1. Market Demand, Supply and Equilibrium

2. Markets and Competition
Market – a group of buyers and sellers of a good or service
Can be highly organized (Corn, Wheat)
Can be less organized (Television)
Competitive market
Many buyers and many sellers
Each has a negligible impact on market price

3. Demand
Quantity demanded – the amount of a good buyers are willing and able to purchase
Law of demand – other things equal, when the price of the good rises the quantity demanded of a good falls
Demand schedule – a table illustrating the relationship between a price of a good and quantity demanded
Demand curve – a graph illustrating the relationship between price of a good and quantity demanded
Individual demand – Demand of one individual

4. Demand schedule and demand curve
Hamburger Demand Curve
demand schedule – a table that shows the quantity demanded at each price.
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
Price
decrease
in price
Price of
hamburgers
Quantity of
hamburgers demanded
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00 12 10 8 6 4 2
Demand curve
increases quantity
of hamburgers demanded. 12 10 11 9 1 2 3 4 5 6 7 8
Quantity
demand curve – illustrates how the quantity demanded of the good changes as its price varies. Because a lower price increases the quantity demanded, the demand curve slopes downward.

5. Market Demand Schedule
Market demand – the sum of all individual demand schedules for a good or service
Price of hamburger
Bob
Sam
Market
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00 12 10 8 6 4 2 + 7 5 3 1 = 19 16 13
The quantity demanded in a market is the sum of the quantities demanded by all the
buyers at each price. Thus, the market demand curve is found by adding horizontally
the individual demand curves. At a price of $2.00 Bob demands 4 hamburgers, and
Sam demands 3. The quantity demanded in the market at this price is 7 hamburgers.

6. Market Demand Curve + = Bob’s demand Sam’s demand Market demand DBob
$3.00
2.50
2.00
1.50
1.00
0.50
Price
$3.00
2.50
2.00
1.50
1.00
0.50
Price
$3.00
2.50
2.00
1.50
1.00
0.50
Price
DBob
DSam
DMarket 12 10 11 9 1 2 3 4 5 6 7 8
Quantity 1 2 3 4 5 6 7
Quantity 18 2 4 6 8 10 12 14 16
Quantity

7. Determinants of Demand
Consumer Income
Normal good – an increase in income will cause an increase in demand, all else equal
Inferior good – an increase in income a decrease in demand, all else equal
Price
Quantity D0 P0 Q0
Hamburger Market
Hamburger?
Inferior D2 Q2 D1 Q1
Steak?
Normal
For Hamburger
increase in income (D1)
decrease in income (D2)

8. Determinants of Demand
Prices of related goods
Substitutes an increase in the price of one leads to an increase in the demand for the other
Complements an increase in the price of one leads to a decrease in the demand for the other
Price
Quantity D0 P0 Q0
Hamburger Market
Compliments D2 Q2 D1 Q1
buns, cheese & soda
Increase in bun price (D1)
Substitutes
chicken, steak & fish
Increase in chicken price (D2)

9. Determinants of Demand
Tastes
News story
Oprah “all burgers are evil”,
Mad cow (D1)
Advertisement
Beef, It’s What’s for Dinner
Diets
Adkins Diet (D2)
Price
Quantity D0 P0 Q0
Hamburger Market D2 Q2 D1 Q1

10. Determinants of Demand
Expectations about future prices, quality and availability
Leaner, healthier, meat announcement (D1)
New tax on hamburgers next month to promote health (D2)
Price
Quantity D0 P0 Q0
Hamburger Market D2 Q2 D1 Q1

11. Determinants of Demand
Consumer Income
Normal good – an increase in income will cause an increase in demand, all else equal
Inferior good – an increase in income causes a decrease in demand, all else equal
Prices of related goods
Substitutes an increase in the price of one leads to an increase in the demand for the other
Complements an increase in the price of one leads to a decrease in the demand for the other
Tastes
Expectations about future prices, quality and availability
Number of buyers

12. Demand Terminology
Change in Demand is a shift in the demand curve resulting from a change in one of the determinants of demand
Change in Quantity Demanded is a movement along a given demand curve caused by a change in own price
Price D0
Price
Quantity 20
$2.00 A D0 D1 10
$2.00
$4.00 B 12 20
Quantity
As incomes increase, the demand curve for hamburger shifts to the left. Note the left graph: the demand curve shifts from D0 to D1. At price of $2.00, the quantity demanded falls from 20 to 10 hamburgers.
An increase in the price of hamburgers causes a movement to a different point on a given demand curve. Note the right graph: when the price rises from $2.00 to $4.00, the quantity demanded falls from 20 to 12 hamburgers, as reflected by the movement from point A to point B.

