1 / 33

CHAPTER 3 Demand, Supply and Market Equilibrium

CHAPTER 3 Demand, Supply and Market Equilibrium. Markets. An institution or mechanism that brings together buyers and sellers of particular goods and services. This chapter focuses on competitive markets. What is a competitive market?. Demand.

stacia
Download Presentation

CHAPTER 3 Demand, Supply and Market Equilibrium

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. CHAPTER 3Demand, Supply and Market Equilibrium

  2. Markets An institution or mechanism that brings together buyers and sellers of particular goods and services. This chapter focuses on competitive markets. What is a competitive market?

  3. Demand A schedule or a curve that shows the various amounts consumers are willing and able to purchase at each of a series of possible prices, during. some specified period of time

  4. Law of Demand • Ceteris paribus, as price falls, the quantity demanded rises (& vice-versa) • Explanation of law of demand: • diminishing marginal utility • income effect • substitution effect

  5. Individual versus Market demand • The market demand us the horizontal sum of individual demand curve.

  6. Changes in Demand A change in one or more of the determinants of demand results in a shift in the demand curve

  7. Changes in Demand Changes in any of these determinants will cause a change in demand: • tastes (preferences) • number of buyers • income • prices of related goods • expectations let’s examine these more closely…

  8. Changes in Tastes (preferences) positive change shifts D curve right more will be demanded at each price D′ Changes in Demand D PA QA

  9. Changes in Number of Buyers: decrease will shift curve left Changes in Demand D D’ PA QA

  10. Changes in Money Incomes: when income increases demand for NORMAL goods increases demand for INFERIOR goods decreases Changes in Demand

  11. Changes in Prices of Related Goods: when two products are SUBSTITUTES, price of one & demand for the other move in the same direction when two products are COMPLEMENTS, price of one & demand for the other move in opposite directions when products are unrelatedno effect Changes in Demand

  12. Changes in Consumer Expectations: about future prices or incomes Changes in Demand

  13. when price of the product changes, there is a movement alongthe demand curve…this is called a change in quantity demanded. when any other determinant of demand changes, there is a shift in the demand curve… this is called a change in demand. Change in Quantity Demanded

  14. A schedule or a curve showing the amounts that producers are willing and able to make available for sale at each of a series of possible prices, during some specified period of time. Supply

  15. Ceteris paribus, as price rises, the quantity supplied rises (& vice-versa) why? price is revenue to suppliers higher price necessary to induce higher supply, to cover higher costs of production Law of Supply

  16. Changes in any of these determinants will cause the supply curve to shift: factor prices technology taxes & subsidies prices of other goods producer expectations number of sellers let’s examine these more closely… Determinants of Supply

  17. A change in quantity supplied is a movement from one point to another on a fixed supply curve A change in supply is a shift of the entire curve NOT supply! Increase in QS Decrease in QS S price quantity Changes in Quantity Supplied

  18. Equilibrium price will be established where the supply decisions of producers and the demand decisions of buyers are mutually consistent Market Equilibrium

  19. Equilibrium price & quantity • Equilibrium price (market clearing price) is the price in a competitive market at which the quantity demanded is equal to the quantity supplied. • There is neither a shortage nor a surplus at this price. • Equilibrium quantity is the quantity demanded & supplied at the equilibrium price in a competitive market.

  20. What is the rationing function of prices?

  21. Efficient allocation • Efficient allocation of society’s resources occur in a competitive market at equilibrium. • Efficient allocation means: • Productive efficiency • Allocative efficiency

  22. when both supply and demand change, the effect is a combination of the individual effects if both demand and supply shift, one of either price or quantity cannot be predicted–the result is indeterminate Complex Cases

  23. Complex Cases Table 3-3

  24. 3.4 Applications: Government Set Prices Price Ceilings: A legally established maximum price for a good or service.

  25. Rationing Problem Black Markets Price Ceilings and Shortages

  26. Government Set Prices: Price Floors Price Floor: A legally established price above an equilibrium price

  27. Additional consequences Distort resource allocation Cause shortages or surpluses Produce negative side effects Price Floors and Surplus

  28. Mathematics of Market Equilibrium P = 100 - 0.5 Qd P = 5 + 0.5 Qs Calculate the equilibrium quantity & price • Step 1: Set the right hand side of both equations to equal on another & solve for Q* (Q*= Qd = Qs in equilibrium) • Step 2: Substitute Q* into either equation & solve for P* (P*=P in equilibrium)

  29. Homework questions Study questions are end of chapter: 3,6,7, 8, 9,13, 14, 17 The key will be posted on my website.

More Related