Market

Demand and supply

Outcomes
 What factors affect buyers’ demand for goods?
 What factors affect sellers’ supply of goods?
 How do supply and demand determine the price of a
good and the quantity sold?
 How do changes in the factors that affect demand or
supply affect the market price and quantity of a
good?
 What is elasticity?
 How do Gov’ interventions affect market outcomes?
Markets and Competition
 Market
 Buyers as a group
 Determine the demand for the product
 Sellers as a group
 Determine the supply of the product

 Competitive market & Perfectly competition

 Demand

 Quantity demanded
 Amount of a good that buyers are willing and able to
purchase
 Law of demand
 Other things equal
 When the price of a good rises, the quantity demanded of
the good falls
 When the price falls, the quantity demanded rises

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part,
except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or
4
school-approved learning management system for classroom use.
 Sam’s Demand Schedule and Demand Curve
Price of Quantity
Price
Lattes of lattes
of lattes
demanded
$6.00
$0.00 16
$5.00
1.00 14
$4.00 2.00 12
$3.00 3.00 10
4.00 8
$2.00
5.00 6
$1.00
6.00 4
$0.00 Quantity of
5
0 5 10 15 Lattes
Summary: Variables That Influence Buyers

6
 Supply

 Quantity supplied
 Amount of a good
 Sellers are willing and able to sell
 Law of supply
 Other things equal
 When the price of a good rises, the quantity supplied of
the good rises
 When the price falls, the quantity supplied falls

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part,
except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or
7
school-approved learning management system for classroom use.
Starbucks’ Supply Schedule and Supply Curve
Price Quantity
P of of lattes
$6.00 lattes supplied
$0.00 0
$5.00
1.00 3
$4.00
2.00 6
$3.00 3.00 9
$2.00 4.00 12
5.00 15
$1.00
6.00 18
$0.00
Q
0 5 10 15 8
Summary: Variables That Influence Sellers

9
 Supply and Demand Together

P D
$6.00
S
P QD QS
$5.00 $0 24 0
$4.00 1 21 5

$3.00
2 18 10
3 15 15
$2.00
4 12 20
$1.00 5 9 25
$0.00 6 6 30
Q
0 5 10 15 20 25 30 35
 EXAMPLE: A Shift in Both Supply and Demand
 EVENTS: Price of gas
P
rises AND new technology
reduces production costs S1 S2

STEP 1: Both curves shift. P2

STEP 2: Both shift to the
right. P1

STEP 3: Q rises, but the effect

on P is ambiguous: D1 D2
Q
If demand increases more than Q1 Q2
supply, P rises.
11
The Elasticity of Demand

 Elasticity
 Measure of the responsiveness of Qd or Qs
 To a change in one of its determinants
 Price elasticity of demand
 How much the quantity demanded of a good responds to a
change in the price of that good
 Loosely speaking, it measures the price-sensitivity of buyers’ demand
 Income elasticity of demand
 Cross-price elasticity of demand

12
The Price Elasticity of Supply

 Price elasticity of supply

 How much the quantity supplied of a good responds to a
change in the price of that good
 Percentage change in quantity supplied
 Divided by the percentage change in price
 Loosely speaking, it measures sellers’
price-sensitivity

13
 Government Policies That Alter the
Private Market Outcome
 Price controls
 Price ceiling: legal maximum on the price at which a good
can be sold
 Rent-control laws
 Price floor: legal minimum on the price at which a good
can be sold
 Minimum wage laws

 Taxes: government can make buyers or sellers

pay a specific amount on each unit

14
 Active Learning 1 A. $90 price ceiling
The market for
P hotel rooms
The price falls to $90. 140
S
(binding price ceiling 130
below the 120
equilibrium) 110
100
Buyers demand Price ceiling
120 rooms, sellers 90

supply 90, leaving a 80 D

shortage = 30
shortage. 70
60
50
40
0 Q 15
50 60 70 80 90 100 110 120 130
Market Efficiency

 Total surplus = CS + PS
 Consumer surplus = Value to buyers – Amount paid by
buyers
 Buyers’ gains from participating in the market
 Producer surplus = Amount received by sellers – Cost to
sellers
 Sellers’ gains from participating in the market

Total surplus = Value to buyers – Cost to sellers

16
 Evaluating the Market Equilibrium
Market equilibrium:
P
P = $30
Q = 15 (thousand) 60
Total surplus 50 S
= CS + PS
40 CS
30
Is the market PS
equilibrium efficient? 20
10
D
0 Q
0 5 10 15 20 25 30
17
Active Learning 1 B. Answers
P
A $100 tax on
B. With tax: $ 400
airplane tickets
CS = ½ x $150 x 75 350
= $5,625 300
PS = $5,625 S
PB = 250
Tax revenue
200
= $100 x 75
PS = 150
= $7,500 D
100

TS = $18,750 50
DWL = $1,250 0 Q
0 25 50 75 100 125 18
Analysis of a Tariff on Cotton Shirts
P
Free trade Cotton shirts
deadweight
CS = A + B + C loss = D + F
+D+E+F
PS = G S
Total surplus = A + B
+C+D+E+F+G
A
With tariff B
CS = A + B $30
C E
PS = C + G $20
D F
Revenue = E G
D
Total surplus = A + B Q
+C+E+G 25 40 70 80
19