macroeconomic mcgrowhill macro ch 3 19e use this one

Chapter Objectives• Demand and its determinants • Supply and its determinants • Supply, demand, & market equilibrium • Changes in supply and demand • Government-set prices... LAW OF D

Demand, Supply and Market

Equilibrium

03

Chapter Objectives

• Demand and its determinants

• Supply and its determinants

• Supply, demand, & market

equilibrium

• Changes in supply and

demand

• Government-set prices

MARKETS DEFINED

MARKETS

POTENTIAL SELLERS POTENTIAL

BUYERS

A Market

• Interaction between buyers

and sellers

• Buyers demand goods

• Sellers supply goods

• Assumptions

– Standardized good – Competitive market

$5 4 3 2 1

DEMAND DEFINED

DEMAND SCHEDULE

Various Amounts

A Series of Possible Prices

…a specified time period

…other things being equal

P Q D 10 20 35 55 80

LAW OF DEMAND

• As Price Falls…

…Quantity Demanded Rises

• As Price Rises…

…Quantity Demanded Falls

An inverse relationship exists between price and quantity

demanded

• Diminishing Marginal Utility

LAW OF DEMAND

• Diminishing Marginal Utility

LAW OF DEMAND

• Income Effect

• Diminishing Marginal Utility

LAW OF DEMAND

• Income Effect

• Substitution Effect

• Diminishing Marginal Utility

GRAPHING DEMAND

P

Q o

10 20 35 55 80

Price of Corn CORN

Plot the Points

10 20 30 40 50 60 70 80

P

Q o

10 20 35 55 80

Price of Corn CORN

Plot the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND

Q o

10 20 35 55 80

Price of Corn CORN

Plot the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND

Q o

10 20 35 55 80

Price of Corn CORN

Plot the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND

Q o

10 20 35 55 80

Price of Corn CORN

Plot the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND

Q o

10 20 35 55 80

D

Price of Corn CORN

Connect the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND

Q o

10 20 35 55 80

D

Price of Corn CORN

10 20 30 40 50 60 70 80

What if Demand Increases?

GRAPHING DEMAND

Q o

D

Price of Corn CORN

10 20 30 40 50 60 70 80

D’

Increase

in Demand

Increase

in Quantity Demanded

10 20 35 55 80

30 40 60 80 +

GRAPHING DEMAND

Q o

10 20 35 55 80

D

Price of Corn CORN

10 20 30 40 50 60 70 80

What if Demand Decreases?

GRAPHING DEMAND

Q o

10 20 35 55 80

D

Price of Corn CORN

10 20 30 40 50 60 70 80

10 20 40 60

D’

Decrease

in Demand

Decrease

in Quantity Demanded

GRAPHING DEMAND

– Normal (Superior) & Inferior Goods

• Prices of Related Goods

– Substitutes & Complements – Unrelated Goods

• Expectations

Determinants of Demand

Table 3.1 Determinants of Demand: Factors That Shift the Demand Curve

Change in buyers’ tastes Physical fitness rises in popularity, increasing the

demand for jogging shoes and bicycles; cell phone popularity rises, reducing the demand for land-line phones.

Change in the number of buyers A decline in the birthrate reduces the demand for

children’s toys.

Change in income 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.

Change in the prices of related

goods 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).

Change in consumer expectations Inclement weather in South America creates an

expectation of higher future coffee bean prices,

SUPPLY DEFINED

SUPPLY SCHEDULE

$1 2 3 4 5

P Q S

CORN

Various Amounts

5 20 35 50 60

SUPPLY DEFINED

SUPPLY SCHEDULE

$1 2 3 4 5

P Q S

CORN

Various Amounts

A Series of Possible Prices

…a specified time period

…other things being equal

5 20 35 50 60

LAW OF SUPPLY

• As Price Rises…

…Quantity Supplied Rises

• As Price Falls…

…Quantity Supplied Falls

A direct relationship exists between price and quantity supplied

P

Q o

60 50 35 20 5

Q o

60 50 35 20 5

P

Q o

60 50 35 20 5

Q o

60 50 35 20 5

Q o

60 50 35 20 5

S P

Q o

60 50 35 20 5

S P

Q o

60 50 35 20 5

P Q S

Price of Corn

CORN

What if Supply Increases?

