1. Demand, Supply, and Equilibrium
Microeconomics – Unit 2: Nature and Function of Product Markets

2. The Relationship Between Demand and Total/Marginal Utility
Total Utility
Marginal Utility
The Law of Diminishing Marginal Utility

3. Demand Amounts of a product consumers are willing and able to buy
Law of Demand = inverse or negative relationship between price and quantity demanded D
Price D
Quantity

4. Law of Demand Why? Price is an obstacle to buying
Diminishing marginal utility

5. Determinants of Demand
Consumer tastes/preferences
# of buyers in the market
Consumers’ incomes
Income Effect
Prices of related goods
Substitute goods
Substitution Effect
Complementary goods
Consumer expectations

6. Supply
Amounts of a product that producers are willing and able to make available for sale
Law of Supply = positive relationship between price and quantity supplied S
Price S
Quantity

7. Law of Supply Why? Price = incentive to sell more product
Increases in marginal cost

8. Determinants of Supply
Resource prices
Technology
Taxes and subsidies
Prices of other goods
Substitution in production
Producer expectations
# of sellers in the market

9. Market Equilibrium Equilibrium price = “market clearing price”
Equilibrium price (Po) =
A. Productive Efficiency
B. Allocative Efficiency
Market ensures MB ≥ MC
Any price above equilibrium = surplus
Any price below equilibrium = shortage

10. Producer and Consumer Surplus
Consumer Surplus = the sum of the products of the prices and quantities consumers would have been willing to buy ABOVE the equilibrium price
Producer Surplus = the sum of the products of the prices and quantities suppliers would have been willing to sell BELOW the equilibrium price

11. Producer and Consumer Surplus

12. Price Ceilings Gov’t sets a maximum price sellers may charge consumers
EX: rent controls, usury laws D S
Shortage Po
Price Pc S D Qs Qo Qd
Quantity

13. Price Floors Gov’t sets a minimum price buyers may pay sellers
EX: crop price supports, minimum wages
Surplus D S Pf Po
Price S D Qd Qo Qs
Quantity

14. Deadweight Loss A.K.A “allocative inefficiency”
A loss of economic efficiency that can occur when equilibrium for a good or service is not achieved.

15. Consumer and Producer Surplus w/Deadweight Loss

16. Differences in Qd/Qs and Changes in Demand/Supply
A change in QUANTITY demanded or supply is a MOVEMENT ALONG the demand or supply curve (a move from one point on the curve to another). Almost always caused by a change in price.
A CHANGE in demand or supply is a shift of the ENTIRE demand or supply curve.

17. Fictional Product: Greebies

18. Changes in Supply/Demand/Equilibrium
∆’s in Demand
Raises or reduces both equilibrium price (Price) and equilibrium quantity (Qty)
∆’s in Supply
Increase in S = lower Price, higher Qty
Decrease in S = higher Price, lower Qty

19. Graph Shift

20. Changes in Supply/Demand/Equilibrium
S increases, D decreases
Qty depends on relative increase in S vs. D
S decreases, D increases
S decreases, D decreases
If decrease in S > decrease in D = Price will increase, Qty will decrease
If decrease in S < decrease in D = Price will decrease, Qty will decrease

21. Changes in Supply/Demand/Equilibrium
S increases, D increases
If increase in S > increase in D = Price will decrease Qty will increase
If increase in S < increase in D = Price will increase, Qty will increase

22. Graph Shift

23. Changes in Demand/Supply/Equilibrium
If increase in S EQUALs the increase in D then Price will stay the same.
If decrease in S EQUALs the decrease in D then Price will stay the same

24. Wrap it up!
Supply and Demand Conclusion

25. Closure: Exit Ticket Activity
Answer question on Socrative