chapter 3 demand, supply and market equilibrium
DESCRIPTION
CHAPTER 3 Demand, Supply and Market Equilibrium. Markets. An institution or mechanism that brings together buyers and sellers of particular goods and services. This chapter focuses on competitive markets. What is a competitive market?. Demand. - PowerPoint PPT PresentationTRANSCRIPT
![Page 1: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/1.jpg)
1
CHAPTER 3Demand, Supply
and Market Equilibrium
![Page 2: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/2.jpg)
MarketsAn institution or mechanism that brings together buyers and sellers of particular goods and services.
This chapter focuses on competitive markets.
What is a competitive market?
2
![Page 3: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/3.jpg)
3
A schedule or a curve that shows the various amounts consumers are willing and able to purchase at each of a series of possible prices, during. some specified period of time
Demand
![Page 4: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/4.jpg)
Demand Schedule for DVDs
Price(dollars/dvd)
Quantity(millions of dvds/week)
ABCDE
12345
96432
4
![Page 5: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/5.jpg)
5
Ceteris paribus, as price falls, the quantity demanded rises (& vice-versa)
Explanation of law of demand: 1. diminishing marginal utility2. income effect3. substitution effect
Law of Demand
![Page 6: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/6.jpg)
Individual versus Market demand
The market demand us the horizontal sum of individual demand curve.
6
![Page 7: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/7.jpg)
Market Demand Schedule for DVDs
Quantity demanded (millions/week)
Total quantity demanded/week
Price(dollars/dvd)
Buyer 1 Buyer 2
Buyer 3
ABCDE
12345
85321
96432
75432
24161185
7
![Page 8: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/8.jpg)
8
A change in one or more of the determinants of demand results in a shift in the demand curve
Changes in Demand
![Page 9: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/9.jpg)
9
Changes in any of these determinants will cause a change in demand:
tastes (preferences)number of buyersincomeprices of related goodsexpectations
let’s examine these more closely…
Changes in Demand
![Page 10: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/10.jpg)
10
Changes in Tastes (preferences)positive change shifts D curve rightmore will be demanded at each price
PPAA
QQAA
DD DD′′
Changes in Demand
![Page 11: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/11.jpg)
11
Changes in Number of Buyers:decrease will shift curve left
PPAA
QQAA
D’D’ DD
Changes in Demand
![Page 12: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/12.jpg)
12
Changes in Money Incomes:when income increasesdemand for NORMAL goods increasesdemand for INFERIOR goods decreases
Changes in Demand
![Page 13: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/13.jpg)
13
Changes in Prices of Related Goods:when two products are SUBSTITUTES, price of
one & demand for the other move in the same direction
when two products are COMPLEMENTS, price of one & demand for the other move in opposite directions
when products are unrelatedno effect
Changes in Demand
![Page 14: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/14.jpg)
14
Changes in Consumer Expectations:about future prices or incomes
Changes in Demand
![Page 15: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/15.jpg)
15
when price of the product changes, there is a movement along the demand curve…this is called a change in quantity demanded.
when any other determinant of demand changes, there is a shift in the demand curve… this is called a change in demand.
Change in Quantity Demanded
![Page 16: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/16.jpg)
16
A schedule or a curve showing the amounts that producers are willing and able to make available for sale at each of a series of possible prices, during some specified period of time.
Supply
![Page 17: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/17.jpg)
Supply Schedule for DVDs
Price(dollars/dvd)
Quantity(millions of dvds/week)
ABCDE
12345
05101316
17
![Page 18: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/18.jpg)
18
Ceteris paribus, as price rises, the quantity supplied rises (& vice-versa)
why?price is revenue to suppliershigher price necessary to induce higher supply,
to cover higher costs of production
Law of Supply
![Page 19: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/19.jpg)
19
Changes in any of these determinants will cause the supply curve to shift:
factor pricestechnologytaxes & subsidiesprices of other goodsproducer expectationsnumber of sellers
let’s examine these more closely…
Determinants of Supply
![Page 20: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/20.jpg)
20
A change in quantity supplied is a movement from one point to another on a fixed supply curve
A change in supply is a shift of the entire curve
priceprice
quantityquantity
SS
Increase in QIncrease in QSS
Decrease in QDecrease in QSS
NOT NOT supply!supply!NOT NOT
supply!supply!
Changes in Quantity Supplied
![Page 21: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/21.jpg)
21
Equilibrium price will be established where the supply decisions of producers and the demand decisions of buyers are mutually consistent
Market Equilibrium
![Page 22: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/22.jpg)
Market Supply & Demand for DVDs Price(dollars/dvd)
Quantity demanded(millions of dvds/week)
Quantity supplied(millions of dvds/week)
Shortage (-) or surplus (+)(millions of dvds/week)
12345
24161185
05
101316
22
![Page 23: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/23.jpg)
Equilibrium price & quantity
23
Equilibrium price (market clearing price) is the price in a competitive market at which the quantity demanded is equal to the quantity supplied.
There is neither a shortage nor a surplus at this price.
Equilibrium quantity is the quantity demanded & supplied at the equilibrium price in a competitive market.
![Page 24: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/24.jpg)
24
What is the rationing function of prices?
![Page 25: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/25.jpg)
Efficient allocation
25
Efficient allocation of society’s resources occur in a competitive market at equilibrium.
Efficient allocation means:1.Productive efficiency2.Allocative efficiency
![Page 26: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/26.jpg)
26
when both supply and demand change, the effect is a combination of the individual effects
if both demand and supply shift, one of either price or quantity cannot be predicted–the result is indeterminate
Complex Cases
![Page 27: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/27.jpg)
27
Change in supply
Change in demand
Effect on equilibrium price
Effect on equilibrium quantity
Increase Decrease Decrease Indeterminate
Decrease Increase Increase Indeterminate
Increase Increase Indeterminate Increase
Decrease Decrease Indeterminate Decrease
Table 3-3Complex Cases
![Page 28: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/28.jpg)
28
Price Ceilings: A legally established maximum price for a good or service.
3.4 Applications: Government Set Prices
![Page 29: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/29.jpg)
29
Rationing ProblemBlack Markets
Price Ceilings and Shortages
![Page 30: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/30.jpg)
30
Price Floor: A legally established price above an equilibrium price
Government Set Prices: Price Floors
![Page 31: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/31.jpg)
31
Additional consequences• Distort resource allocation• Cause shortages or surpluses• Produce negative side effects
Price Floors and Surplus
![Page 32: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/32.jpg)
Mathematics of Market Equilibrium
P = 100 - 0.5 Qd
P = 5 + 0.5 Qs
Calculate the equilibrium quantity & price Step 1: Set the right hand side of both equations to
equal on another & solve for Q* (Q*= Qd = Qs in equilibrium)
Step 2: Substitute Q* into either equation & solve for P* (P*=P in equilibrium)
32
![Page 33: CHAPTER 3 Demand, Supply and Market Equilibrium](https://reader035.vdocuments.us/reader035/viewer/2022062221/56813fe9550346895daadb59/html5/thumbnails/33.jpg)
Homework questions
Study questions are end of chapter: 3,6,7, 8, 9,13, 14, 17
The key will be posted on my website.
33