GRAPHING SUPPLY

S P

Q o

60 50 35 20 5

P Q S

CORN

80 70 60 45 30

S’

Increase

in Supply

Increase

in Quantity Supplied

GRAPHING SUPPLY

S P

Q o

60 50 35 20 5

P Q S

Price of Corn

CORN

What if Supply Decreases?

GRAPHING SUPPLY

S P

Q o

60 50 35 20 5

Decrease

in Supply

Decrease

in Quantity Supplied

GRAPHING SUPPLY

DETERMINANTS OF

SUPPLY

• Taxes & Subsidies

Determinants of Supply

Table 3.2 Determinants of Supply: Factors That Shift the Supply Curve

Change in resource prices 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.

Change in technology The development of more effective wireless

technology increases the supply of cell phones.

Change in taxes and subsidies 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.

Change in prices of other goods An increase in the price of cucumbers decreases the

supply of watermelons.

Change in producer expectations An expectation of a substantial rise in future log prices

decreases the supply of logs today.

Change in the number of suppliers An increase in the number of tattoo parlors increases

the supply of tattoos; the formation of women’s professional basketball leagues increases the supply

DETERMINANTS OF

SUPPLY

• Resource Prices

• Technology

• Taxes & Subsidies

• Prices of Other Goods

• Price Expectations

Combining

with Demand

MARKET DEMAND &

SUPPLY

$5 4 3 2 1

10 20 35 55 80

$5 4 3 2 1

60 50 35 20 5

200 B U Y E R S

200 S E L L E R S

12,000 10,000 7,000 4,000 1,000

P Q S

BUSHELS

OF CORN

MARKET SUPPLY

EQUILIBRIUM ica lly…

S P

Q o

2,000 4,000 7,000 11,000 16,000

$5 4 3 2 1

12,000 10,000 7,000 4,000 1,000

D

P Q

S

Price of Corn CORN

MARKET

CORN MARKET

Market Clearing Equilibrium

MARKET DEMAND &

SUPPLY

S P

Q o

2,000 4,000 7,000 11,000 16,000

$5 4 3 2 1

12,000 10,000 7,000 4,000 1,000

D

P Q

S

Price of Corn CORN

MARKET

CORN MARKET

Surplus

At a $4 price more is being supplied than demanded

MARKET DEMAND &

SUPPLY

7

S P

Q o

2,000 4,000 7,000 11,000 16,000

$5 4 3 2 1

12,000 10,000 7,000 4,000 1,000

D

P Q

S

Price of Corn CORN

MARKET

CORN MARKET

At a $2 price more is being demanded than

supplied

Shortage

MARKET DEMAND &

SUPPLY

7

S P

Q o

2,000 4,000 7,000 11,000 16,000

$5 4 3 2 1

12,000 10,000 7,000 4,000 1,000

D

P Q

S

Price of Corn CORN

MARKET

CORN MARKET

Shortage

MARKET DEMAND &

SUPPLY

Surplus

MARKET EQUILIBRIUM

• Equilibrium Price & Quantity

• Rationing Function of Prices

Rationing Functions of Prices

demand and supply to establish a

price at which selling and buying

decisions are consistent.

Efficient Allocation

• Producing goods in the least costly way

• Using the best technology

• Using the right mix of resources

• Producing the right mix of goods

• The combination of goods most highly valued by society

Complex Cases

• Supply Increases; Demand

Decreases

–Prices Decrease –Quantity Indeterminate

• Supply Decreases; Demand

Increases

–Price Increases –Quantity Indeterminate

Multiple Shifts…

Complex Cases

• Supply Increases; Demand

Increases

–Prices Indeterminate –Quantity Increases

• Supply Decreases; Demand

Decreases

–Price Indeterminate –Quantity Decreases

Multiple Shifts…

Government Set Prices

• Price Ceilings

–Shortages –Rationing Problem –Black Markets

–Rent Controls

• Price Floors

–Surpluses

Government Set Prices

Government Set Prices

Government Set Prices

Government Set Prices

Legal Market for Human Organs

human organs?

• Increase the incentive to donate

• Eliminate the persistent shortage of

eyes, livers, hearts, kidneys, etc.

Legal Market for Human Organs

by commercializing it

change in quantity supplied surplus

shortage equilibrium price equilibrium quantity rationing function of prices price ceiling and floor