1. Mehdi Arzandeh, University of Manitoba
PowerPoint Presentation by
Mehdi Arzandeh, University of Manitoba

2. © 2016 McGraw‐Hill Education Limited
Demand, Supply, and Market Equilibrium 3
LEARNING OBJECTIVES
LO3.1 Characterize and give example of markets.
LO3.2 Describe demand and explain how it can change.
LO3.3 Describe supply and explain how it can change.
LO3.4 Relate how supply and demand interact to determine market equilibrium.
LO3.5 Explain how changes in supply and demand affect equilibrium prices and quantities.
LO3.6 Identify what government-set prices are and how they can cause surpluses and shortages.
LOA3.1 Illustrate how supply and demand analysis can provide insights on actual economic situations.
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3.1
Markets
Interaction between buyers and sellers
Markets may be:
Local
National
International
Price is discovered in the interactions of buyers and sellers
LO1
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LO4.1
3.2
Demand
Schedule or curve
Amount consumers are willing and able to purchase at a given price
During a specified period of time
Other things equal
Individual demand
Market demand
LO2
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LO4.1
FIGURE 3-1
An Individual Buyer’s Demand for Corn 6 $5 4 3 2 1
Quantity Demanded (bushels per week)
Price (per bushel) P P Qd $5 4 3 2 1 10 20 35 55 80 D Q
LO2
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LO4.1
3.2
Demand
Law of Demand
The negative or inverse relationship between price and quantity demanded.
Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls.
Reasons:
Law of diminishing marginal utility
Income effect and substitution effect
LO2
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LO4.1
3.2
Demand
The Demand Curve
The inverse relationship between price and quantity demanded shown on a graph. Figure 3-1
Quantity demanded on the horizontal axis and price on the vertical axis.
The downward slope reflects the law of demand
The demand curve is the marginal benefit curve
LO2
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LO4.1
FIGURE 3-2
Market Demand for Corn, Three Buyers
The horizontal summation of the individual demand curves
Quantity Demanded
Price
per bushel
Total Qd
per week
Joe
Jen
Jay $5 10 12 8 30 4 20 23 17 60 3 35 39 26
100 2 55
154 1 80 87 54
221
LO2
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LO4.1
FIGURE 3-2
Market Demand for Corn, Three Buyers
The horizontal summation of the individual demand curves
LO2
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LO4.1
3.2
Demand
Determinants of Demand
Change in consumer tastes and preferences
Change in number of buyers
Change in income
Normal goods
Inferior goods
LO2
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LO4.1
3.2
Demand
Determinants of Demand
Change in prices of related goods
Complements
Substitutes
Change in consumers’ expectations
Future prices
Future income
LO2
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LO4.1
FIGURE 3-3
Changes in the Demand for Corn P 6 5 4 3 2 1
Price (per bushel) D2 D1 D3 Q
Quantity Demanded (bushels per week)
LO2
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13. Change in Quantity Demanded
LO4.1
FIGURE 3-3
Changes in the Demand for Corn P 6 5 4 3 2 1
Change in Demand
Change in Quantity Demanded
Price (per bushel) D2 D1 D3 Q
Quantity Demanded (bushels per week)
LO2
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LO4.1
TABLE 3-1
Determinants of Demand Curve Shifts
Determinant
Examples
Change in buyers’ tastes
Physical 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 buyers
A decline in the birthrate reduces the demand for children’s toys.
Change in income
A rise in incomes increases the demand for normal goods such as restaurant meals, sports tickets, and MP3 players while reducing the demand for inferior goods such as cabbage, turnips, and inexpensive wine.
Change in the prices of related goods
A 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 expectations
Political instability in South America creates an expectation of higher future coffee bean prices, thereby increasing today’s demand for coffee beans.
LO2
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3.3
Supply
Schedule or curve
Amount producers are willing and able to sell at a given price
Individual supply
Market supply
LO3
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3.3
Supply
Law of Supply
Other things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls.
Reason:
Price acts as an incentive to producers
At some point, costs will rise
LO3
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LO4.1
FIGURE 3-4
An Individual Producer’s Supply of Corn P
Supply of Corn
Price per Bushel Qs
per Week $5 60 4 50 3 35 2 20 1 5 S
Price (per bushel) Q
Quantity supplied (bushels per week)
LO3
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LO4.1
FIGURE 3-5
Changes in the Supply of Corn P S3 S1 $6 5 4 3 2 1
Price (per bushel)
Decrease
in supply S2
Increase
in supply Q
Quantity supplied (thousands of bushels per week)
LO3
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19. Change in Quantity Supplied
LO4.1
FIGURE 3-5
An Individual Producer’s Supply of Corn P
Change in Quantity Supplied $6 5 4 3 2 1
Price (per bushel) S3 S1 S2
Change in Supply Q
Quantity supplied (thousands of bushels per week)
LO3
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3.3
Supply
Determinants of Supply
Factor prices
Technology
Taxes and subsidies
Prices of other goods
Price expectations
The number of sellers
LO3
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LO4.1
TABLE 3-2
Determinants of Supply Curve Shifts
Determinant
Examples
Change in factor prices
A 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 technology
The development of more effective wireless technology increases the supply of cell phones.
