1. Copyright 2011 The McGraw-Hill Companies 3-1 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show 3 Demand, Supply, and Market Equilibrium

2. Copyright 2011 The McGraw-Hill Companies 3-2 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show Chapter Objectives Demand Defined and What Affects It Supply Defined and What Affects It How Supply & Demand Together Determine Market Equilibrium How Changes in Supply and Demand Affect Equilibrium Prices and Quantities Government-Set Prices and their Implications for Surpluses & Shortages

3. Copyright 2011 The McGraw-Hill Companies 3-3 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show Demand Demand Defined Demand Schedule Law of Demand –Diminishing Marginal Utility –Income Effect –Substitution Effect Demand Curve Market Demand

4. Copyright 2011 The McGraw-Hill Companies 3-4 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show Individual Demand 60 50 40 30 20 10 0 1 2 3 4 5 6 7 8 Quantity Demanded (kg per week) Price (per /kg) PQdQd R50 40 30 20 10 2345623456 Individual Demand P Q D

5. Copyright 2011 The McGraw-Hill Companies 3-5 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show Individual Demand Tastes Number of Buyers Income –Normal Goods –Inferior Goods Price of Related Goods –Substitute Good –Complementary Good –Unrelated Goods Consumer Expectations Determinants of Demand

6. Copyright 2011 The McGraw-Hill Companies 3-6 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show Individual Demand 6 5 4 3 2 1 0 Quantity Demanded Price PQdQd R5 4 3 2 1 10 20 35 55 80 Individual Demand P Q D1D1 2 4 6 8 10 12 14 16 18 Demand Can Increase or Decrease Increase in Demand Decrease in Demand D2D2 D3D3

7. Copyright 2011 The McGraw-Hill Companies 3-7 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show Individual Demand 6 5 4 3 2 1 0 Quantity Demanded Price PQdQd R5 4 3 2 1 10 20 35 55 80 Individual Demand P Q D1D1 2 4 6 8 10 12 14 16 18 Demand Can Increase or Decrease Decrease in Demand D2D2 D3D3 An Increase in Demand Means a Movement of the Line A Movement Between Any Two Points on a Demand Curve is Called a Change in Quantity Demanded

8. Copyright 2011 The McGraw-Hill Companies 3-8 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show Supply Supply Defined Supply Schedule Law of Supply –Revenue Implications –Marginal Cost Supply Curve Market Supply

9. Copyright 2011 The McGraw-Hill Companies 3-9 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show Individual Supply 60 50 40 30 20 10 0 Quantity Supplied (kg per week) Price (kg per week) PQsQs R50 40 30 20 10 6543265432 Individual Supply P Q S1S1 1 2 3 4 5 6 7

10. Copyright 2011 The McGraw-Hill Companies 3-10 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show Individual Supply Resource Prices Technology Taxes and Subsidies Prices of Other Goods Producer Expectations Number of Sellers Determinants of Supply

11. Copyright 2011 The McGraw-Hill Companies 3-11 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show Individual Supply 6 5 4 3 2 1 0 Quantity Supplied Price PQsQs R5 4 3 2 1 60 50 35 20 5 Individual Supply P Q S1S1 Supply Can Increase or Decrease S2S2 S3S3 2 4 6 8 10 12 14

12. Copyright 2011 The McGraw-Hill Companies 3-12 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show Individual Supply 6 5 4 3 2 1 0 Quantity Supplied Price PQsQs R5 4 3 2 1 60 50 35 20 5 Individual Supply P Q S1S1 Supply Can Increase or Decrease S2S2 S3S3 An Increase in Supply Means a Movement of the Line A Movement Between Any Two Points on a Supply Curve is Called a Change in Quantity Supplied 2 4 6 8 10 12 14

13. Copyright 2011 The McGraw-Hill Companies 3-13 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show Market Equilibrium Equilibrium Price Equilibrium Quantity Surplus Shortage Rationing Function of Prices 3.1

14. Copyright 2011 The McGraw-Hill Companies 3-14 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show Market Equilibrium 60 50 40 30 20 10 0 2 4 6 8 10 12 14 16 18 Meat per kg (hundreds per week) Price PQdQd R50 40 30 20 10 400 600 800 1000 1200 Market Demand 200 Buyers PQsQs R50 40 30 20 10 1200 1000 800 600 400 Market Supply 200 Sellers 200 Buyers & 200 Sellers D S R40 Price Floor 400 kg Surplus R20 Price Ceiling 400 kg Shortage

15. Copyright 2011 The McGraw-Hill Companies 3-15 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show Market Equilibrium Changes in Demand Changes in Supply Changes in Equilibrium Efficient Allocation –Productive Efficiency –Allocative Efficiency

16. Copyright 2011 The McGraw-Hill Companies 3-16 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show Supply Increase; Demand Decrease Supply Decrease; Demand Increase Supply Increase; Demand Increase Supply Decrease; Demand Decrease Market Equilibrium PriceQuantity ? ? ? ?

17. Copyright 2011 The McGraw-Hill Companies 3-17 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show Government-Set Prices Price Ceilings on Fuel Rationing Problem Black Markets Rent Controls Price Floors on Minimum Wage Optimal Allocation of Resources

18. Copyright 2011 The McGraw-Hill Companies 3-18 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show A Legal Market for Human Organs Waiting List for Transplants Demand for Organs Vertical Supply of Organs Incentive Role of Market and Up- Sloping Supply Increases Quantity Decreases Price Moral Objections Increase the Cost of Health Care Better to Legalize and Regulate? Last Word

19. Copyright 2011 The McGraw-Hill Companies 3-19 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show A Legal Market for Human Organs Last Word P Q S2S2 S1S1 D1D1 P1P1 P0P0 Q1Q1 Q2Q2 Q3Q3 Supply of Organs Demand for Organs Shortage at Zero Price Q 1 – Q 3 Supply With Price Incentive At Price P 1 the Shortage is Reduced By Q 1 – Q 2

20. Copyright 2011 The McGraw-Hill Companies 3-20 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show Key Terms Page demand demand schedule law of demand diminishing marginal utilitydiminishing marginal utility income effect substitution effect demand curve determinants of demand normal goods inferior goods substitute good complementary good change in demand change in quantity demandedchange in quantity demanded supply supply schedule law of supply supply curve determinants of supply change in supply change in quantity suppliedchange in quantity supplied equilibrium price equilibrium quantity surplus shortage price ceiling price floor

21. Copyright 2011 The McGraw-Hill Companies 3-21 Demand Individual Demand Determinants of Demand Supply Individual Supply Determinants of Supply Market Equilibrium Government- Set Prices Last Word Key Terms End Show Next Chapter Preview… Extensions of Demand And Supply Analysis