of Health Care Better to Legalize and Regulate?

A Legal Market for Human Organs Last Word Supply With Price Incentive S1 S2 P Supply of Organs Demand for Organs Shortage at Zero Price Q1 – Q3 P1 At Price P1 the Shortage is Reduced By Q1 – Q2 D1 P0 Q1 Q2 Q3 Q

Key Terms Page demand demand schedule law of demand diminishing marginal utility income effect substitution effect demand curve determinants of demand normal goods inferior goods substitute good complementary good change in demand change in quantity demanded supply supply schedule law of supply supply curve determinants of supply change in supply change in quantity supplied equilibrium price equilibrium quantity surplus shortage price ceiling price floor

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