1. # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Demand, Supply, and Market Equilibrium 3

2. 3-2 Markets Interaction between buyers and sellers Markets may be: Local National International Price is discovered in the interactions of buyers and sellers LO1

3. 3-3 Demand Schedule or curve Amount consumers are willing and able to purchase at a given price Other things equal Individual demand Market demand LO1

4. 3-4 Law of Demand Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. Reasons: Common sense Law of diminishing marginal utility Income effect and substitution effects LO1

5. 3-5 6 5 4 3 2 1 0 10 20 30 40 50 60 70 80 Quantity Demanded (latte per month) Price (per latte) PQdQd $5 4 3 2 1 10 20 35 55 80 Individual Demand P Q D The Demand Curve LO1

6. 3-6 Market Demand LO1 Market Demand for Lattes, Three Buyers Price per Latte Quantity Demanded Total Q d per week Joe Java Sarah Coffee Mike Cappuccino $51012830 420231760 3353926100 2556039154 1808754221

7. 3-7 Market Demand LO1 SarahJoeMikeMarket QQQQ PPPP $3 353926100 ++= D1D1 D2D2 D3D3 D (= 35 + 39 + 26)

8. 3-8 Changes in Demand LO1 6 5 4 3 2 1 0 Quantity Demanded (thousands of lattes per month) Price (per latte) Individual Demand P Q D1D1 2 4 6 8 10 12 14 16 18 Demand Can Increase or Decrease Decrease in Demand D2D2 D3D3 Increase in demand Decrease in demand

9. 3-9 Changes in Demand Change in consumer tastes and preferences Change in number of buyers Change in income Normal goods Inferior goods LO1

10. 3-10 Changes in Demand Change in prices of related goods Complements Substitutes Change in consumers’ expectations Future prices Future income LO1

11. 3-11 Changes in Quantity Demanded Change in demand is a shift of the demand curve Change in quantity demanded is a movement from one point to another point on a fixed demand curve LO1

12. 3-12 Supply Schedule or curve The amount producers are willing and able to sell at a given price Individual supply Market supply LO2

13. 3-13 Law of Supply Other things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls. Reason: Price acts as an incentive to producers At some point, costs will rise LO2

14. 3-14 The Supply Curve LO2 5 4 3 2 1 0 Price (per latte) Quantity Supplied (lattes per month) S 10 20 30 40 50 60 70 Market Supply of Lattes Price per Latte Q s per Month $5 60 4 50 3 35 2 20 1 5 P Q

15. 3-15 Changes in Supply LO2 $6 5 4 3 2 1 0 Price (per latte) S1S1 Quantity Supplied (thousands of lattes per month) 2 4 6 8 10 12 14 16 P Q S2S2 S3S3 Increase in supply Decrease in supply

16. 3-16 Determinants of Supply A change in resource prices A change in technology A change in the number of sellers A change in taxes and subsidies A change in prices of other goods A change in producer expectations LO2

17. 3-17 Changes in Quantity Supplied Change in supply is a shift in the supply curve Change in the quantity supplied represents a movement along a supply curve LO2

18. 3-18 Market Equilibrium Equilibrium occurs where the demand curve and supply curve intersect Surplus and shortage Rationing function of prices Efficient allocation Productive efficiency Allocative efficiency LO3

19. 3-19 Market Equilibrium LO3 6 5 4 3 2 1 0 2 4 6 8 10 12 14 16 18 Quantity of lattes (thousands per month) Price (per latte) PQdQd $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 Market Demand 200 Buyers PQsQs $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 6,000 latte surplus 7,000 latte shortage

20. 3-20 Rationing Functions of Prices The ability of the competitive forces of demand and supply to establish a price at which selling and buying decisions are consistent. LO3

21. 3-21 ` LO4 0 P D4D4 D3D3 Changes in Demand and Equilibrium and Equilibrium LO4 0 P D1D1 D2D2 S Increase in demand D increase: P , Q  D decrease: P , Q  Decrease in demand S

22. 3-22 Changes in Supply and Equilibrium LO4 0 P D S4S4 S3S3 0 P D S2S2 S1S1 Increase in supply S increase: P , Q  S decrease: P , Q  Decrease in supply

23. 3-23 Government-Set Prices Price ceilings Set below equilibrium price Rationing problem Black markets Example: Rent control LO5

24. 3-24 Government-Set Prices LO5 S P Q D P0P0 PCPC Q0Q0 Shortage QdQd QsQs Ceiling $3.50 3.00

25. 3-25 Government-Set Prices Price floors Prices are set above the market price Chronic surpluses Example: Minimum wage laws LO5

26. 3-26 Government-Set Prices LO5 S P Q D P0P0 PfPf Q0Q0 Surplus QsQs QdQd Floor 2.00 $3.00