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Supply and
Demand
d
Chapter Outline
Market demand
Market supply
Market equilibrium
Comparative statics analysis
pp y demand, and price
p
Supply,
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Learning Objectives
Define supply, demand, and equilibrium price
List and
d provide
d specific
f examples
l off the
h non-price
determinants of supply and demand
Distinguish between the short
short-run
run rationing
function and long-run guiding function of price
Illustrate how the concepts of supply and demand
can be used in management decisions about price
and allocations of resources.
Use supply and demand diagrams to determine
price in the short and long run
3-3
Market Demand
The demand for a good or service is defined
as:
Quantities of a good or service that people are
ready willing and able to buy at various prices
ready,
within some given time period. (Other factors
besides price held constant.)
3-4
Market Demand
Ready implies that consumers are
prepared
d to b
buy a good
d or service b
both
h
because they are:
Willing: Consumers have a preference for it.
Able: Consumers have the income to support this
preference.
3-5
Market Demand
Market demand is the sum of all the individual
demands.
demands
Individuals may have distinct demand curves,
y sum to the overall demand in the
and they
market.
Example: demand for pizza
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Market Demand
There is an inverse
relationship between
price and the quantity
demanded of a good or
service.
This is
Thi
i called
ll d th
the Law
L
of Demand.
Thus, the demand
curve is downward
sloping.
l i
Copyright 2014 Pearson Education, Inc. All rights reserved.
3-7
Market Demand
Graphical
R
Representation
t ti
off
Demand
Algebraic
Representation
ep ese tat o of
o
Demand
Qd=700-100P
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Market Demand
Changes in price result in changes in the
quantity demanded
d
d d
This is shown as movement along the demand
curve.
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Market Demand
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Market Demand
Non-price determinants of demand-result is
a shift
h f in the
h demand
d
d curve.
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Market Supply
The supply of a good or service is defined as
quantities that
h people
l are ready
d to sell
ll at
various prices within some given time period
(Other factors besides price held constant)
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Market Supply
Changes in price result in changes in the
quantity supplied
l d
shown as movement along the supply curve
Ch
Changes iin non-price
i d
determinants
t
i
t result
lt in
i
changes in supply
shown as a shift in the supply curve
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Market Supply
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Market Supply
Non-price determinants of supply-results in
a shift
h f in the
h supply
l curve.
costs and technology
prices of other goods or services offered by the
seller
future expectations
number of sellers
weather conditions
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Market Equilibrium
Equilibrium price: the price that equates
the
h quantity demanded
d
d d with
h the
h quantity
supplied
Equilibrium quantity: the amount that
people are willing to buy and sellers are
willing to offer at the equilibrium price level
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Market Equilibrium
Shortage: a market situation in which the
quantity demanded
d
d d exceeds
d the
h quantity
supplied
shortage occurs at a price below the equilibrium
level
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Market Equilibrium
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Long-run Analysis
initial change: increase in
demand from D1 to D2
result: increase in
equilibrium price and
quantity (to P2, Q2)
follow-on adjustment:
movement of resources
into the market
rightward shift in the
supply curve to S2
equilibrium
q
price and
p
quantity (to P3, Q3)
Copyright 2014 Pearson Education, Inc. All rights reserved.
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Global Application
What are the implications of rising demand for
oill among d
developing
l
counties?
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Global Application
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Global Application
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Summary
The law of demand states that, other factors
h ld constant, the
held
h quantity d
demanded
d d is
inversely related to price.
The
Th llaw off supply
l states
t t th
that,
t other
th ffactors
t
held constant, the quantity supplied is
directly related to price.
price
Non-price factors may shift the curves.
Price serves a short-run
short run rationing function
and a long-run guiding function in the
marketplace.
Copyright 2014 Pearson Education, Inc. All rights reserved.
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