1. Chapter 3 Demand, Supply, and Market Equilibrium McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. A Market
Market: A market is an mechanism that brings together buyers (demanders) and sellers (suppliers) of particular goods and services.
The goal of the chapter is to explain the way in which markets adjust to changes and the role of prices in bringing the markets toward equilibrium.
3-2

3. Demand (D)
Demand schedule shows the various amounts of a product that consumers are willing and able to buy at each specific price during a specified time period.
3-3

4. Law of Demand
Other things equal, Ceteris Paribus , as price (P) falls quantity demanded (Qd) rises and vice-versa.
inverse relationship.
A Giffen Good is a good that exeriences increased demand when the price rises and decreased demand when the price falls.
Example of Giffen good: Perfume. If you lower price from $80 to $40, you may actually sell fewer units because people will perceive the perfume as lower quality.
3-4

5. 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
3-5

6. Determinants of Demand (D) or Shifts in demand (D) curve
Tastes (Patriotism & Kuwait flags, Boots, Fitness)
Number of buyers (more people more demand)
Income
Normal goods (mostly all goods, TV, Mobile)
Inferior goods (view goods, apartment, bean)
Note on Income effect: It depends on people
Price of related goods
Substitute good (Air/Train, Pepsi/Coke)
Complementary good (DVD/DVD Player, iPhone/App store)
Unrelated goods
Consumer expectations (now vs. future)
3-6

7. Shifts in demand (D) curve

8. 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)
3-8

9. Change in Quantity Demanded
Individual Demand
Demand Can Increase or Decrease P 6 5 4 3 2 1
Change in Demand
Individual
Demand P Qd
Change in Quantity Demanded $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)
3-9

10. Supply (S)
Supply schedule shows the various amounts of a product that producer is willing and able to sell at each specific price during a specified time period.
3-10

11. Law of Supply
Other things equal, Ceteris Paribus , as price (P) raises quantity supplied (Qs) rises and vice-versa.
direct relationship.
3-11

12. 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)
3-12

13. Determinants of Supply or Shifts in Supply Curve
Resource prices: (price of inputs, fuel, raw materials)
Technology (better tech)
Taxes and subsidies (Tax is bad, Subsidy is good)
Prices of other goods: in produce’s point view
Substitute good (Tomatoes/Strawberries)
Complement good (Chicken/Eggs, Oil/Gas)
Producer expectations (now vs. future)
Number of sellers (more sellers more supply)
3-13

14. Shifts in Supply Curve

15. 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)
3-15

16. Change in Quantity Supplied
Individual Supply
Supply Can Increase or Decrease P 6 5 4 3 2 1 S3
Individual
Supply S1
Change in Quantity Supplied S2 P Qs $5 4 3 2 1 60 50 35 20 5
Price (per bushel)
Change in Supply Q
Quantity Supplied (bushels per week)
3-16

17. Supply & Demand Market Equilibrium
200 Buyers & 200 Sellers
Market
Supply
200 Sellers
Market
Demand
200 Buyers 6 5 4 3 2 1
6,000 Bushel
Surplus S P Qd P Qs
$4 Price Floor
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
$2 Price Ceiling
7,000 Bushel
Shortage D 7
Bushels of Corn (thousands per week)
3-17

18. Market Equilibrium

19. Market Equilibrium ∆ in D & ∆ in S
Change in demand
Shift of the D curve
Change in supply
Shift of the S curve
Change in equilibrium price and quantity
3-19

21. ? ? ? ? Market Equilibrium Supply increase; Demand decrease
Price
Quantity
Supply increase; Demand decrease
Supply decrease; Demand increase
Supply increase; Demand increase
Supply decrease; Demand decrease ? ? ? ?
3-21

22. Government-Set Prices Price Ceilings and Price Floors
Price ceilings: 1. The maximum legal price a seller may charge, typically placed below equilibrium. 2. Shortages result as quantity demanded exceeds quantity supplied. 3. Examples: Rent controls and gasoline price controls (1970s)
3-22

23. Government-Set Prices Price Ceilings and Price Floors
Price floors: 1. The minimum legal price a seller may charge typically placed above equilibrium. 2. Surpluses result as quantity supplied exceeds quantity demanded. 3. Examples: Minimum wage, farm price supports

24. Advanced analysis Demand is: Qd = 50 – 5P Supply is: Qs = –10 + 5P
Equilibrium condition:Qs = Qd
50 – 5P = –10 + 5P
60 = 10P and 6 = P
Now substitute P = 6 in either Qd or Qs to determine equilibrium quantity
Qd = 50 – 5P = 50 – 5(6) = 20 or
Qs = –10 + 5P = –10 + 5(6) = 20