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Demand, Supply, and Market Equilibrium

Demand, Supply, and Market Equilibrium. 3. Markets. Interaction between buyers and sellers Markets may be: Local National International Price is discovered in the interactions of buyers and sellers. LO1. Demand. Schedule or curve

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Demand, Supply, and Market Equilibrium

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  1. Demand, Supply, and Market Equilibrium 3

  2. Markets Interaction between buyers and sellers Markets may be: Local National International Price is discovered in the interactions of buyers and sellers LO1

  3. Demand Schedule or curve Amount consumers are willing and able to purchase at a given price Other things equal Individual demand Market demand LO1

  4. Law of Demand Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. Reasons: Common sense Law of diminishing marginal utility Income effect and substitution effects LO1

  5. The Demand Curve 6 5 4 3 2 1 0 Price (per latte) 10 20 30 40 50 60 70 80 Quantity Demanded (latte per month) P Individual Demand P Qd 10 20 35 55 80 $5 4 3 2 1 D Q LO1

  6. Market Demand LO1

  7. Market Demand P P P P + + = Joe Sarah Mike Market $3 $3 $3 $3 D D2 D1 D3 35 Q 39 Q 26 Q 100 Q (= 35 + 39 + 26) LO1

  8. Changes in Demand Demand Can Increase or Decrease P 6 5 4 3 2 1 0 Individual Demand Increase in demand Price (per latte) D2 D1 Decrease in Demand Decrease in demand D3 Q 2 4 6 8 10 12 14 16 18 Quantity Demanded (thousands of lattes per month) LO1

  9. Changes in Demand Change in consumer tastes and preferences Change in number of buyers Change in income Normal goods Inferior goods LO1

  10. Changes in Demand Change in prices of related goods Complements Substitutes Change in consumers’ expectations Future prices Future income LO1

  11. Changes in Quantity Demanded • Change in demand is a shift of the demand curve • Change in quantity demanded is a movement from one point to another point on a fixed demand curve LO1

  12. Supply Schedule or curve The amount producers are willing and able to sell at a given price Individual supply Market supply LO2

  13. Law of Supply Other things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls. Reason: Price acts as an incentive to producers At some point, costs will rise LO2

  14. The Supply Curve 5 4 3 2 1 0 P S Price (per latte) Q 10 20 30 40 50 60 70 Quantity Supplied (lattes per month) LO2

  15. Changes in Supply P S3 S1 $6 5 4 3 2 1 0 Decrease in supply S2 Price (per latte) Increase in supply Q 2 4 6 8 10 12 14 16 Quantity Supplied (thousands of lattes per month) LO2

  16. 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

  17. Changes in Quantity Supplied • Change in supply is a shift in the supply curve • Change in the quantity supplied represents a movement along a supply curve LO2

  18. Market Equilibrium Equilibrium occurs where the demand curve and supply curve intersect Surplus and shortage Rationing function of prices Efficient allocation Productive efficiency Allocative efficiency LO3

  19. Market Equilibrium 200 Buyers & 200 Sellers Market Supply 200 Sellers Market Demand 200 Buyers 6 5 4 3 2 1 0 6,000 latte surplus S P Qd P Qs 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 Price (per latte) 3 7,000 latte shortage D 2 4 6 8 10 12 14 16 18 7 Quantity of lattes (thousands per month) LO3

  20. 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

  21. ` Changes in Demand and Equilibrium and Equilibrium D increase: P, Q D decrease: P, Q P P S S D3 D2 D4 D1 0 0 Decrease in demand Increase in demand LO4 LO4

  22. Changes in Supply and Equilibrium S increase: P, Q S decrease: P, Q P P S4 S3 S1 S2 D D 0 0 Decrease in supply Increase in supply LO4 LO4

  23. Government-Set Prices Price ceilings Set below equilibrium price Rationing problem Black markets Example: Rent control LO5

  24. Government-Set Prices P S $3.50 P0 Ceiling 3.00 PC D Shortage Q Qs Q0 Qd LO5

  25. Government-Set Prices Price floors Prices are set above the market price Chronic surpluses Example: Minimum wage laws LO5

  26. Government-Set Prices P S Surplus Floor $3.00 Pf P0 2.00 D Q Qd Q0 Qs LO5

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