Chapter 03_20e
Download
Report
Transcript Chapter 03_20e
3
Demand, Supply, and Market
Equilibrium
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Markets
• Any institution where buyers and
•
LO1
sellers interact
Price is determined in the interactions
of buyers and sellers
Demand
• Schedule or curve
• Amount consumers are willing and
•
•
LO1
able to purchase at a given price
Other things equal
Market demand
Law of Demand
• Other things equal, as price falls,
quantity demanded rises, and as
price rises, quantity demanded falls.
• Reasons:
• Common sense
• Law of diminishing marginal utility
• Income effect and substitution effects
LO1
Determinants of Demand
• Factors other than price
• Usually assumed to be constant
• When a determinant changes,
demand shifts
LO1
Determinants of Demand
• Change in buyer’s tastes
• Change in number of buyers
• Change in income
• Normal Goods
• Inferior Goods
LO1
Determinants of Demand
• Change in prices of related goods
• Complements
• Substitutes
• Chris Rock
• Change in consumers’ expectations
• Future prices
• Future income
• Future product availability
LO1
Demand vs. Quantity Demanded
• Change in demand
• Refers to shift of entire demand
•
LO2
curve to left or right
Cause: Change in determinants of
demand
Demand vs. Quantity Demanded
• Change in quantity demanded
• Refers to movement from one point
•
LO2
to another on fixed demand curve
Cause: Change in price of good
under consideration
Supply
• Schedule or curve
• Amount producers are willing and
•
•
LO2
able to sell at a given price
Other things equal
Market supply
Law of Supply
• Other things equal, as price rises
•
LO2
quantity supplied rises and as price
falls quantity supplied falls.
Reason:
• Higher prices act as an incentive to
producers
• At some point costs will rise
Determinants of Supply
• Factors other than price
• Usually assumed to be constant
• When a determinant changes, supply
shifts
LO1
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
Supply vs. Quantity Supplied
• Change in supply
• Refers to shift of entire supply curve
•
LO2
to left or right
Cause: Change in determinants of
supply
Supply vs. Quantity Supplied
• Change in quantity supplied
• Refers to movement from one point
•
LO2
to another on fixed supply curve
Cause: Change in price of good
under consideration
Market Shortage
• Occurs when current price is too low
• Quantity demanded exceeds quantity
•
LO3
supplied at the current price
Current price will rise.
Market Surplus
• Occurs when current price is too high
• Quantity supplied exceeds quantity
•
LO3
demanded at the current price
Current price will fall
Market Equilibrium
• Price which equates quantity
•
•
LO3
demanded and quantity supplied
No reason for price to change
Crisis
Government Set Prices
• Price Ceilings
• Good is necessity, equilibrium price
•
LO5
is too high
• Set below equilibrium price
• Rationing problem
• Black markets
Example: Rent control
Government Set Prices
• Price Floors
• Good is necessity, equilibrium price
•
LO5
is too low
• Prices are set above the market
price
• Chronic surpluses
Example: Minimum wage laws