Transcript CHAPTER 3_M20e - Business and Computer Science

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
– Buyers = Demanders
– Sellers = Suppliers
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
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
Determinants of Demand
1) Change in buyer’s tastes
2) Change in number of buyers
3) Change in income
• Normal Goods
• Inferior Goods
LO1
Determinants of Demand
4) Change in prices of related goods
• Complements
• Substitutes
• Chris Rock
4a) Unrelated goods
LO1
Determinants of Demand
5) 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
•
•
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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
1. A change in resource prices
2. A change in technology
LO2
Computer-Aided Design and
Manufacturing
• Computer-Aided Design
(CAD) -- The use of
computers in the design of
products.
• Computer-Aided
Manufacturing (CAM) -The use of computers in the
manufacturing of products.
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Business,
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Business,
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Flexible Manufacturing
• Flexible Manufacturing -- Designing machines
to do multiple tasks so they can produce a variety of
products.
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Understanding
Business,
Understanding
Business,
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© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Determinants of Supply
3. A change in taxes and subsidies
4. A change in prices of other goods
5. A change in producer expectations
6. A change in the number of sellers
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
Equilibrium Point
High
Market Equilibrium
Price
S
Low
D
Quantity
High
2-21
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Market Shortage
• Occurs when current price is too low
• Quantity demanded exceeds quantity
•
LO3
supplied at the current price
Current price will rise.
Equilibrium Point
High
Market Equilibrium
Price
S
Low
Shortage
Quantity
D
High
2-23
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Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Market Surplus
• Occurs when current price is too high
• Quantity supplied exceeds quantity
•
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demanded at the current price
Current price will fall
Market Equilibrium
• Price which equates quantity
•
•
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demanded and quantity supplied
No reason for price to change
Crisis
Efficient Allocation
• Productive efficiency
• Producing goods in the least costly way
• Using the best technology
• Using the right mix of resources
• Allocative efficiency
• Producing the right mix of goods
• The combination of goods most highly
valued by society
LO4
Market Equilibrium
6
5
Qd
$5
2000
4
4000
3
7000
2
11,000
1
16,000
Price (per bushel)
P
6,000 bushel
surplus
S
4
3
2
7,000 bushel
shortage
1
0
2
4
67
8
10
D
12
14
16
Bushels of corn (thousands per week)
LO4
18
P
Qs
$5
12,000
4
10,000
3
7000
2
4000
1
1000
Rationing Function of Prices
• The ability of the competitive forces of
demand and supply to establish a price at
which selling and buying decisions are
consistent
LO4
Changes in Demand and
Equilibrium
D increase:
P, Q
D decrease:
P, Q
P
P
S
S
D2
D3
D1
0
0
Increase in demand
LO5
D4
Decrease in demand
Changes in Supply and Equilibrium
S increase:
P, Q
S decrease:
P, Q
P
P
S1
S4
S2
D
D
0
0
Increase in supply
LO5
S3
Decrease in supply
Complex Cases
Effects of Changes in Both Supply and Demand
Change in Supply
Change in Demand
Effect on Equilibrium
Price
Effect on Equilibrium
Quantity
1. Increase
Decrease
Decrease
Indeterminate
2. Decrease
Increase
Increase
Indeterminate
3. Increase
Increase
Indeterminate
Increase
4. Decrease
Decrease
Indeterminate
Decrease
LO5