macroeconomic mcgrowhill macro ch 3 19e use this one

03
Demand, Supply and Market
Equilibrium

McGraw-Hill/Irwin

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.


Chapter Objectives
Markets
Demand Defined
Demand Graphed
Changes in Deman
d
Supply Defined
Supply Graphed
Changes in Supply
Equilibrium
Surpluses
Shortages
Key Terms

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• Demand and its determinants
• Supply and its determinants

• Supply, demand, & market
equilibrium
• Changes in supply and
demand
• Government-set prices

End
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3-2

Copyright McGraw-Hill/Irwin, 2005

3-2


MARKETS DEFINED
Markets
Demand Defined
Demand Graphed
Changes in Deman
d
Supply Defined
Supply Graphed
Changes in Supply
Equilibrium
Surpluses

POTENTIAL
BUYERS

Shortages
Key Terms

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End
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3-3

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POTENTIAL
SELLERS

MARKETS
Copyright McGraw-Hill/Irwin, 2005


A Market

Markets
Demand Defined
Demand Graphed
Changes in Deman
d
Supply Defined
Supply Graphed
Changes in Supply
Equilibrium

Surpluses
Shortages
Key Terms

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• Interaction between buyers
and sellers
• Buyers demand goods
• Sellers supply goods
• Assumptions
– Standardized good
– Competitive market

End
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3-4

Copyright McGraw-Hill/Irwin, 2005

3-4


DEMAND DEFINED
Markets

DEMAND SCHEDULE

Demand Defined
Demand Graphed
Changes in Deman
d
Supply Defined
Supply Graphed
Changes in Supply
Equilibrium
Surpluses
Shortages
Key Terms

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End
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3-5

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P
$5
4
3
2
1

QD
10
20
35
55
80

Various Amounts
A Series of Possible Prices

…a specified time period
…other things being equal

Copyright McGraw-Hill/Irwin, 2005


LAW OF DEMAND

Markets
Demand Defined
Demand Graphed
Changes in Deman
d
Supply Defined
Supply Graphed
Changes in Supply
Equilibrium
Surpluses
Shortages
Key Terms

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End
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An inverse relationship exists
between price and quantity
demanded
• As Price Falls…
…Quantity Demanded Rises
• As Price Rises…
…Quantity Demanded Falls
Copyright McGraw-Hill/Irwin, 2005


LAW OF DEMAND

Markets
Demand Defined
Demand Graphed
Changes in Deman
d

• Diminishing Marginal Utility

Supply Defined
Supply Graphed
Changes in Supply
Equilibrium
Surpluses
Shortages
Key Terms

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Next
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End
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3-7

Copyright McGraw-Hill/Irwin, 2005


LAW OF DEMAND

Markets
Demand Defined
Demand Graphed
Changes in Deman
d
Supply Defined
Supply Graphed

• Diminishing Marginal Utility
• Income Effect

Changes in Supply
Equilibrium
Surpluses
Shortages
Key Terms

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Next
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End
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3-8

Copyright McGraw-Hill/Irwin, 2005


LAW OF DEMAND

Markets
Demand Defined
Demand Graphed
Changes in Deman
d

Supply Defined
Supply Graphed
Changes in Supply
Equilibrium

• Diminishing Marginal Utility
• Income Effect
• Substitution Effect

Surpluses
Shortages
Key Terms

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Next
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End
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3-9

Copyright McGraw-Hill/Irwin, 2005


LAW OF DEMAND

Markets
Demand Defined

Demand Graphed
Changes in Deman
d
Supply Defined
Supply Graphed
Changes in Supply
Equilibrium
Surpluses
Shortages
Key Terms

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End
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•
•
•
•
•

Diminishing Marginal Utility
Income Effect
Substitution Effect
Demand Curve

Individual and Market
Demand

Copyright McGraw-Hill/Irwin, 2005


Market Demand
Market Demand for Corn, Three Buyers
Price
per bushel

Joe

Jen

Jay

Total
Qd
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

Quantity Demanded

LO1

3-11


GRAPHING DEMAND
Price of Corn

Markets

P

Demand Defined
Demand Graphed
Changes in Deman
d
Supply Defined

Supply Graphed
Changes in Supply
Equilibrium
Surpluses
Shortages
Key Terms

Previous
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End
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3 - 12

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CORN

P
$5
4
3
2
1

QD
10
20
35
55

80

$5

Plot the Points

4
3
2
1

o

10 20 30 40 50 60 70 80
Quantity of Corn

Copyright McGraw-Hill/Irwin, 2005

Q


GRAPHING DEMAND
Price of Corn

Markets

P

Demand Defined
Demand Graphed

Changes in Deman
d
Supply Defined
Supply Graphed
Changes in Supply
Equilibrium
Surpluses
Shortages
Key Terms

Previous
Slide
End
Show
3 - 13

Next
Slide

CORN

P
$5
4
3
2
1

QD
10

20
35
55
80

$5

Plot the Points

4
3
2
1

o

10 20 30 40 5055 60 70 80
Quantity of Corn

Copyright McGraw-Hill/Irwin, 2005

Q


GRAPHING DEMAND
Price of Corn

Markets

P

Demand Defined
Demand Graphed
Changes in Deman
d
Supply Defined
Supply Graphed
Changes in Supply
Equilibrium
Surpluses
Shortages
Key Terms

