1. Chapter 3 Demand, Supply, and Market Equilibrium Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. 3-2 Markets Interaction between buyers and sellers Markets may be Local National International Price is discovered in the interactions of buyers and sellers LO1

3. 3-3 Demand Demand schedule or demand curve Amount consumers are willing and able to purchase at a given price Other things equal Individual demand Market demand LO2

4. 3-4 Law of Demand Law of demand Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls Explanations Price acts as an obstacle to buyers Law of diminishing marginal utility Income effect and substitution effect LO2

5. 3-5 The Demand Curve LO2 6 5 4 3 2 1 0 10 20 30 40 50 60 70 80 Quantity demanded (bushels per week) Price (per bushel) PQdQd $5 4 3 2 1 10 20 35 55 80 P Q D

6. 3-6 Market Demand LO2 Market Demand for Corn, Three Buyers Price per bushel Quantity Demanded Total Q d per week JoeJenJay $5 1012830 4 20231760 3 353926100 2 556039154 1 808754221

7. 3-7 Changes in Demand 6 5 4 3 2 1 0 Quantity demanded (thousands of bushels per week) Price (per bushel) P Q D1D1 2 4 6 8 10 12 14 16 18 Increase in Demand Decrease in Demand D2D2 D3D3 LO2 PQdQd $5 4 3 2 1 2000 4000 7000 11,000 16,000 Decrease in demand Increase in demand

8. 3-8 Changes in Demand LO2 6 5 4 3 2 1 0 Quantity demanded (thousands of bushels per week) Price (per bushel) P Q D1D1 2 4 6 8 10 12 14 16 18 Decrease in Demand D2D2 D3D3 Change in demand Change in quantity demanded

9. 3-9 Determinants of Demand Determinants of demand Change in consumer tastes and preferences Change in the number of buyers Change in income Normal goods Inferior goods LO2

10. 3-10 Determinants of Demand Change in prices of related goods Complementary good Substitute good Change in consumer expectations Future prices Future income LO2

11. 3-11 Determinants of Demand Determinants of Demand: Factors That Shift the Demand Curve DeterminantExamples Change in buyers’ tastesPhysical 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 buyersA decline in the birthrate reduces the demand for children’s toys. Change in incomeA 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 goodsA 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 expectationsInclement weather in South America creates an expectation of higher future coffee bean prices, thereby increasing today’s demand for coffee beans.

12. 3-12 Supply Supply schedule or a supply curve Amount producers are willing and able to sell at a given price Individual supply Market supply LO3

13. 3-13 Law of Supply Law of supply Other things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls Explanation Price acts as an incentive to producers At some point, costs will rise LO3

14. 3-14 The Supply Curve LO3 5 4 3 2 1 0 Price (per bushel) Quantity supplied (bushels per week) S1S1 10 20 30 40 50 60 70 P Q PQsQs $5 4 3 2 1 60 50 35 20 5

15. 3-15 Changes in Supply LO3 $6 5 4 3 2 1 0 Price (per bushel) S1S1 Quantity supplied (thousands of bushels per week) 2 4 6 8 10 12 14 16 P Q S2S2 S3S3 Increase in supply Decrease in supply PQsQs $5 4 3 2 1 12,000 10,000 7000 4000 1000

16. 3-16 Changes in Supply $6 5 4 3 2 1 0 Price (per bushel) S1S1 Quantity supplied (thousands of bushels per week) 2 4 6 8 10 12 14 16 P Q S2S2 S3S3 Change in quantity supplied Change in supply LO3

17. 3-17 Determinants of Supply 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 LO3

18. 3-18 Determinants of Supply Determinants of Supply: Factors That Shift the Supply Curve DeterminantExamples Change in resource pricesA 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 technologyThe development of more effective wireless technology increases the supply of cell phones. Change in taxes and subsidiesAn 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 goodsAn increase in the price of cucumbers decreases the supply of watermelons. Change in producer expectationsAn expectation of a substantial rise in future log prices decreases the supply of logs today. Change in the number of suppliersAn 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.

19. 3-19 Market Equilibrium Equilibrium occurs where the demand curve and supply curve intersect Equilibrium price and equilibrium quantity Surplus and shortage Rationing function of prices Efficient allocation LO4

20. 3-20 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 LO4

21. 3-21 Market Equilibrium 6 5 4 3 2 1 0 2 4 6 8 10 12 14 16 18 Bushels of corn (thousands per week) Price (per bushel) P Qd Qd $5 4 3 2 1 2000 4000 7000 11,000 16,000 P Qs Qs $5 4 3 2 1 12,000 10,000 7000 4000 1000 7 D S 6,000 bushel surplus 7,000 bushel shortage LO4 3

22. 3-22 Rationing Function of Prices The ability of the competitive forces of demand and supply to establish a price at which selling and buying decisions are consistent LO4

23. 3-23 Changes in Demand and Equilibrium LO5 0 P D4D4 D3D3 0 P D1D1 D2D2 S Increase in demand D increase: P , Q  D decrease: P , Q  Decrease in demand S

24. 3-24 Changes in Supply and Equilibrium 0 P D S4S4 S3S3 0 P D S2S2 S1S1 Increase in supply S increase: P , Q  S decrease: P , Q  Decrease in supply LO5

25. 3-25 Complex Cases LO5 Effects of Changes in Both Supply and Demand Change in SupplyChange in Demand Effect on Equilibrium Price Effect on Equilibrium Quantity 1. IncreaseDecrease Indeterminate 2. DecreaseIncrease Indeterminate 3. IncreaseIncreaseIndeterminateIncrease 4. DecreaseDecreaseIndeterminateDecrease

26. 3-26 Government Set Prices Price ceiling Set below equilibrium price Rationing problem Black markets Example is rent control LO6

27. 3-27 Government Set Prices S P Q D P0P0 PCPC Q0Q0 Shortage QdQd QsQs Ceiling $3.50 3.00 LO6

28. 3-28 Government Set Prices Price floor Prices are set above the market price Chronic surpluses Example is the minimum wage law LO6

29. 3-29 Government Set Prices LO6 S P Q D P0P0 PfPf Q0Q0 Surplus QsQs QdQd Floor 2.00 $3.00

30. 3-30 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.

31. 3-31 Legal Market for Human Organs Negative effects Diminishes the special nature of life by commercializing it The market would leave out the poor and uninsured Increases the cost of medical care Prohibition on market solution has resulted in a $1 billion illegal market