1. 3
C H A P T E R
Individual Markets:
Demand & Supply

2. MARKETS DEFINED MARKETS
POTENTIAL
BUYERS
POTENTIAL
SELLERS
MARKETS

3. DEMAND DEFINED DEMAND SCHEDULE …a specified time periodQD
Various Amounts $5 4 3 2 1 10 20 35 55 80
A Series of Possible Prices
…a specified time period
…other things being equal

4. LAW OF DEMAND
An inverse relationship exists between price and quantity demanded
As Price Falls…
…Quantity Demanded Rises
As Price Rises…
…Quantity Demanded Falls

5. LAW OF DEMAND
Diminishing Marginal Utility

6. LAW OF DEMAND
Diminishing Marginal Utility
Income Effect

7. LAW OF DEMAND Diminishing Marginal Utility Income Effect
Substitution Effect

8. LAW OF DEMAND Diminishing Marginal Utility Income Effect
Substitution Effect
Demand Curve
Individual and Market Demand

9. GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q
Price of Corn P $5 4 3 2 1
CORN
Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o Q
Quantity of Corn

10. GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q
Price of Corn P $5 4 3 2 1
CORN
Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o 55 Q
Quantity of Corn

11. GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q
Price of Corn P $5 4 3 2 1
CORN
Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o Q 35
Quantity of Corn

12. GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q
Price of Corn P $5 4 3 2 1
CORN
Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o Q
Quantity of Corn

13. GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q
Price of Corn P $5 4 3 2 1
CORN
Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o Q
Quantity of Corn

14. GRAPHING DEMAND Connect the Points P QD $5 4 3 2 1 10 20 35 55 80 P D
Price of Corn P $5 4 3 2 1
CORN
Connect the Points P QD $5 4 3 2 1 10 20 35 55 80 D o Q
Quantity of Corn

15. GRAPHING DEMAND What if Demand Increases? P QD $5 4 3 2 1 10 20 35 55
Price of Corn
What if
Demand
Increases? P $5 4 3 2 1
CORN P QD $5 4 3 2 1 10 20 35 55 80 D o Q
Quantity of Corn

16. GRAPHING DEMAND Increase in Quantity Demanded P QD $5 4 3 2 1 10 20 35
Price of Corn P
Increase
in Quantity
Demanded $5 4 3 2 1
CORN P QD $5 4 3 2 1 10 20 35 55 80 30 40 60 80 +
Increase in
Demand D’ D o Q
Quantity of Corn

17. GRAPHING DEMAND What if Demand Decreases? P QD $5 4 3 2 1 10 20 35 55
Price of Corn
What if
Demand
Decreases? P $5 4 3 2 1
CORN P QD $5 4 3 2 1 10 20 35 55 80 D o Q
Quantity of Corn

18. GRAPHING DEMAND Decrease in Quantity Demanded P QD $5 4 3 2 1 10 20 35
Price of Corn P
Decrease
in Quantity
Demanded $5 4 3 2 1
CORN P QD $5 4 3 2 1 10 20 35 55 80 -- 10 20 40 60
Decrease in
Demand D D’ o Q
Quantity of Corn

19. DETERMINANTS OF DEMAND
Tastes
Number of Buyers
Income
Normal (Superior) & Inferior Goods
Prices of Related Goods
Substitutes & Complements
Unrelated Goods
Expectations

20. SUPPLY DEFINED SUPPLY SCHEDULE Various Amounts P QS $1 2 3 4 5 5 20 35
CORN P QS
Various Amounts $1 2 3 4 5 5 20 35 50 60

21. SUPPLY DEFINED …a specified time period …other things being equal
SUPPLY SCHEDULE
CORN P QS
Various Amounts $1 2 3 4 5 5 20 35 50 60
A Series of Possible Prices
…a specified time period
…other things being equal

22. LAW OF SUPPLY As Price Rises… …Quantity Supplied Rises As Price Falls…
A direct relationship exists between price and quantity supplied
As Price Rises…
…Quantity Supplied Rises
As Price Falls…
…Quantity Supplied Falls

23. GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q 5
Price of Corn P $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 o 5 Q
Quantity of Corn

24. GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q
Price of Corn P $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q
Quantity of Corn

25. GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q
Price of Corn P $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 o 35 Q
Quantity of Corn

26. GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q
Price of Corn P $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q
Quantity of Corn

27. GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q
Price of Corn P $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q
Quantity of Corn

