micro economics chapter 03

3
Demand, Supply, and Market
Equilibrium

McGraw-Hill/Irwin

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


Markets

• Any institution where buyers and
•

LO1

sellers interact
Price is determined in the interactions
of buyers and sellers


Demand

• Schedule or curve
• Amount consumers are willing and
•
•

LO1

able to purchase at a given price

Other things equal
Market demand


Law of Demand
• Other things equal, as price falls,
quantity demanded rises, and as
price rises, quantity demanded falls.
• Reasons:
• Common sense
• Law of diminishing marginal utility
• Income effect and substitution effects

LO1


Determinants of Demand
• Factors other than price
• Usually assumed to be constant
• When a determinant changes,
demand shifts

LO1


Determinants of Demand

• Change in buyer’s tastes
• Change in number of buyers
• Change in income

• Normal Goods
• Inferior Goods

LO1


Determinants of Demand

• Change in prices of related goods
• Complements
• Substitutes
• Chris Rock
• Change in consumers’ expectations
• Future prices
• Future income
• Future product availability
LO1


Demand vs. Quantity Demanded

• Change in demand
• Refers to shift of entire demand
•

LO2

curve to left or right
Cause: Change in determinants of
demand

Demand vs. Quantity Demanded

• Change in quantity demanded
• Refers to movement from one point
•

LO2

to another on fixed demand curve
Cause: Change in price of good
under consideration


Supply

• Schedule or curve
• Amount producers are willing and
•
•

LO2

able to sell at a given price
Other things equal
Market supply


Law of Supply

• Other things equal, as price rises
•

LO2

quantity supplied rises and as price
falls quantity supplied falls.
Reason:
• Higher prices act as an incentive to
producers
• At some point costs will rise


Determinants of Supply
• Factors other than price
• Usually assumed to be constant
• When a determinant changes, supply
shifts

LO1


Determinants of Supply

• A change in resource prices
• A change in technology
• A change in the number of sellers
• A change in taxes and subsidies
• A change in prices of other goods

• A change in producer expectations

LO2


Supply vs. Quantity Supplied

• Change in supply
• Refers to shift of entire supply curve
•

LO2

to left or right
Cause: Change in determinants of
supply


Supply vs. Quantity Supplied

• Change in quantity supplied
• Refers to movement from one point
•

LO2

to another on fixed supply curve
Cause: Change in price of good
under consideration

Market Shortage

• Occurs when current price is too low
• Quantity demanded exceeds quantity
•

LO3

supplied at the current price
Current price will rise.


Market Surplus

• Occurs when current price is too high
• Quantity supplied exceeds quantity
•

LO3

demanded at the current price
Current price will fall


Market Equilibrium

• Price which equates quantity
•
•

LO3

demanded and quantity supplied
No reason for price to change
Crisis