1. DEMAND, SUPPLY, AND MARKET EQUILIBRIUM
CHAPTER 3
DEMAND, SUPPLY, AND
MARKET EQUILIBRIUM
Thanks to Dr. Amy Peng Ryerson University
©2007 McGraw-Hill Ryerson Ltd.

2. Demand
A schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices, during a specified period of time
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.1

3. An Individual Buyer’s Demand for Corn
Graph
Price
per bushel
Quantity demanded per week $5 10 4 20 3 35 2 55 1 80
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Chapter 3.1

4. Law of Demand
All else equal, as price falls, the quantity demanded rises; as price rises, the quantity demanded falls
Supported by:
diminishing marginal utility
income effect
substitution effect
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.1

5. Market Demand + = 22 43 74 115 167 Price QD–1st Buyer QD–2nd Buyer
QD–Market $5 10 12 $4 20 23 $3 35 39 $2 55 60 $1 80 87 + = 22 43 74
115
167
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.1

6. 35 39 74
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.1

7. Change in Demand
A change in one or more of the determinants of demand will change the demand data, and therefore there is a shift in the demand curve
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.1

8. Change in Demand Demand shifters are changes in: Tastes (preferences)
Number of Buyers
Income
Prices of Related Goods
Expectations
let’s examine these more closely…
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.1

9. Change in Demand Changes in tastes (preferences)
positive change shifts D curve right
more will be demanded at each price D′ D PA QA
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Chapter 3.1

10. Change in Demand Changes in number of buyers:
decrease will shift curve left D’ D PA QA
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Chapter 3.1

11. Change in Demand Changes in money incomes: when income increases
demand for NORMAL goods increases
demand for INFERIOR goods decreases
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Chapter 3.1

12. Change in Demand Changes in prices of related goods:
when two products are SUBSTITUTES, price of one and demand for the other move in the same direction
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Chapter 3.1

13. Change in Demand Changes in prices of related goods:
when two products are COMPLEMENTS, price of one and demand for the other move in opposite directions
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Chapter 3.1

14. Change in Demand Changes in prices of related goods:
when products are UNRELATED, there is no effect
Changes in expectations:
about future prices or incomes
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Chapter 3.1

15. Change in Quantity Demanded
when any other determinant of demand changes, there is a shift in the demand curve
when price of the product changes, there is a movement along the demand curve
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Chapter 3.1

16. Movement Along Demand CurvePA 
Movement along the curve P2 P1 Q1 Q2 QA
change in price
change in quantity demanded
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Chapter 3.1

17. Supply
A schedule or a curve showing the amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices, during a specified period of time
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.2

18. Figure 3-4 An Individual Producer’s Supply of Corn5 1 20 2 35 3 50 4 60 $5
Quantity supplied per week
Price
per bushel
This information can be presented in a supply schedule
Quantity Supplied
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.2

19. An Individual Producer’s Supply of Corn
or graphed
Price
per bushel
Quantity supplied per week $5 60 4 50 3 35 2 20 1 5
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.2

20. Law of Supply
All else being equal, as price rises, the quantity supplied rises; as price falls, the quantity supplied falls
Why?
price is revenue to suppliers
higher prices are necessary to induce higher supplies and to cover higher costs of production
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.2

21. The Market Supply Curve
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Chapter 3.2

22. ©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.2

23. ©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.2

24. Determinants of Supply
Supply shifters are changes in:
Factor Prices (input costs ie. Resources)
Technology
Taxes and Subsidies
Prices of Other Goods
Producer Expectations
Number of Sellers
let’s examine these more closely…
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.2

25. Changes in Supply Changes in factor prices:
decrease will increase supply and shift curve right
more will be supplied at each price S′ S PA QA
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Chapter 3.2

26. Changes in Supply Changes in taxes and subsidies:
increases in taxes will reduce supply S′ S PA QA
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Chapter 3.2

27. Changes in Supply Changes in technology:
new technology will decrease costs and increase supply S′ S PA QA
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Chapter 3.2

28. Changes in Supply Changes in prices of other goods:
higher prices of substitutes in production will reduce supply S′ S PA QA
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Chapter 3.2

29. Changes in Supply Changes in price expectations:
of the future price of a product
difficult to generalize
Changes in number of sellers:
as the number of sellers increases, so does supply
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Chapter 3.2

