Transcript Supply and Demand - McGraw Hill Higher Education

Chapter 3
Supply and Demand
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Market and Interactions
• A market is any place where goods are
bought and sold and includes the
interaction of all buyers and sellers.
• We must interact because we have a
limited amount of time, energy, and
resources, so we can’t produce everything
we desire.
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The Two Markets
• Factor Market:
– Any place where factors of production (land,
labor, capital, and entrepreneurship) are
bought and sold.
• Product Market:
– Any place where finished goods and services
(products) are bought and sold.
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Figure 3.1
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Product Market
• Consumers buy and producers sell in the
product market.
• Imports and exports are also a part of the
product market.
• Governments supply goods and services in
product markets.
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Locating Markets
• A market exists wherever and whenever
an exchange takes place.
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Supply and Demand
• Market transactions require two sides:
• Supply
– People supply labor in the factor market.
– Firms supply goods and services in the product
market.
• Demand
– People demand goods and services in the product
market.
– Firms demand factors of production in the factor
market.
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Supply and Demand
• Supply – The ability and willingness to sell
(produce) specific quantities of a good at
alternative prices in a given time period,
ceteris paribus (other things being equal).
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Supply and Demand
• Demand – The ability and willingness to
buy specific quantities of a good at
alternative prices in a given time period,
ceteris paribus (other things being equal).
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Demand Curve
• A curve describing the quantities of a good
a consumer is willing and able to buy at
alternative prices in a given time period,
ceteris paribus.
• The demand curve does not state actual
purchases, rather only what consumers
are willing and able to purchase.
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Individual Demand
• A demand exists only if someone is both
willing and able to pay for a good.
• How much someone is willing to pay for
something is determined by his/her
income and the opportunity cost.
– Opportunity cost – the most desired goods or
services foregone in order to obtain
something else.
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Figure 3.2
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Law of Demand
• The quantity of a good demanded in a
given time period increases as its price
falls, ceteris paribus.
• There is an inverse or negative relationship
between price and quantity demanded,
ceteris paribus.
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Determinants of
Demand
•
•
•
•
•
Tastes (desire for this and other goods)
Income (of the consumer)
Other goods (their availability and price)
Expectations (for income, prices, tastes)
Number of buyers
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Shift in Demand
• The demand schedule and curve remain
unchanged only so long as the underlying
determinants of demand remain constant.
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Shift in Demand
• Any change in one of the determinants of
demand causes the demand curve to shift.
• The quantity demanded at any (every)
given price changes.
• The demand curve can shift to the right
(increase in demand) or to the left
(decrease in demand).
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Shift in Demand
• When demand increases, consumers want
to buy more at each particular price.
– Demand curve shifts right.
• When demand decreases, consumers want
to buy less at each particular price.
– Demand curve shifts left.
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Figure 3.3
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Movement versus Shifts
• Movements along a demand curve are a
response to price changes for that good.
• Shifts of the demand curve occur only
when the determinants of demand
change. A change in price does not shift
the demand curve.
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Market Demand
• The total quantities of a good or service
people are willing and able to buy at
alternative prices in a given time period.
• The sum of individual demands.
• Market demand is determined by the
number of potential buyers and their
respective tastes, incomes, other goods,
and expectations.
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Market Supply
• The total quantities of a good or service
that sellers are willing and able to sell at
alternative prices in a given time period,
ceteris paribus.
• The sum of individual supplies.
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Market Supply
• Market supply is an expression of sellers’
intentions – of their ability and willingness
to sell – not a statement of actual sales.
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Figure 3.5
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Determinants of Supply
•
•
•
•
•
•
Technology
Factor (or resource) costs
Other goods
Taxes and subsidies
Expectations
Number of sellers
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Law of Supply
• The quantity of a good supplied in a given
time period increases as its price
increases, ceteris paribus.
• There is a direct or positive relationship
between price and quantity supplied,
ceteris paribus.
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Shift in Supply
• When supply increases, producers want to
produce and sell more at each particular
price.
– Supply curve shifts right.
• When supply decreases, producers want
to produce and sell less at each particular
price.
– Supply curve shifts left.
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Shifts in Supply
• Changes in a quantity supplied:
– Movement along a given supply curve.
– Due to a change in the price of the good.
• Changes in supply:
– Shifts in the supply curve due to a change in
one of the determinants of supply.
– A change in a good’s price does not shift its
supply curve.
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Equilibrium
• Supply interacts with demand to
determine the market price.
• Only one price and quantity are
compatible with the existing intentions of
both buyers and sellers.
• It is the price at which the quantity of a
good demanded in a given time period
equals the quantity supplied.
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Figure 3.6
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Invisible Hand
• The market behaves as if it is directed by
some unseen force. Adam Smith (1776)
called this the invisible hand.
– It means that the equilibrium price is
determined by the collective behavior of
many buyers and sellers.
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Equilibrium Price
• The equilibrium price occurs at the
intersection of the supply and demand
curves.
• There is only one equilibrium price.
• The market will naturally move toward this
price.
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Market Shortage
• The amount by which the quantity
demanded exceeds the quantity supplied
at a given price.
– Occurs when the selling price is lower than
the equilibrium price.
– Sellers supply less than buyers demand at that
price.
– Unsatisfied consumers bid up the price to the
equilibrium price.
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Market Surplus
• The amount by which the quantity
supplied exceeds the quantity demanded
at a given price.
– Occurs when the selling price is higher than
the equilibrium price.
– Sellers supply more than buyers demand at
the current price.
– Unsatisfied sellers mark the price down to the
equilibrium price.
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Changes in Equilibrium
• No equilibrium price is permanent.
• Equilibrium price and quantity change
whenever the supply or demand curves
shift.
• This happens when the determinants of
supply or demand change.
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Figure 3.7
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Disequilibrium Pricing
• The following are imposed by government
and cause disequilibrium pricing.
• Price Ceiling:
– Maximum price imposed on a good or service.
• Price Floor:
– Minimum price imposed on a good or service.
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Price Ceilings
• Price ceilings have three predictable
effects:
– They increase quantity demanded.
– They decrease quantity supplied.
– They create a market shortage.
• Rent controls on housing are an example.
• There will be less housing for everyone
when rent controls are imposed.
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Figure 3.8
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Price Floors
• Price floors have three predictable effects:
– They increase quantity supplied.
– They decrease quantity demanded.
– They create a market surplus.
• Minimum wages and price supports for
agriculture are examples.
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Figure 3.9
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Price Floors
• A government imposed price floor may
create:
– A wrong mix of output.
– An increased tax burden.
– An altered distribution of income.
– Political favoritism.
• Government failure – a government
intervention that fails to improve
economic outcomes.
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Market Mechanism in Action
• WHAT? – Produce what consumers are
willing to buy.
• HOW? – Profitably; at the most efficient
consumption of resources.
• FOR WHOM? – For those willing and able to
pay the market price.
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