Chapter 3. Demand, Supply, and Market Equilibrium

Chapter 3Demand, Supply, and Market EquilibriumCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.MarketsInteraction between buyers and sellersMarkets may beLocalNationalInternationalPrice is discovered in the interactions of buyers and sellersLO1DemandDemandDemand schedule or demand curveAmount consumers are willing and able to purchase at a given priceOther things equalIndividual demandMarket demandLO2Law of DemandLaw of demandOther things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded fallsExplanations Price acts as an obstacle to buyersLaw of diminishing marginal utilityIncome effect and substitution effectLO2Determinants of DemandDeterminants of demandChange in consumer tastes and preferencesChange in the number of buyersChange in incomeNormal goodsInferior goodsLO2Determinants of DemandChange in prices of related goodsComplementary goodSubstitute goodChange in consumer expectationsFuture pricesFuture incomeLO2SupplySupplySupply schedule or a supply curveAmount producers are willing and able to sell at a given priceIndividual supplyMarket supplyLO3Law of SupplyLaw of supplyOther things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied fallsExplanationPrice acts as an incentive to producersAt some point, costs will riseLO3Determinants of SupplyDeterminants of supplyA change in resource pricesA change in technologyA change in the number of sellersA change in taxes and subsidiesA change in prices of other goodsA change in producer expectationsLO3Market EquilibriumEquilibrium occurs where the demand curve and supply curve intersectEquilibrium price and equilibrium quantitySurplus and shortageRationing function of pricesEfficient allocationLO4Efficient AllocationProductive efficiencyProducing goods in the least costly wayUsing the best technologyUsing the right mix of resourcesAllocative efficiencyProducing the right mix of goodsThe combination of goods most highly valued by societyLO4Rationing Function of PricesThe ability of the competitive forces of demand and supply to establish a price at which selling and buying decisions are consistentLO4Changes in Demand and EquilibriumLO50PD4D30PD1D2SIncrease in demandD increase:P, QD decrease:P, QDecrease in demandSChanges in Supply and Equilibrium0PDS4S30PDS2S1Increase in supplyS increase:P, QS decrease:P, QDecrease in supplyLO5Government Set PricesPrice ceilingSet below equilibrium priceRationing problemBlack marketsExample is rent controlLO6Government Set PricesPrice floorPrices are set above the market priceChronic surplusesExample is the minimum wage lawLO6