1. 3
Demand, Supply, and Market Equilibrium

2. 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

3. 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

4. Individual Demand Individual Demand P Qd $5 4 3 2 1 10 20 35 55 80 P6 5 4 3 2 1
Quantity Demanded (bushels per week)
Price (per bushel)
Individual
Demand P Qd $5 4 3 2 1 10 20 35 55 80 D Q

5. 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

6. Individual Demand Demand Can Increase or Decrease Individual Demand P6 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
Quantity Demanded (bushels per week)

7. 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
Quantity Demanded (bushels per week)

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

9. 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) Q
Quantity Supplied (bushels per week)

10. 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

11. Individual Supply Supply Can Increase or Decrease Individual Supply P6 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) Q
Quantity Supplied (bushels per week)

12. 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 Q
Quantity Supplied (bushels per week)

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

14. 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 7
Bushels of Corn (thousands per week)

15. Market Equilibrium Changes in Demand Changes in Supply
Changes in Equilibrium
Efficient Allocation
Productive Efficiency
Allocative Efficiency

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

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

18. 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?

19. 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

20. 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

21. Public and Private Sectors
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The U.S. Economy:
Public and Private Sectors
Chapter 4!!!