28. GRAPHING SUPPLY Connect the Points P QS $5 4 3 2 1 60 50 35 20 5 P S o
Price of Corn P S $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5
Connect the Points o Q
Quantity of Corn

29. GRAPHING SUPPLY What if Supply Increases? P QS $5 4 3 2 1 60 50 35 20
Price of Corn
What if
Supply
Increases? P S $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q
Quantity of Corn

30. GRAPHING SUPPLY Increase in Supply P QS $5 4 3 2 1 60 50 35 20 5 80 70
Price of Corn P
Increase in
Supply S’ S $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 80 70 60 45 30
Increase
in Quantity
Supplied o Q
Quantity of Corn

31. GRAPHING SUPPLY What if Supply Decreases? P QS $5 4 3 2 1 60 50 35 20
Price of Corn
What if
Supply
Decreases? P S $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q
Quantity of Corn

32. GRAPHING SUPPLY P QS $5 4 3 2 1 60 50 35 20 5 45 30 20 -- Decrease
Price of Corn S’ P S $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 45 30 20 --
Decrease
in Quantity
Supplied o Q
Quantity of Corn

33. DETERMINANTS OF SUPPLY
Resource Prices
Technology
Taxes & Subsidies
Prices of Other Goods
Price Expectations
Number of Sellers

34. DETERMINANTS OF SUPPLY
Resource Prices
Technology
Taxes & Subsidies
Prices of Other Goods
Price Expectations
Number of Sellers
Combining
with
Demand

35. x x MARKET DEMAND & SUPPLY EQUILIBRIUM P QD P QS $5 4 3 2 1 10 20 35
BUSHELS
OF CORN P QS
BUSHELS
OF CORN
MARKET
DEMAND
MARKET
SUPPLY
200 B U Y E R S
200 S E L R $5 4 3 2 1 10 20 35 55 80
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 60 50 35 20 5 x x
EQUILIBRIUM
Graphically…

36. MARKET DEMAND & SUPPLY P QD P QS $5 4 3 2 1 2,000 4,000 7,000 11,000
Price of Corn P
CORN
MARKET
CORN
MARKET S $5 4 3 2 1 P QD P QS $5 4 3 2 1
2,000
4,000
7,000
11,000
16,000
Market
Clearing
Equilibrium $5 4 3 2 1
12,000
10,000
7,000
4,000
1,000 D 7 o Q
Quantity of Corn

37. MARKET DEMAND & SUPPLY Surplus P QD P QS $5 4 3 2 1 2,000 4,000 7,000
Price of Corn P
CORN
MARKET
CORN
MARKET
Surplus S $5 4 3 2 1 P QD P QS
At a $4 price
more is being
supplied than
demanded $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 D 7 o Q
Quantity of Corn

38. MARKET DEMAND & SUPPLY Shortage P QD P QS $5 4 3 2 1 2,000 4,000 7,000
Price of Corn P
CORN
MARKET
CORN
MARKET S $5 4 3 2 1 P QD P QS
At a $2 price
more is being
demanded than
supplied $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
Shortage D 7 11 o Q
Quantity of Corn

39. MARKET DEMAND & SUPPLY Surplus Shortage P QD P QS $5 4 3 2 1 2,000
Price of Corn P
CORN
MARKET
CORN
MARKET
Surplus S $5 4 3 2 1 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
Shortage D 7 11 o Q
Quantity of Corn

40. MARKET EQUILIBRIUM Equilibrium Price & Quantity
Rationing Function of Prices
Changes in Demand
Changes in Quantity Demanded
Changes in Supply
Changes in Quantity Supplied

41. Complex Cases Multiple Shifts… Supply Increases; Demand Decreases
Prices Decrease
Quantity Indeterminate
Supply Decreases; Demand Increases
Price Increases

42. Complex Cases Multiple Shifts… Supply Increases; Demand Increases
Prices Indeterminate
Quantity Increases
Supply Decreases; Demand Decreases
Price Indeterminate
Quantity Decreases

43. Government Set Prices Price Ceilings Price Floors Shortages
Rationing Problem
Black Markets
Rent Controls
Price Floors
Surpluses

44. Government Set Prices Price Ceilings Price Floors Shortages
Rationing Problem
Black Markets
Rent Controls
Price Floors
Surpluses

45. Key Terms market 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
surplus
shortage
equilibrium price
equilibrium quantity
rationing function of prices
price ceiling and floor
Copyright McGraw-Hill/Irwin, 2005
BACK
END

46. Next:
The Market System
Chapter 4