Demand, Supply, and Market Equilibrium 3 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Markets Any institution where buyers and sellers interact Price is determined in the interactions of buyers and sellers LO1

Demand Schedule or curve Amount consumers are willing and able to purchase at a given price Other things equal Market demand LO1

Law of Demand Other things equal, as price falls, quantity demanded rises, and as price rises, quantity demanded falls. Reasons: Common sense Law of diminishing marginal utility Income effect and substitution effects LO1

Determinants of Demand Factors other than price Usually assumed to be constant When a determinant changes, demand shifts LO1

Determinants of Demand Change in buyer’s tastes Change in number of buyers Change in income Normal Goods Inferior Goods LO1

Determinants of Demand Change in prices of related goods Complements Substitutes Chris Rock Change in consumers’ expectations Future prices Future income Future product availability LO1

Demand vs. Quantity Demanded Change in demand Refers to shift of entire demand curve to left or right Cause: Change in determinants of demand LO2

Demand vs. Quantity Demanded Change in quantity demanded Refers to movement from one point to another on fixed demand curve Cause: Change in price of good under consideration LO2

Supply Schedule or curve Amount producers are willing and able to sell at a given price Other things equal Market supply LO2

Law of Supply Other things equal, as price rises quantity supplied rises and as price falls quantity supplied falls. Reason: Higher prices act as an incentive to producers At some point costs will rise LO2

Determinants of Supply Factors other than price Usually assumed to be constant When a determinant changes, supply shifts LO1

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

Supply vs. Quantity Supplied Change in supply Refers to shift of entire supply curve to left or right Cause: Change in determinants of supply LO2

Supply vs. Quantity Supplied Change in quantity supplied Refers to movement from one point to another on fixed supply curve Cause: Change in price of good under consideration LO2

Market Shortage Occurs when current price is too low Quantity demanded exceeds quantity supplied at the current price Current price will rise. LO3

Market Surplus Occurs when current price is too high Quantity supplied exceeds quantity demanded at the current price Current price will fall LO3

Market Equilibrium Price which equates quantity demanded and quantity supplied No reason for price to change Crisis LO3

Government Set Prices Price Ceilings Good is necessity, equilibrium price is too high Set below equilibrium price Rationing problem Black markets Example: Rent control LO5

Government Set Prices Price Floors Good is necessity, equilibrium price is too low Prices are set above the market price Chronic surpluses Example: Minimum wage laws LO5