McGraw-Hill/Irwin

Chapter 3
Demand, Supply,
and Market
Equilibrium
Copyright 2009 by The McGraw-Hill Companies, Inc. All

Chapter Objectives
Demand and its determinants
Supply and its determinants
Supply, demand, & market
equilibrium
Changes in supply and demand
Government-set prices
3-2

A Market
Interaction between buyers
and sellers
Buyers demand goods
Sellers supply goods
Assumptions
Standardized good
Competitive market
3-3

Demand
Schedule or curve
Amount consumers willing
and able to purchase at a
given price
Other things equal
Individual demand
Market demand
3-4

Law of Demand
Other things equal, as price
falls quantity demanded
rises
Explanations:
Diminishing marginal utility
Income effect
Substitution effect
3-5

Individual Demand
P6

P
$5

Qd
10

20

35

55

80

Price (per bushel)

5
4
3
2
1
0

D
10

20

30

40

50

60

70

80

Quantity Demanded (bushels per week)

3-6

Determinants of Demand
Factors that shift the demand
curve
Cause more or less to be
bought at any possible price
Increase or decrease in demand
Tastes
Number of buyers
3-7

Determinants of Demand
Income
Normal goods
Inferior goods

Price of related goods

Substitute good
Complementary good
Unrelated goods

Consumer expectations
3-8

Individual Demand
P6

P
$5

Qd
10

20

35

55

80

Price (per bushel)

5
4
3
2

D2

D1

D3
0

10

12

14

16

18 Q

Quantity Demanded (bushels per week)

3-9

Individual Demand
P6

Change in Demand

P
$5

Qd
10

20

35

55

80

Price (per bushel)

5
4

Change in Quantity
Demanded

3
2

D2

D1

D3
0

10

12

14

16

18 Q

Quantity Demanded (bushels per week)

3-10

Supply
Schedule or curve
Amount producers willing
and able to sell at a given
price

Individual supply
Market supply
3-11

Law of Supply
Other things equal, as price
rises the quantity supplied
rises
Explanations:
Revenue implications
Marginal cost

3-12

Individual Supply
P6
S1

P
$5

Qs
60

50

35

20

Price (per bushel)

5
4
3
2
1
0

10

20

30

40

50

60

70

Quantity Supplied (bushels per week)

3-13

Determinants of Supply

Resource prices
Technology
Taxes and subsidies
Prices of other goods
Producer expectations
Number of sellers
3-14

Individual Supply
P6
S3

P
$5

Qs
60

50

35

20

Price (per bushel)

S1
S2

4
3
2
1
0

10

20

30

40

50

60

70

Quantity Supplied (bushels per week)

3-15

Individual Supply
P6
S3

P
$5

Qs
60

50

35

20

Price (per bushel)

Change in Quantity
Supplied

S1
S2

4
3
2

Change in Supply

1
0

10

20

30

40

50

60

70

Quantity Supplied (bushels per week)

3-16

Market Equilibrium
Equilibrium price and quantity
Surplus and shortage
Rationing function of price
Efficient allocation
Productive efficiency
Allocative efficiency
3-17

Market Equilibrium
6

6,000 Bushel
Surplus

Qd

$5

2,000

4,000

3
2

7,000
11,000

Price (per bushel)

S
$4 Price Floor

4
3
3

$2 Price Ceiling

1 16,000

7,000 Bushel
Shortage

1
0

6 7 8

10

Qs

$5

12,000

10,000

7,000

4,000

1,000

D
12

14

16

18

Bushels of Corn (thousands per week)

3-18

Market Equilibrium
Change in demand
Shift of the demand curve

Change in supply
Shift of the supply curve

Change in equilibrium price and

quantity

3-19

Market Equilibrium
Price Quantity

Supply increase;
Demand decrease
Supply decrease;
Demand increase
Supply increase;
Demand increase
Supply decrease;
Demand decrease

?
?
?
?
3-20

Government-Set Prices
Price ceilings on gasoline
Rationing problem
Black markets

Rent controls
Price floors on wheat
Optimal allocation of
resources
3-21

A Market for Human Organs

Waiting list for transplants
Demand for organs
Supply of organstwo
possibilities
Market eliminates shortage
Moral objections
Legalize and regulate?
3-22

A Market for Human Organs

S1

S2
Supply of Organs

P1
At Price P1 the
Shortage is Reduced
By Q1 Q2

P0

Demand for Organs

D1
Q1

Q2

Q3

Q
3-23

Key Terms

demand
demand schedule
law of demand
diminishing marginal utility
income effect
substitution effect
demand curve
determinants of demand
normal goods
inferior goods
substitute good
complementary good
change in demand
change in quantity demanded

supply
supply schedule
law of supply
supply curve
determinants of supply
change in supply
change in quantity
supplied
equilibrium price
equilibrium quantity
surplus
shortage
price ceiling
price floor
3-24

Next Chapter Preview

The U.S. Economy:

Public and Private
Sectors

3-25