Change in taxes and subsidies
An 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 goods
An increase in the price of cucumbers decreases the supply of watermelons.
Change in producer expectations
An expectation of a substantial rise in future log prices decreases the supply of logs today.
Change in number of suppliers
An 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.
LO3
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3.4
Market Equilibrium
Equilibrium occurs where the demand curve and supply curve intersect.
Surplus and shortage
Rationing function of prices
Efficient allocation
Productive efficiency
Allocative efficiency
LO4
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LO4.1
FIGURE 3-6
KEY GRAPH Equilibrium Price and Quantity 6 5 4 3 2 1
6,000 Bushel
Surplus S P Qd P Qs
2,000
4,000
7,000
11,000
16,000 $5 4 3 2 1 $5 4 3 2 1
12,000
10,000
7,000
4,000
1,000
Price (per bushel) 3
7,000 Bushel
Shortage D 7
Bushels of Corn (thousands per week)
LO4
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3.4
Market Equilibrium
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
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3.4
Market Equilibrium
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
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LO4.1
Changes in Supply, Demand, and Equilibrium
3.5
CHANGES IN DEMAND
If supply of a good is constant and its demand increases,
equilibrium price increases
equilibrium quantity increases.
If supply of a good is constant and its demand decreases,
equilibrium price decreases
equilibrium quantity decreases.
LO5
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LO4.1
Changes in Demand and Supply and the Effects on Price and Quantity
FIGURE 3-7
(a) Increase in demand
(b) Decrease in demand P P S S D2 D3 D1 D4
D increase:
P, Q
D decrease:
P, Q
LO5
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LO4.1
Changes in Supply, Demand, and Equilibrium
3.5
CHANGES IN SUPPLY
If demand for a good is constant and its supply increases,
equilibrium price falls
equilibrium quantity rises.
If demand for a good is constant and its supply decreases,
equilibrium price rises
equilibrium quantity falls.
LO5
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LO4.1
Changes in Demand and Supply and the Effects on Price and Quantity
FIGURE 3-7
(c) Increase in supply
(d) Decrease in supply P P S1 S2 S4 S3 D D
S increase:
P, Q
S decrease:
P, Q
LO5
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LO4.1
Changes in Supply, Demand, and Equilibrium
3.5
COMPLEX CASES
Supply Increase, Demand Decrease
Supply Decrease, Demand Increase
Supply Increase, Demand Increase
Supply Decrease, Demand Decrease
LO5
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LO4.1
TABLE 3-3
Effects of Changes in Both Supply and Demand
Change
in Supply
in Demand
Effect on
Equilibrium Price
Equilibrium Quantity
1. Increase
Decrease
Indeterminate
2. Decrease
Increase
3. Increase
4. Decrease
LO5
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Application: Government-Set Prices
3.6
Price Ceilings
The maximum legal price a seller may charge for a product or service e.g. rent control.
Set below equilibrium price
Rationing problem
Black markets
Credit card interest ceilings
LO6
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LO4.1
FIGURE 3-8
A Price Ceiling Results in a Shortage S
$1.25 P0
ceiling
0.75 PC D
Shortage Q Qs Q0 Qd
LO6
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Application: Government-Set Prices
3.6
Price Floors
A minimum price fixed by the government e.g. supported prices for some agricultural products and current minimum wages.
Set above equilibrium price
Chronic surpluses
Resource allocation problem
LO6
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LO4.1
FIGURE 3-9
A Price Floor Results in a Surplus S
Surplus
floor
$4.00 Pf
3.00 P0 D Q Qd Q0 Qs
LO6
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LO4.1
A Legal Market for Human Organs?
The LAST WORD
Waiting list for transplants
Demand for organs
Supply of organs—two possibilities
Market eliminates shortage
Moral objections
Legalize and regulate?
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LO4.1
A Legal Market for Human Organs?
The LAST WORD P S2 S1
Supply of Organs
Shortage at Zero Price
Q3 – Q1 P1
At Price P1 the
Shortage is Reduced
By Q2 – Q1
Demand for Organs D1 P0 Q1 Q2 Q3 Q
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LO4.1
Chapter Summary
LO3.1 Characterize and give examples of markets. LO3.2 Describe demand and explain how it can change. LO3.3 Describe supply and explain how it can change. LO3.4 Relate how supply and demand interact to determine market equilibrium. LO3.5 Explain how changes in supply and demand affect equilibrium prices and quantities. LO3.6 Identify what government-set prices are and how they can cause surpluses and shortages.
© 2016 McGraw‐Hill Education Limited