CHAPTER 3

Demand, Supply, and Market Equilibrium

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 Markets
Demand
Supply
Market Equilibrium
Changes in Supply, Demand, and Equilibrium
Application: Government-Set Prices

3-2
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 Markets
Interaction between buyers and sellers.
Markets may be:
• Local
• National
• International
Price is discovered in the interactions of buyers and
sellers.
LO3.1 3-3
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 Demand
A schedule or curve that shows the various amounts of a
product that consumers are willing and able to purchase at
each of a series of possible prices during specified periods of
time.
Demand schedule (table) or demand curve (graph)
Amount consumers are willing and able to purchase at a given
price assuming:
• Other things equal
• Individual demand
Market demand
LO3.2 3-4
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 Law of Demand
Law of demand: Other things equal, as price falls, the
quantity demanded rises, and as price rises, the
quantity demanded falls
Explanations:
• Price acts as an obstacle to buyers
• Law of diminishing marginal utility
• Income effect and substitution effect
LO3.2 3-5
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 The Demand Curve
P
$6
Individual demand
for corn 5

P Qd 4

Price (per bushel)

$5 10
3
4 20
2
3 35
1
2 55 D

1 80 0 10 20 30 40 50 60 70 80 Q

Quantity demanded (bushels per week)

LO3.2 3-6
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 Market Demand
Market Demand for Corn, Three Buyers
Quantity Demanded Total
Price Qd
per bushel Joe Jen Jay per week
$5 10 12 8 30
4 20 23 17 60
3 35 39 26 100
2 55 60 39 154
1 80 87 54 221

LO3.2 3-7
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 Changes in Demand
P
Market Demand for $6

Corn, 200 Buyers, (D1) 5

P Qd

Price (per bushel)

4
Increase in demand
$5 2,000 a
3

4 4,000 2
b D2

3 7,000 1 Decrease
D1
in demand D3
2 11,000 Q
0 2 4 6 8 10 12 14 16 18
1 16,000 Quantity demanded (thousands of bushels per week)

LO3.2 3-8
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 Determinants of Demand (1 of 2)
Determinants of demand
Change in consumer tastes and preferences
Change in the number of buyers
Change in income:
• Normal goods
• Inferior goods

LO3.2 3-9
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 Determinants of Demand (2 of 2)
Change in prices of related goods
• Complementary good
• Substitute good
Change in consumer expectations
• Future prices
• Future income

LO3.2 3-10
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 Determinants of Demand: Factors that Shift
the Demand Curve
Determinant Examples
Physical fitness rises in popularity, increasing the demand for jogging shoes and
Change in buyers’ tastes bicycles; smartphone popularity rises, reducing the demand for landline phones.
Change in the number of A decline in the birthrate reduces the demand for children’s toys.
buyers
A rise in incomes increases the demand for normal goods such as restaurant
meals, sports tickets, and necklaces while reducing the demand for inferior
Change in income goods such as cabbage, turnips, and cheap wine.
A reduction in airfares reduces the demand for bus transportation (substitute
Change in the prices of goods); a decline in the price of printers increases the demand for ink cartridges
related goods (complementary goods).
Change in consumer Inclement weather in South America creates an expectation of higher future
expectations coffee bean prices, thereby increasing today’s demand for coffee beans.
3-11
LO3.2
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 Supply
A schedule or curve that shows the various amounts of a
product that producers are willing and able to make
available for sale at each of a series of possible prices
during a specified period of time.
Supply schedule or a supply curve
Amount producers are willing and able to sell at a given
price
Individual supply
Market supply
LO3.3 3-12
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 Law of Supply
Law of supply: Other things equal, as the price rises,
the quantity supplied rises and as the price falls, the
quantity supplied falls.
Explanation:
• Price acts as an incentive to producers.
• At some point, costs will rise.

