1. Demand, Supply, and Market Equilibrium 3 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Markets Any institution where buyers and sellers interact – Buyers = Demanders – Sellers = Suppliers Price is determined in the interactions of buyers and sellers LO1

3. Demand Schedule or curve Amount consumers are willing and able to purchase at a given price Other things equal Market demand LO1

4. Law of Demand Other things equal, as price falls, quantity demanded rises, and as price rises, quantity demanded falls. Reasons: Common sense Law of diminishing marginal utility Income effect and substitution effects LO1

5. Determinants of Demand Factors other than price Usually assumed to be constant When a determinant changes, demand shifts LO1

6. Demand vs. Quantity Demanded Change in demand Refers to shift of entire demand curve to left or right Cause: Change in determinants of demand LO2

7. Determinants of Demand 1) Change in buyer’s tastes 2) Change in number of buyers 3) Change in income Normal Goods Inferior Goods LO1

8. Determinants of Demand 4) Change in prices of related goods Complements Substitutes Chris Rock 4a) Unrelated goods LO1

9. Determinants of Demand 5) Change in consumers’ expectations Future prices Future income Future product availability LO1

10. Demand vs. Quantity Demanded Change in demand Refers to shift of entire demand curve to left or right Cause: Change in determinants of demand LO2

11. Demand vs. Quantity Demanded Change in quantity demanded Refers to movement from one point to another on fixed demand curve Cause: Change in price of good under consideration LO2

12. Supply Schedule or curve Amount producers are willing and able to sell at a given price Other things equal Market supply LO2

13. Law of Supply Other things equal, as price rises quantity supplied rises and as price falls quantity supplied falls. Reason: Higher prices act as an incentive to producers At some point costs will rise LO2

14. Determinants of Supply Factors other than price Usually assumed to be constant When a determinant changes, supply shifts LO1

15. Determinants of Supply 1. A change in resource prices 2. A change in technology LO2

16. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Computer-Aided Design and Manufacturing Computer-Aided Design (CAD) -- The use of computers in the design of products. Computer-Aided Manufacturing (CAM) -- The use of computers in the manufacturing of products. 9-16

17. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Flexible Manufacturing Flexible Manufacturing -- Designing machines to do multiple tasks so they can produce a variety of products. 9-17

18. Determinants of Supply 3. A change in taxes and subsidies 4. A change in prices of other goods 5. A change in producer expectations 6. A change in the number of sellers LO2

19. Supply vs. Quantity Supplied Change in supply Refers to shift of entire supply curve to left or right Cause: Change in determinants of supply LO2

20. Supply vs. Quantity Supplied Change in quantity supplied Refers to movement from one point to another on fixed supply curve Cause: Change in price of good under consideration LO2

21. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-21 Quantity High Low Price Equilibrium Point Market Equilibrium SD

22. Market Shortage Occurs when current price is too low Quantity demanded exceeds quantity supplied at the current price Current price will rise. LO3

23. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-23 Quantity High Low Price Equilibrium Point Market Equilibrium SD Shortage

24. Market Surplus Occurs when current price is too high Quantity supplied exceeds quantity demanded at the current price Current price will fall LO3

25. Market Equilibrium Price which equates quantity demanded and quantity supplied No reason for price to change Crisis LO3

26. 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

27. Market Equilibrium 6 5 4 3 2 1 0 2 4 6 8 10 12 14 16 18 Bushels of corn (thousands per week) Price (per bushel) P Qd Qd $5 4 3 2 1 2000 4000 7000 11,000 16,000 P Qs Qs $5 4 3 2 1 12,000 10,000 7000 4000 1000 7 3 D S 6,000 bushel surplus 7,000 bushel shortage LO4

28. 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

29. Changes in Demand and Equilibrium LO5 0 P D4D4 D3D3 0 P D1D1 D2D2 S Increase in demand D increase: P , Q  D decrease: P , Q  Decrease in demand S

30. Changes in Supply and Equilibrium 0 P D S4S4 S3S3 0 P D S2S2 S1S1 Increase in supply S increase: P , Q  S decrease: P , Q  Decrease in supply LO5

31. Complex Cases LO5 Effects of Changes in Both Supply and Demand Change in SupplyChange in Demand Effect on Equilibrium Price Effect on Equilibrium Quantity 1. IncreaseDecrease Indeterminate 2. DecreaseIncrease Indeterminate 3. IncreaseIncreaseIndeterminateIncrease 4. DecreaseDecreaseIndeterminateDecrease