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Demand, Supply, and Market Equilibrium
Demand, Supply, and Market Equilibrium
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Basic Decision-Making Units
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Input Markets and Output Markets
• Output, or product,
markets are the markets
in which goods and
services are exchanged.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Demand in Output Markets
ANNA'S DEMAND
• A demand schedule
SCHEDULE FOR is a table showing
TELEPHONE CALLS how much of a given
QUANTITY product a household
PRICE DEMANDED
(PER (CALLS PER would be willing to
CALL) MONTH) buy at different prices.
$ 0 30
0.50 25
3.50 7 • Demand curves are
7.00 3 usually derived from
10.00 1
15.00 0 demand schedules.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Demand Curve
ANNA'S DEMAND
SCHEDULE FOR
• The demand curve is
TELEPHONE CALLS a graph illustrating
PRICE
QUANTITY
DEMANDED
how much of a given
(PER
CALL)
(CALLS PER
MONTH)
product a household
$ 0 30 would be willing to
0.50 25
3.50 7 buy at different prices.
7.00 3
10.00 1
15.00 0
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Law of Demand
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Other Properties of Demand Curves
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Income and Wealth
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Related Goods and Services
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Related Goods and Services
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Shift of Demand Versus Movement Along a
Demand Curve
• A change in demand is
not the same as a change
in quantity demanded.
• In this example, a higher
price causes lower
quantity demanded.
• Changes in determinants
of demand, other than
price, cause a change in
demand, or a shift of the
entire demand curve, from
DA to DB.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
A Change in Demand Versus a Change in Quantity
Demanded
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
A Change in Demand Versus a Change in Quantity
Demanded
To summarize:
Change in price of a good or service
leads to
Change in demand
(Shift of curve).
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Impact of a Change in Income
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Impact of a Change in the Price
of Related Goods
• Demand for complement good
(ketchup) shifts left
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
From Household to Market Demand
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
From Household Demand to Market
Demand
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Supply in Output Markets
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Supply Curve and
the Supply Schedule
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Law of Supply
6
5 states that there is a
4 positive relationship
3
between price and
2
1
quantity of a good
0
supplied.
0 10 20 30 40 50
Thousands of bushels of soybeans • This means that
produced per year
supply curves
typically have a
positive slope.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Determinants of Supply
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
A Change in Supply Versus
a Change in Quantity Supplied
• A change in supply is
not the same as a
change in quantity
supplied.
• In this example, a higher
price causes higher
quantity supplied, and
a move along the
demand curve.
• In this example, changes in determinants of supply, other
than price, cause an increase in supply, or a shift of the
entire supply curve, from SA to SB.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
A Change in Supply Versus
a Change in Quantity Supplied
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
A Change in Supply Versus
a Change in Quantity Supplied
To summarize:
Change in price of a good or service
leads to
Change in supply
(Shift of curve).
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
From Individual Supply
to Market Supply
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Market Supply
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Market Equilibrium
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Market Equilibrium
• Only in equilibrium is
quantity supplied
equal to quantity
demanded.
• At any price level
other than P0, the
wishes of buyers
and sellers do not
coincide.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Market Disequilibria
• Excess demand, or
shortage, is the condition
that exists when quantity
demanded exceeds
quantity supplied at the
current price.
• When quantity demanded
exceeds quantity
supplied, price tends to
rise until equilibrium is
restored.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Market Disequilibria
• Excess supply, or
surplus, is the condition
that exists when quantity
supplied exceeds quantity
demanded at the current
price.
• When quantity supplied
exceeds quantity
demanded, price tends to
fall until equilibrium is
restored.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Increases in Demand and Supply