Chap 003
Short Description
Demand, Supply and Market Equillibrium...
Description
Chapter 3: Demand, Supply, and Market Equilibrium
Markets • Markets bring together buyers (“demanders”) and sellers (“suppliers”). • Some markets are local while others are national or international. • Markets help to determine the prices and quantities bought and sold of millions of goods and services.
LO: 3-1
Demand • D e m a n d is a schedule or curve that shows the various amounts of a product that consumers will buy at each of a series of possible prices during a specific period. • The L a w o f D em an d states that, all else equal, as price falls, the quantity demanded rises, and vice versa.
LO: 3-1
Demand Curve P
6 5
LO: 3-1
P $5
Qd 10
4
20
3
35
2
55
1
80
) e t 4 t a l r e p ( 3 e c i r P2
1 0
D
10
20
30
40
50
60
70
80
Quantity Demanded (lattes per month)
Q
Market Demand • In d i v i d u a l d e m a n d is the demand schedule or curve of a single consumer. • M ar k e t d e m a n d is the sum of all the individual demands. • Market demand is determined by: • • • • •
LO: 3-1
Consumers’ tastes (preferences) The number of consumers in the market Consumers’ incomes The prices of related goods Expected prices
Demand Can Increase or Decrease Shifts of the demand curve are changes in demand
P
6 5
) e t 4 t a l r e p ( 3 e c i r P2
D 2
1
D 1
D 3 0 LO: 3-1
2
4
6
8
10
12
14
16
18 Q
Quantity Demanded (lattes per month)
Demand Can Increase or Decrease P
Movements along the demand curves are changes in quantity demanded
6
C h a n g e i n D em a n d
5 ) e t 4 t a l
Change in Quantity Demanded
r e p ( 3 e c i r P2
D 2
1
D 1
D 3 0 LO: 3-1
2
4
6
8
10
12
14
16
18 Q
Quantity Demanded (lattes per month)
Supply • Supply is a schedule or curve showing the amounts of a product that producers will make available for sale at each of a series of possible prices during a specific period. • The L a w o f S u p p l y states that, all else equal, as price rises, the quantity supplied rises, and vice versa. • Shifts of the supply curve are changes in supply. • Movements along the supply curve are changes in quantity supplied. LO: 3-2
Supply Curve P
6
S 5
LO: 3-2
P $5
Qs 60
4
50
3
35
2
20
1
5
) e t 4 t a l r e p ( 3 e c i r P2
1 0
10
20
30
40
50
60
70
Quantity Supplied (lattes per month)
Q
Market Supply • M ar k e t s u p p l y is derived from individual supply by “horizontally adding” the supply curves of the individual producers. • M ar k e t s u p p l y is determined by: • • • • • • LO: 3-2
Resource prices Technology Taxes and subsidies Prices of other goods Expected price The number of sellers in the market
Market Equilibrium • In a competitive market neither buyers nor sellers can set the price. • Intersection of demand and supply curves determine eq u i li b r i u m p r i c e and e q u i l i b r i u m quantity. E q u i li b r i u m p r i c e in
E q u i l i b r i u m q u an t i t y
the competitive market is the price at which quantity supplied is equal to quantity demanded.
is the quantity demanded and quantity supplied that occur at equilibrium price in the competitive market.
LO: 3-2
Market Equilibrium • Any price above the equilibrium price would create a surplus, or ex c e s s s u p p l y . • Surpluses drive prices down to equilibrium: as prices fall, the incentive to produce declines and the incentive for consumers to buy increases.
• Any price below the equilibrium price would create a shortage, or e x c es s d e m a n d . • Shortages push prices up equilibrium: as prices rise, the incentive to produce increases and the incentive for consumers to buy decreases. is a Excess supply
is a Excess demand
situation when quantity supplied exceeds quantity demanded.
situation when quantity demanded exceeds quantity supplied.
LO: 3-3
Government-Set Prices • Government occasionally concludes that market prices are unfairly high to buyers or unfairly low to sellers. • Government may then place legal limits on how high or low a price or prices may go, creating price ceilings or price floors. • A price ceiling limits price increase and thus creates a shortage of the product. • A price floor limits price decrease and thus creates surplus of the product.
• Government-controlled prices distort resource allocations and cause negative side effects. LO: 3-5
Market Equilibrium Market demand P
Qd
$5
2,000
4
4,000
3
7,000
2
11,000
1 16,000
6,000 Cups Surplus
5
S $4 Price Floo r
) e t 4 t a l r e p ( 3 e c i r P2
$2 Price Ceiling
7,000 Cups Shortage
1 0
LO: 3-3
Market supply
6
2
4
6 7 8
10
D 12
14
16
Cups of latte (thousands per month)
18
P
Qs
$5
12,000
4
10,000
3
7,000
2
4,000
1
1,000
Changes in Demand, Supply, and Equilibrium • Changes in demand when supply is constant: • An increase in demand will result in a higher equilibrium price and quantity; • A decline in demand will result in a lower equilibrium price and quantity.
• Changes in supply when demand is constant: • An increase in supply will result in a lower equilibrium price and a higher equilibrium quantity; • A decline in supply will result in a higher equilibrium price and a lower equilibrium quantity. LO: 3-4
When Demand and Supply Both Change Price
• Supply increases; Demand decreases • Supply decreases; Demand increases • Supply increases; Demand increases • Supply decreases; Demand decreases LO: 3-4
Quantity
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