30. Changes in Quantity Supplied
A change in supply is a shift of the entire curve
A change in quantity supplied is a movement from one point to another on a fixed supply curve
price
quantity S
Increase in QS
NOT supply!
Decrease in QS
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.2

31. Supply and Demand: Market Equilibrium
Equilibrium price will be established where the supply decisions of producers and the demand decisions of buyers are mutually consistent
Surpluses drive prices down
Shortages drive prices up
Let’s look at the process of adjustment to equilibrium graphically
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.3

32. Figure 3-6 Equilibrium Price and Quantity
6000-bushel
surplus S
$4 is not the equilibrium price D
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Chapter 3.3

33. Equilibrium Price and QuantityS
$2 is not the equilibrium price
7000-bushel
shortage D
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Chapter 3.3

34. Equilibrium Price and Quantity
$3 is the equilibrium price S
QD=QS D
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Chapter 3.3

35. Equilibrium Price and Quantity
Rationing Function of Prices:
combination of freely made individual decisions results in market-clearing price
Efficient Allocation:
Productive Efficiency
Allocative Efficiency
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Chapter 3.3

36. Changes in Supply, Demand, and Equilibrium
Changes in demand or supply will affect the equilibrium price and quantity
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.3

37. Increase in Demand D2 P D1 S Q p1 q3 q1
An increase in demand will cause:
A shortage at the original price p1
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Chapter 3.3

38. Increase in Demand D2 P D1 S Q Price has increased from p1 to p2;
quantity traded has increased from q1 to q2 D2 P D1 S p2 q2 p1 q3
NOT an increase in supply q1 Q
Consumers will bid price up to p2
QS will increase, QD will decrease
New equilibrium reached at p2, q2
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.3

39. Decrease in Demand D1 P D2 S Q p1 q3 q1
A decrease in demand will cause:
A surplus at the original price p1
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Chapter 3.3

40. Decrease in Demand D1 P D2 S Q Price has decreased from p1 to p2;
quantity traded has decreased from q1 to q2 P D2 S p1 q3 q2 p2
NOT a decrease in supply q1 Q
Producers will drop price to p2
QS will decrease, QD will increase
New equilibrium will be reached at p2, q2
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.3

41. Increase in Supply S1 D P S2 Q p1 q3 q1
An increase in supply will cause:
A surplus at the original price p1
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.3

42. Increase in Supply S1 D P S2 Q Price has decreased from p1 to p2;
quantity traded has increased from q1 to q2 P S2 p1 q3 q2 p2 q1 Q
Producers will drop price to p2
QD will increase, QS will decrease
New equilibrium will be reached at p2, q2
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.3

43. Decrease in Supply S2 D P S1 Q p1 q3 q1
A decrease in supply will cause:
A shortage at the original price p1
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.3

44. Decrease in Supply S2 D P S1 Q Price has increased from p1 to p2;
quantity traded has decreased from q1 to q2 D P S1 p2 q2 p1 q3 q1 Q
Consumers will bid price up to p2
QS will increase, QD will decrease
New equilibrium will be reached at p1, q2
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.3

45. Complex Cases
When both supply and demand change, the effect is a combination of the individual effects
If both demand and supply shift, one of either price or quantity cannot be predicted—the result is indeterminate
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Chapter 3.3

46. Table 3-3 Complex Cases Change in supply Change in demand
Effect on equilibrium price
Effect on equilibrium quantity
Increase
Decrease
Indeterminate
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Chapter 3.3

47. Figure 3-8 A Price Ceiling Results in a ShortageD P S
The result of
imposing a
legal price
ceiling is a... P0
SHORTAGE S D Q Qs Qd
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Chapter 3.4

48. Price Ceilings and Shortages
Rationing Problem
Black Markets
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Chapter 3.4

49. Figure 3-9 A Price Floor Results in a SurplusD P S
SURPLUS P0
The result of
imposing a
legal price
floor is a... S D Q Qd Q0 Qs
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3.4

50. Price Floors and Surplus
Controversial Tradeoffs
Additional Consequences
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Chapter 3.4

51. Chapter Summary Demand Supply Supply and Demand: Market Equilibrium
Demand schedule
Market Demand
Change in demand
Supply
Supply schedule
Market Supply
Change in supply
Supply and Demand: Market Equilibrium
Application: Government-Set Prices (Ceilings and Floors)
©2007 McGraw-Hill Ryerson Ltd.
Chapter 3