Previous
Slide
End
Show
3 - 14

Next
Slide

CORN

P
$5
4
3
2
1

QD
10
20
35
55
80

$5

Plot the Points

4
3
2
1

o

10 20 30 40 50 60 70 80
35
Quantity of Corn

Copyright McGraw-Hill/Irwin, 2005

Q


GRAPHING DEMAND
Price of Corn

Markets

P

Demand Defined
Demand Graphed
Changes in Deman
d
Supply Defined
Supply Graphed
Changes in Supply
Equilibrium
Surpluses
Shortages
Key Terms

Previous
Slide
End
Show
3 - 15

Next
Slide

CORN

P
$5

4
3
2
1

QD
10
20
35
55
80

$5

Plot the Points

4
3
2
1

o

10 20 30 40 50 60 70 80
Quantity of Corn

Copyright McGraw-Hill/Irwin, 2005

Q

GRAPHING DEMAND
Price of Corn

Markets

P

Demand Defined
Demand Graphed
Changes in Deman
d
Supply Defined
Supply Graphed
Changes in Supply
Equilibrium
Surpluses
Shortages
Key Terms

Previous
Slide
End
Show
3 - 16

Next
Slide

CORN

P
$5
4
3
2
1

QD
10
20
35
55
80

$5

Plot the Points

4
3
2
1

o

10 20 30 40 50 60 70 80
Quantity of Corn

Copyright McGraw-Hill/Irwin, 2005

Q


GRAPHING DEMAND
Price of Corn

Markets

P

Demand Defined
Demand Graphed
Changes in Deman
d
Supply Defined
Supply Graphed
Changes in Supply
Equilibrium
Surpluses
Shortages
Key Terms

Previous
Slide
End
Show
3 - 17

Next

Slide

CORN

P
$5
4
3
2
1

QD
10
20
35
55
80

$5

Connect the Points

4
3
2
1

o

D

10 20 30 40 50 60 70 80
Quantity of Corn

Copyright McGraw-Hill/Irwin, 2005

Q


GRAPHING DEMAND
Price of Corn

Markets

P

Demand Defined
Demand Graphed
Changes in Deman
d
Supply Defined
Supply Graphed
Changes in Supply
Equilibrium
Surpluses
Shortages
Key Terms

Previous
Slide
End

Show
3 - 18

Next
Slide

CORN

P
$5
4
3
2
1

QD
10
20
35
55
80

$5

What if
Demand
Increases?

4
3

2
1

o

D
10 20 30 40 50 60 70 80
Quantity of Corn

Copyright McGraw-Hill/Irwin, 2005

Q


GRAPHING DEMAND
Price of Corn

Markets

P

Demand Defined
Demand Graphed
Changes in Deman
d
Supply Defined
Supply Graphed
Changes in Supply
Equilibrium
Surpluses

Shortages
Key Terms

Previous
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End
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3 - 19

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CORN

P
$5
4
3
2
1

$5

QD
4
1030
20403
3560
Increase
2

5580
in
80+
1
Demand
o

Increase
in Quantity
Demanded

10 20 30 40 50 60 70 80
Quantity of Corn

Copyright McGraw-Hill/Irwin, 2005

D’
D
Q


GRAPHING DEMAND
Price of Corn

Markets

P

Demand Defined
Demand Graphed

Changes in Deman
d
Supply Defined
Supply Graphed
Changes in Supply
Equilibrium
Surpluses
Shortages
Key Terms

Previous
Slide
End
Show
3 - 20

Next
Slide

CORN

P
$5
4
3
2
1

QD
10

20
35
55
80

$5

What if
Demand
Decreases?

4
3
2
1

o

D
10 20 30 40 50 60 70 80
Quantity of Corn

Copyright McGraw-Hill/Irwin, 2005

Q


GRAPHING DEMAND
Price of Corn

Markets

P

Demand Defined
Demand Graphed
Changes in Deman
d
Supply Defined
Supply Graphed
Changes in Supply
Equilibrium
Surpluses
Shortages
Key Terms

Previous
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End
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3 - 21

Next
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CORN

P
$5
4

3
2
1

$5

QD
4
10-10 3
20
20
35
40 2 Decrease
55
60
80
in

Decrease
in Quantity
Demanded

1

Demand
o

10 20 30 40 50 60 70 80
Quantity of Corn

Copyright McGraw-Hill/Irwin, 2005

D
D’
Q


Markets
Demand Defined
Demand Graphed
Changes in Deman
d
Supply Defined
Supply Graphed
Changes in Supply
Equilibrium

Shortages
Key Terms

End
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3 - 22

– Normal (Superior) & Inferior Goods

• Prices of Related Goods

Surpluses

Previous
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DETERMINANTS OF
DEMAND
• Tastes
• Number of Buyers
• Income

Next
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– Substitutes & Complements
– Unrelated Goods

• Expectations
Copyright McGraw-Hill/Irwin, 2005


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

Examples

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,
thereby increasing today’s demand for coffee beans.

LO1

3-23


Determinants of Demand
• Consumer taste and preference is a
powerful determinant….
– Consider Subliminal Advertising (see Video)


SUPPLY DEFINED
Markets
Demand Defined
Demand Graphed
Changes in Deman
d
Supply Defined

SUPPLY SCHEDULE
Various Amounts

Supply Graphed
Changes in Supply
Equilibrium
Surpluses
Shortages
Key Terms

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Copyright McGraw-Hill/Irwin, 2005

CORN

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