1. Demand, Supply, and Market Equilibrium
Chapter 3
Demand, Supply, and Market Equilibrium

2. Markets
Markets bring together buyers (demanders) and sellers (suppliers)
New York Stock Exchange
Chicago Board of Trade

3. Demand
Demand is a schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of prices
Price is the independent variable
Quantity is the dependent variable

4. Law of Demand
There is an inverse relationship between price and quantity demanded.
Common sense – people buy more at low prices
Law of Diminishing Marginal Utility – people need a lower price to entice them to buy more
Income Effect – lower price increases purchasing power
Substitution Effect – the lower price will entice some to switch from more expensive substitute goods

5. The Demand Curve
Graph
Market demand is the sum of all the individual demand schedules in a market.

6. Change in Demand
A change in demand results in a shift of the demand curve.
An increase in demand causes the demand curve to shift to the right while a decrease in demand will result in a shift to the left of the demand curve.
Note – A change in price causes a change in quantity demanded and does not cause a shift

7. Determinants of Demand
A change in a determinant will cause the demand curve to shift.
1. Tastes and Preferences
Technology
Medical research
Advertising
Fads

8. 2. Number of Buyers
Globalization
Baby Boomers

9. 3. Income
Normal Goods (also called superior goods) – people buy more of these goods as their incomes increase
Inferior Goods – As incomes increase, consumers buy less of these goods

10. 4. Prices of Related Goods
Substitutes – goods that can be used in place of each other
An increase in the price of a good will increase the demand for a substitute good

11. Complementary Goods – goods that are used in conjunction with one another
An increase in the price of one good will result in a decrease in demand for it’s complement
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12. 5. Consumer Expectations
Expectations of higher prices in the future leads to an increase in current demand
Real Estate speculation

13. Supply
Supply is a schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at a series of prices
Law of Supply – There is a direct relationship between price and quantity supplied. Thus, the supply curve is up sloping.

14. As with demand, a change in a determinant will cause the supply curve to shift.
Anything that results in a decrease in production costs will cause supply to increase (shift to the right). Anything that results in an increase in production costs will cause supply to decrease (shift to the left)
A change in price changes quantity supplied and causes movement on the supply curve.

15. Determinants of Supply
1. Resource Prices
2. Technology
3. Taxes and Subsidies (payments to produce)
4. Prices of other goods – substitution in production
5. Producer expectations
6. The number of sellers in the market

16. Market Equilibrium Also known as the market clearing price
Quantity demanded = quantity supplied
The intersection of demand and supply
Graph

17. The Rationing Function of Prices helps to eliminate shortages (excess demand) and surpluses (excess supply)
Graph

18. Efficient Use of Resources
Competitive Markets result in an efficient use of societies resources
Productive Efficiency – least cost production
Allocative Production – producing the mix of goods and services most desired by society

19. Changes in Supply, Demand, and Equilibrium
Shifts in Demand or Supply – memorize these graphs!
D  PQ
D  PQ
S  PQ
S  PQ

20. Shifts in Both Demand and Supply
Hint – When both demand and supply shift, the resulting change in either price or quantity will be indeterminate
DS  P?Q
DS  P?Q
DS  PQ?
DS  PQ?

21. Government Set Prices
Price Ceilings – An effective price ceiling is set below equilibrium price.
Graph
Historic Example – Rent Control
Results – Shortages, Black Markets

22. Price Floors – An effective price floor is set above equilibrium price
Graph
Historic Example – Agriculture
Result – Surplus, Government Purchase of Surplus