Slide 1 : 3 Demand, Supply, and Market Equilibrium –
Tom petty
Chapter Objectives : 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
Demand : Demand Demand Defined
Quantities of product that will be purchased at various prices.
Not just what you want – but what you are wiling to pay for that quantity.
DEMAND DEFINED : DEMAND DEFINED DEMAND SCHEDULE CORN Various Amounts A Series of Possible Prices …a specified time period …other things being equal 10
20
35
55
80 $5
4
3
2
1
LAW OF DEMAND : LAW OF DEMAND As Price Falls…
…Quantity Demanded Rises
As Price Rises…
…Quantity Demanded Falls An inverse relationship exists between price and quantity demanded
Individual Demand : Individual Demand P Qd $5
4
3
2
1 10
20
35
55
80 Individual
Demand P Q D
Individual Demand : Individual Demand Tastes
Number of Buyers
Income
Normal Goods
Inferior Goods
Price of Related Goods
Substitute Good
Complementary Good
Unrelated Goods
Consumer Expectations Determinants of Demand
Individual Demand : Individual Demand 6
5
4
3
2
1
0 Quantity Demanded (bushels per week) Price (per bushel) P Qd $5
4
3
2
1 10
20
35
55
80 Individual
Demand P Q D1 2 4 6 8 10 12 14 16 18 Demand Can Increase or Decrease Increase in Demand Decrease in Demand D2 D3
Individual Demand : Individual Demand 6
5
4
3
2
1
0 Quantity Demanded (bushels per week) Price (per bushel) P Qd $5
4
3
2
1 10
20
35
55
80 Individual
Demand P Q D1 2 4 6 8 10 12 14 16 18 Demand Can Increase or Decrease Decrease in Demand D2 D3 An Increase in Demand
Means a Movement
of the Line A Movement Between
Any Two Points on a
Demand Curve is Called a Change in Quantity
Demanded
Slide 10 : THE LAW OF DEMAND The Income Effect A lower price frees income for additional purchases - and vice versa The Substitution Effect A lower price relative to other goods attracts new buyers - and vice versa
Slide 11 : The law of demand can be explained in terms of income and _______________ effects or by the law of ___________ marginal utility.
Slide 13 : A fall in the price of a product tends to ___________ a consumer’s real income and a rise in its price tends to _________ real income which is called the ________ effect.
Slide 14 : Cow
Important Vocab : Important Vocab When the price of a product increases, the product becomes relatively ____ _______ than it was and the prices of other products become relatively _________ that they were. They will buy _______ of the product in question and ________ of the other products, which is called the ___________ effect.
Made in America – Eaten in Japan : Made in America – Eaten in Japan
Diminishing Marginal Utility : Diminishing Marginal Utility DMU – or a HoHo eating contest for three minutes.
http://www.youtube.com/watch?v=-8TTvt_dfWg
Supply : Supply Supply Defined
Various amounts of products that sellers are willing to sell at a series of possible prices during a specific time
SUPPLY DEFINED : SUPPLY DEFINED SUPPLY SCHEDULE $1
2
3
4
5 CORN Various Amounts A Series of Possible Prices …a specified time period …other things being equal 5
20
35
50
60
LAW OF SUPPLY : LAW OF SUPPLY As Price Rises…
…Quantity Supplied Rises
As Price Falls…
…Quantity Supplied Falls A direct relationship exists between price and quantity supplied
Individual Supply : Individual Supply 6
5
4
3
2
1
0 Quantity Supplied (bushels per week) Price (per bushel) P Qs $5
4
3
2
1 60
50
35
20
5 Individual
Supply P Q S1 10 20 30 40 50 60 70
Individual Supply : Individual Supply Resource Prices
Technology
Taxes and Subsidies
Prices of Other Goods
Producer Expectations
Number of Sellers Determinants of Supply
Individual Supply : Individual Supply 6
5
4
3
2
1
0 Quantity Supplied (bushels per week) Price (per bushel) P Qs $5
4
3
2
1 60
50
35
20
5 Individual
Supply P Q S1 Supply Can Increase or Decrease S2 S3 2 4 6 8 10 12 14
Individual Supply : Individual Supply 6
5
4
3
2
1
0 Quantity Supplied (bushels per week) Price (per bushel) P Qs $5
4
3
2
1 60
50
35
20
5 Individual
Supply P Q S1 Supply Can Increase or Decrease S2 S3 An Increase or Decrease in Supply Means a Movement of the Line A Movement Between
Any Two Points on a
Supply Curve is Called a Change in Quantity
Supplied 2 4 6 8 10 12 14
Market Equilibrium : Market Equilibrium Equilibrium Price
Equilibrium Quantity
Surplus
Shortage
Rationing Function of Prices
MARKET DEMAND & SUPPLY : MARKET DEMAND & SUPPLY $5
4
3
2
1 10
20
35
55
80 $5
4
3
2
1 60
50
35
20
5 200
B
U
Y
E
R
S MARKET
DEMAND 2,000
4,000
7,000
11,000
16,000 200
S
E
L
L
E
R
S 12,000
10,000
7,000
4,000
1,000 MARKET
SUPPLY EQUILIBRIUM Graphically… x x
Market Equilibrium : 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 $5
4
3
2
1 2,000
4,000
7,000
11,000
16,000 Market
Demand
200 Buyers P Qs $5
4
3
2
1 12,000
10,000
7,000
4,000
1,000 Market
Supply
200 Sellers 200 Buyers & 200 Sellers 7 3 D S $4 Price Floor 6,000 Bushel
Surplus $2 Price Ceiling 7,000 Bushel
Shortage
Market Equilibrium : Market Equilibrium Changes in Demand
Changes in Supply
Changes in Equilibrium
Efficient Allocation
Productive Efficiency
Allocative Efficiency
Market Equilibrium : Supply Increase; Demand Decrease
Supply Decrease; Demand Increase
Supply Increase; Demand Increase
Supply Decrease; Demand Decrease Market Equilibrium Price Quantity ? ? ? ?
Government-Set Prices : Government-Set Prices Price Ceilings on Gasoline
Rationing Problem
Black Markets
Rent Controls
Price Floors on Wheat
Minimum Wage
Lettuce Supply & Demand : Lettuce Supply & Demand Q o D1 Quantity Price (per pound) S1 S2 P Q1 Q2 P1 P2 Crop Freezing Damage…
American Flags : American Flags Q o D1 Quantity Price (per flag) S1 P Q1 Q2 P1 P2 D2 Patriotism Surge…
Pink Salmon : Pink Salmon Q o D2 Quantity Price (per fish) P Q1 Q2 P1 P2 D1 Increase in Supply & Decrease in Demand S2 S1
Gasoline : Gasoline Q o D1 Quantity Price (per gallon) P Q1 Q2 P2 P1 D2 Decrease in Supply & Increase in Demand S1 S2
Sushi : Sushi Q o D1 Quantity Price (per pound) P Q1 Q2 P1 D2 Increase in Demand & Increase in Supply S2 S1
A Legal Market for Human Organs : A Legal Market for Human Organs 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? Last
Word
A Legal Market for Human Organs : A Legal Market for Human Organs Last
Word P Q S2 S1 D1 P1 P0 Q1 Q2 Q3 Supply of Organs Demand for Organs Shortage at Zero Price
Q1 – Q3 Supply With Price Incentive At Price P1 the
Shortage is Reduced
By Q1 – Q2
Key Terms Page : 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
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Public and Private Sectors