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Equilibrium
Chapter 05
McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
After this chapter, you should be able to:
1. Define and differentiate individual demand and market
demand
2. Distinguish between changes in demand and changes in
quantity demanded
3. List and discuss the causes of changes in demand
4. Define and differentiate individual supply and market supply
5. Distinguish between changes in supply and changes in
quantity supplied
6. List and discuss the causes of changes in supply
7. Draw graphs of supply and demand curves
8. Identify equilibrium price and quantity
9. Explain why people have trouble selling their homes
5-2
Individual Demand and Market Demand
5-3
What is the market?
The market is where people buy and sell.
Local markets:
Gasoline, groceries
Regional:
Automobiles
National or international:
Computers
5-4
Changes in Demand
A change in demand: a change in the entire demand
schedule.
5-5
Increases in Demand
An increase in demand is an increase in the quantity
people are willing to purchase at all prices.
5-6
Changes in Quantity Demanded and
Changes in Demand
E and F are on the same line, so they are on the same schedule.
If they are on the same schedule, there can be no change in
demand.
A price change led to a change in quantity demanded.
From H to G?
From H to E?
From F to G?
5-9
What Causes Changes in Demand?
Changes in income
Changes in population
5-10
Changes in Income
The demand for NORMAL goods varies directly with
income.
When income goes up people buy more, therefore demand
goes up.
5-11
Changes in the Price of Related Goods
and Services
Substitute goods
Hot dogs and hamburgers; tuna and salmon
up. Why?
As p hamburgers up increased demand for hot dogs
Complementary goods
Hot dogs and buns; DVDs and DVD players; airfare and
hotel rooms
Inverse relationship: p hot dogs up decrease in quantity
5-12
5-13
5-14
Changes in Taste and Preferences
5-15
Changes in Price Expectations
If people expect the price of something to rise, they
rush out to stock up before it does.
This increases the demand.
5-16
Changes in Population
5-17
Questions for Thought and Discussion
The rapid growth of the Chinese economy has
raised the average income of its citizens.
How would you expect that this has impacted the demand
for food in worldwide markets?
Try drawing this outcome.
5-18
Individual and Market Supply
5-19
Hypothetical Supply of American Cars, 2025
5-20
Changes in Supply and Changes in
Quantity Supplied
Change in quantity supplied: movement along a
supply curve due to a change in price.
A change in supply: a change in the entire supply
schedule.
An increase in supply is an increase in the quantity
producers are willing to supply at all prices.
5-21
Changes in Quantity Supplied
F and G are on the same line, so they are on the same schedule.
If they are on the same schedule, there can be no change in supply.
A price change led to a change in quantity supplied.
From G to F?
From H to E?
From E to G?
5-24
What Causes Changes in Supply?
Changes in the cost of production
When costs rise, S decreases.
Technological advances (increase S)
Prices of other goods
Change in the number of suppliers
New suppliers increase S; shutdowns decrease S.
Changes in taxes
Tax increases reduce S; tax decrease raise S.
Changes in price expectations
Random causes, e.g. Hurricane Katrina in 2005
5-25
Questions for Thought and Discussion
How would you expect that this would impact the supply of
feed corn in the global market for food?
5-26
Graphing Demand and Supply Curves
Price QD
$ 13 1
$ 12 2
$ 11 4
$ 10 8
$ 9 15
$8 20
5-27
Graphing Demand and Supply Curves
5-28
Graphing Equilibrium
Sample D and S Schedules
Price QD QS
$ 13 1
23 $ 12
2 20
$ 11 4
15 $ 10
8 8
$ 9 15 3
$ 8 26 1
5-29
Above Equilibrium
P
Price tends toward
equilibrium. If
P
price is above
equilibrium, sellers
P
will lower prices
until the price
declines to the
equilibrium price.
5-30
Below Equilibrium
5-31
Application: Why Cant I Sell My House?
You can sell virtually any good or service for which
there is a demand.
As long as people are willing and able to pay for that good or
service, you can sell it.
5-32
Simultaneous Shifts in Demand and Supply:
What Happens to Equilibrium?
5-33
Simultaneous Shifts: Which Curve Shifts
More and then What Happens to
Equilibrium?
5-34