13. Demand Terminology
Increase in demand – any change that increases the quantity at every price
Demand curve shifts right (D1)
Decrease in demand – any change that decreases the quantity at every price
Demand curve shifts left (D1)
Price D0 D1
Increase in
Demand D2
Decrease in
Demand
Quantity

14. Demand Review Variable A Change in This Variable . . .
Change in Quantity Demanded
Price of the good itself
Change in Demand
Income
Prices of related goods
Tastes
Expectations
Number of buyers
Movement along the demand curve
Shift in demand curve

15. Supply
Quantity supplied – the amount of a good sellers are willing and able to sell Law of supply – other things equal, when the price of the good changes quantity supplied of a good moves in the same direction Increase in Supply – when the price of the good rises quantity supplied of a good go up Decrease in Supply – when the price of the good falls quantity supplied of a good drops

16. Supply schedule and supply curve
supply schedule – a table that shows the quantity supplied at each price.
Supply curve
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
Price
Price of
hamburger
Quantity of
hamburger supplied
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00 1 2 3 4 5
increase
in price
increases quantity
of hamburger supplied 12 10 11 9 1 2 3 4 5 6 7 8
Quantity
supply curve – a graphic representation of the relationship between price of a good and quantity supplied, higher price increases the quantity supplied, so the supply curve slopes upward.

17. Market Supply
Market supply – sum of the supply schedules of all sellers for a good or service
Price of hamburger
Jan Al
Market
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00 1 2 3 4 5 + 6 8 = 7 10 13
The quantity supplied in a market is the sum of the quantities supplied by all the sellers at each price. Thus, the market supply curve is found by adding horizontally the individual supply curves. At a price of $2.00, Bob supplies 3 hamburgers, and Al supplies 4 hamburgers. The quantity supplied in the market at this price is 7 hamburgers.

18. Market supply Jan’s supply Al’s supply + = Market supply SJan SMarket
$3.00
2.50
2.00
1.50
1.00
0.50
Price
$3.00
2.50
2.00
1.50
1.00
0.50
Price
$3.00
2.50
2.00
1.50
1.00
0.50
Price
SJan
SMarket
SAl 12 10 11 9 1 2 3 4 5 6 7 8
Quantity 1 2 3 4 5 6 7
Quantity 18 2 4 6 8 10 12 14 16
Quantity

19. Shifts in Supply Shift in Supply or “Change in Supply”
Increase in supply: any change that increases the quantity supplied at every price
Supply curve shifts right
Decrease in supply: any change that decreases the quantity supplied at every price
Supply curve shifts left

20. Shifts in Supply Price Quantity Supply curve, S0 ` Supply curve, S2
Supply
curve, S0 `
Supply
curve, S2
Decrease in
supply
Supply
curve, S1
Increase in
Any change that raises the quantity that sellers wish to produce at any given price shifts the supply curve to the right. Any change that lowers the quantity that sellers wish to produce at any given price shifts the supply curve to the left.

21. Determinants of Supply
Variables that can shift the supply curve
Resource Prices (negatively related to increased prices of inputs)
Technology (positively related to improved technology)
Expectations about future
Price of other goods being produced (negatively related to increased prices of other goods)
Number of sellers
Taxes and Subsidies

22. Determinants of Demand
Variables that can shift the supply curve
Input Prices (negatively related to increased prices of inputs)
Price
Quantity S0 P0 Q0
Hamburger
Employees always want a wage increase. How will a wage increase impact the market for Hamburger? (S1) S1 Q1 S2 Q2
A wage decrease? (S2)

23. Determinants of Demand
Variables that can shift the supply curve
Price of other goods being produced (negatively related to increased prices of other goods)
Price
Quantity S0 P0 Q0
Dog Food
In economic recession households demand more cats and fewer dogs
Cats (inferior goods)
Cat food prices increase
Dogs (normal goods) S2 Q2

24. Variables that influence sellers
Supply Review
Variables that influence sellers
Variable
A Change in This Variable . . .
Change in Quantity Supplied
of the good itself
Change in Supply
Resource prices
Technology
Expectations
Number of sellers
Taxes and Subsidies
Price of other goods
movement along the supply curve
Shifts the supply curve

25. Equilibrium
Equilibrium – where market price achieves the condition quantity supplied equals quantity demand
$3.00
2.50
2.00
1.50
1.00
0.50
Price
Supply
Demand
Equilibrium price is $ At this price, 7 hamburgers are supplied, and 7 hamburgers are demanded.
Equilibrium
Equilibrium
price 12 10 11 9 1 2 3 4 5 6 7 8
Quantity
Equilibrium
quantity

26. Equilibrium Excess Supply Price Excess Demand Quantity Demand Supply
Demand
Supply
Price
Supply
Surplus
Demand
$2.50 4 10 7
$2.00
$2.00 7
$1.50
Shortage
Quantity 4 10
Suppose market price is $2.50, the quantity supplied (10 burgers) exceeds the quantity demanded (4 burgers). Suppliers will increase sales by cutting the price which causes an increase in quantity demand and moves the price toward its equilibrium level.
Suppose market price is $1.50, the quantity demanded (10 burgers) exceeds the quantity supplied (4 burgers). With more buyers and goods available, suppliers take advantage of the shortage by raising the price. The price adjustment moves the market toward the equilibrium.

27. Equilibrium Surplus (Excess supply) Shortage (Excess demand)
Quantity supplied > quantity demanded
Downward pressure on price
Shortage (Excess demand)
Quantity demanded > quantity supplied
Upward pressure on price

28. Organ Shortage Kidney Market
“More than 70,000 Americans are waiting for kidneys, and the list grows by almost 5,000 per year. People are dying.”
The Organ Market
by William Saletan
Sunday, April 15, 2007
washingtonpost.com
Kidney Price
Kidney Quantity
Kidney Supply
20,000
Current Supply
Kidney Demand
70,000
What are the solutions?
45,000
25,000 more live
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