03

Demand, Supply, and Market Equilibrium

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

• Schedule or curve
• Amount consumers are willing and
able to purchase at a given price
• Other things equal
• Individual demand
• Market demand

LO1 3-3
 Law of Demand
• Other things equal, as price falls the
quantity demanded rises, and as price
rises the quantity demanded falls
• Reasons
• Common sense (Sales)
• Law of diminishing marginal utility(Utility
from additional unit consumption decreases,
additional purchase contingent on price)
• Income effect and substitution effects
(lower price increase purchasing power and provide
incentive to substitute less)
LO1 3-4
 The Demand Curve

P
6

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 3-5
 Changes in Demand

P
6 Change in Demand

5
Price (per bushel)

4 Change in Quantity
Demanded
3

2
D2

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

LO1 3-6
 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). (independent good) no
change
Inclement weather in South America creates an
expectation of higher future coffee bean prices,
thereby increasing today’s demand for coffee beans.
3-7
 Supply

• Schedule or curve
• Amount producers are willing and
able to sell at a given price
• Individual supply
• Market supply

LO2 3-8
 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 (farmers)
• At some point, marginal costs will
rise
LO2 3-9
 The Supply Curve

P
5 S
Supply of Corn
Price Qs 4

Price (per bushel)

per 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 3-10
 Changes in Supply
P
Change in Quantity
$6
Supplied S3 S1

S2
4
Price (per bushel)

1 Change in Supply

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

LO2 3-11
 Determinants of Supply
Determinants of Supply: Factors That Shift the Supply Curve
Determinant Examples
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
of women’s professional basketball games.

LO2 3-12
 Market Equilibrium

• Equilibrium occurs where the demand

curve and supply curve intersect
• Surplus and shortage
• Rationing functions of prices
• The ability of the competitive forces of
demand and supply to establish a price
at which selling and buying decisions
are consistent

LO3 3-13
 Market Equilibrium

6,000 Bushel S
5 Surplus
P Qd P Qs
Price (per bushel)

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

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

LO3 3-14