03

Demand, Supply, and Market Equilibrium

 Markets
• Interaction between buyers and
sellers
• Markets may be
• Local
• National
• International
• Price is discovered in the interactions
of buyers and sellers

LO1 3-2
 Demand

- Amount consumers are

willing and able to
purchase at different price
levels

LO1 3-3
 Quantity Demanded (Qd)

- Amount consumers are

willing and able to purchase
given the price levels
 Law of Demand

• Other things equal, as price

falls the quantity demanded
rises, and as price rises the
quantity demanded falls

LO1 3-5
 The Demand Curve

P
6
Individual
Demand 5

Price (per bushel)

P Qd
4
$5 10

4 20 3

3 35 2

2 55 1 D

1 80
0 10 20 30 40 50 60 70 80 Q
Quantity Demanded (bushels per week)

LO1 3-6
 Changes in Demand
Demand Can Increase or Decrease
P
6 Change in Demand
Individual
Demand 5
Price (per bushel)

4 Change in Quantity
Demanded
3

2
D2

1 D1
Decrease in Demand
D3
0
2 4 6 8 10 12 14 16 18 Q
Quantity Demanded (bushels per week)

LO1 3-7
 Determinants of Demand
Determinants of Demand: Factors That Shift the Demand Curve
Determinant
Change in buyers’ tastes
Change in the number of buyers
Change in income
Change in the prices of related
goods
Change in consumer expectations
LO1
Examples
Physical fitness rises in popularity, increasing the
demand for jogging shoes and bicycles; cell phone
popularity rises, reducing the demand for land-line
phones.
A decline in the birthrate reduces the demand for
children’s toys.
A rise in incomes increases the demand for normal
goods such as restaurant meals, sports tickets, and
necklaces while reducing the demand for inferior
goods such as cabbage, turnips, and inexpensive
wine.
A reduction in airfares reduces the demand for bus
transportation (substitute goods); a decline in the price
of DVD players increases the demand for DVD movies
(complementary goods).
Inclement weather in South America creates an
expectation of higher future coffee bean prices,
thereby increasing today’s demand for coffee beans.
3-8
 Supply

- Amount producers are

willing and able to sell at
different price levels

LO2 3-9
 Quantity Supplied (Qs)

- Amount producers are

willing and able to sell at
given the price level
 Law of Supply

• Other things equal, as the price rises

the quantity supplied rises, and as the
price falls the quantity supplied falls
• Reasons
• Price acts as an incentive to
producers
• At some point, costs will rise

LO2 3-11
 The Supply Curve

P
S
5
Supply of Corn
Price Qs
4
per
Price (per bushel)
per
Bushel Week
3
$5 60
4 50 2
3 35
2 20 1

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

LO2 3-12
 Changes in Supply
P
Change in Quantity
$6
Supplied S3 S1

5
S2
4
Price (per bushel)

1 Change in Supply

0
Q
2 4 6 8 10 12 14 16
Quantity supplied (thousands of bushels per week)

LO2 3-13
 Determinants of Supply
Determinants of Supply: Factors That Shift the Supply Curve
Determinant
Change in resource prices
Change in technology
Change in taxes and subsidies
Change in prices of other goods
Change in producer expectations
Change in the number of suppliers
LO2
Examples
A decrease in the price of microchips increases the
supply of computers; an increase in the price of crude
oil reduces the supply of gasoline.
The development of more effective wireless
technology increases the supply of cell phones.
An increase in the excise tax on cigarettes reduces the
supply of cigarettes; a decline in subsidies to state
universities reduces the supply of higher education.
An increase in the price of cucumbers decreases the
supply of watermelons.
An expectation of a substantial rise in future log prices
decreases the supply of logs today.
An increase in the number of tattoo parlors increases
the supply of tattoos; the formation of women’s
professional basketball leagues increases the supply
of women’s professional basketball games.
3-14
 Market Equilibrium

- Equilibrium
occurs where
the demand curve and
supply curve intersect

LO3 3-15
 Market Equilibrium
200 Buyers & 200 Sellers
Market Market
6
Demand Supply
200 Buyers 6,000 Bushel S 200 Sellers
5 Surplus
P Qd P Qs
Price (per bushel)

$5 2,000 4
$5 12,000
4 4,000 4 10,000
33
3 7,000 3 7,000
2 11,000 2
2 4,000
1 16,000 7,000 Bushel 1 1,000
1 D
Shortage

0 2 4 67 8 10 12 14 16 18
Bushels of Corn (thousands per week)

LO3 3-16
 Government-Set Prices

• Price Ceilings
• Set below equilibrium price
• Rationing problem
• Black markets
• Example: Rent control

LO5 3-17
 Government-Set Prices

• Price Floors
• Prices are set above the market
price
• Chronic surpluses
• Example: Minimum wage laws

LO5 3-18