LO3.3 3-13
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 The Supply Curve
P
$6
S
Supply of Corn
5
P Qs

Price (per bushel)

4
$5 60
3
4 50
2
3 35
2 20 1

1 5
0 10 20 30 40 50 60 70 Q
Quantity supplied (bushels per week)

LO3.3 3-14
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 Changes in Supply
P
$6
Market Supply S3 S1

of Corn, 200 5
Decrease S2
Producers (S1) in supply b

Price (per bushel)

4
P Qs
a
3
$5 12,000
Increase
4 10,000 2
in supply
3 7,000 1
2 4,000
Q
1 1,000 0 2 4 6 8 10 12 14 16
Quantity supplied (thousands of bushels per week)

LO3.3 3-15
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 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

LO3.3 3-16
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 Determinants of Supply: Factors that Shift the
Supply Curve
Determinant Examples
Change in resource A decrease in the price of microchips increases the supply of computers; an increase in the
prices price of crude oil reduces the supply of gasoline.
Change in technology The development of more effective wireless technology increases the supply of
smartphones.
Change in taxes and An increase in the excise tax on cigarettes reduces the supply of cigarettes; a decline in
subsidies subsidies to state universities reduces the supply of higher education.
Change in prices of An increase in the price of cucumbers decreases the supply of watermelons.
other goods
Change in producer An expectation of a substantial rise in future lumber prices decreases the supply of logs
expectations today.
Change in the number An increase in the number of tattoo parlors increases the supply of tattoos; the formation of
of suppliers women’s professional basketball leagues increases the supply of women’s professional
basketball games.
LO3.3 3-17
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 Market Equilibrium
Equilibrium occurs where the demand curve and
supply curve intersect.
Equilibrium price and equilibrium quantity.
Surplus and shortage.
Rationing function of prices.
Efficient allocation.

LO3.4 3-18
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 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
LO3.4 3-19
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 Equilibrium Price and Quantity
P
$6
6,000-bushel S
5 surplus
P Qd P Qs
Price (per bushel)
4
$5 2,000 $5 12,000
3
4 4,000 4 10,000
3 7,000 2 3 7,000
2 11,000 1 7,000-bushel 2 4,000
1 16,000 shortage D 1 1,000
0 Q
2 4 6 7 8 10 12 14 16 18
Bushels of corn (thousands per week)

LO3.4 3-20
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 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.

LO3.4 3-21
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 Changes in Demand and Equilibrium
D increase: D decrease:
P, Q P, Q
P P

S S

D3
D2

D1 D4

Q Q
0 0
(a) (b)
Increase in demand Decrease in demand

LO3.5 3-22
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 Changes in Supply and Equilibrium
S increase: S decrease:
P, Q P, Q

P P
S1 S2
S4 S3

D
D
Q Q
0 0
(c) (d)
Increase in supply Decrease in supply

LO3.5 3-23
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 Complex Cases
Effects of Changes in Both Supply and Demand
Effect on
Effect on Equilibrium
Change in Supply Change in Demand Equilibrium Price Quantity
1. Increase Decrease Decrease Indeterminate
2. Decrease Increase Increase Indeterminate
3. Increase Increase Indeterminate Increase
4. Decrease Decrease Indeterminate Decrease

LO3.5 3-24
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 Government Set Prices: Price Ceiling
Price ceiling:
• Set below equilibrium price
• Rationing problem
• Black markets
Example is rent control.

LO3.6 3-25
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 Price Ceiling
P
S

$3.50 P0
Ceiling
3.00 PC

Shortage D

Q
0 Qs Q0 Qd

LO3.6 3-26
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 Government Set Prices: Price Floor
Price floor:
• Prices are set above the market price.
• Chronic surpluses.
Example is the minimum wage law.

LO3.6 3-27
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 Price Floor
P
S
Floor Surplus

$3.00 Pf

2.00 P0

D
Q
0 Qd Q0 Qs

LO3.6 3-28
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 Last Word: Student Loans and Tuition Costs
(1 of 2)
By increasing demand, student loans increase the price of
higher education.
In 1958 the federal government began subsidizing student
loans.
Tuition costs have risen steadily since:
• 1971–72: $1,405 (public) & $2,929 (private)
• 2017–18: $25,290 (public) & $50,900 (private) 3-29
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 Last Word: Student Loans and Tuition Costs
(2 of 2)
But economic research finds that loans were major cause of
rising tuition costs.
Each $1 increase in loans increases tuition costs by 70 cents.
More loans lead to higher tuition costs:
• Increases the student’s ability to pay
• Shifts the demand curve right
Government should subsidize supply instead.
3-30
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