3

C HAPT E R

Individual Markets:
Demand & Supply

MARKETS DEFINED

POTENTIAL BUYERS

POTENTIAL SELLERS

MARKETS

DEMAND DEFINED
DEMAND SCHEDULE
P $5 4 3 2 1 QD 10 20 35 55 80

Various Amounts A Series of Possible Prices

a specified time period other things being equal

LAW OF DEMAND
An inverse relationship exists between price and quantity demanded As Price Falls Quantity Demanded Rises As Price Rises Quantity Demanded Falls

LAW OF DEMAND
Diminishing Marginal Utility

LAW OF DEMAND
Diminishing Marginal Utility Income Effect

LAW OF DEMAND
Diminishing Marginal Utility Income Effect Substitution Effect

LAW OF DEMAND
Diminishing Marginal Utility Income Effect Substitution Effect Demand Curve Individual and Market Demand

GRAPHING DEMAND
Price of Corn

CORN

$5

P $5 4 3 2 1

QD 10 20 35 55 80

Plot the Points

10 20 30 40 50 60 70 80 Quantity of Corn

GRAPHING DEMAND
Price of Corn

CORN

$5

P $5 4 3 2 1

QD 10 20 35 55 80

Plot the Points

10 20 30 40 5055 60 70 80 Quantity of Corn

GRAPHING DEMAND
Price of Corn

CORN

$5

P $5 4 3 2 1

QD 10 20 35 55 80

Plot the Points

10 20 30 40 50 60 70 80 35 Quantity of Corn

GRAPHING DEMAND
Price of Corn

CORN

$5

P $5 4 3 2 1

QD 10 20 35 55 80

Plot the Points

10 20 30 40 50 60 70 80 Quantity of Corn

GRAPHING DEMAND
Price of Corn

CORN

$5

P $5 4 3 2 1

QD 10 20 35 55 80

Plot the Points

10 20 30 40 50 60 70 80 Quantity of Corn

GRAPHING DEMAND
Price of Corn

CORN

$5

P $5 4 3 2 1

QD 10 20 35 55 80

Connect the Points

D
10 20 30 40 50 60 70 80 Quantity of Corn

GRAPHING DEMAND
Price of Corn

CORN

$5

P $5 4 3 2 1

QD 10 20 35 55 80

What if Demand Increases?

D
10 20 30 40 50 60 70 80 Quantity of Corn

GRAPHING DEMAND
Price of Corn

CORN

$5

P $5 4 3 2 1

QD 10 30 20 40 35 60 55 80 80 +

Increase in Quantity Demanded

Increase in Demand
10 20 30 40 50 60 70 80 Quantity of Corn

D D Q

GRAPHING DEMAND
Price of Corn

CORN

$5

P $5 4 3 2 1

QD 10 20 35 55 80

What if Demand Decreases?

D
10 20 30 40 50 60 70 80 Quantity of Corn

GRAPHING DEMAND
Price of Corn

CORN

$5

P $5 4 3 2 1

QD 10 -20 10 35 20 55 40 80 60

Decrease in Quantity Demanded

Decrease in Demand
10 20 30 40 50 60 70 80 Quantity of Corn

D D Q

DETERMINANTS OF DEMAND Tastes Number of Buyers Income

Normal (Superior) & Inferior Goods

Prices of Related Goods

Substitutes & Complements Unrelated Goods

Expectations

SUPPLY DEFINED
SUPPLY SCHEDULE
Various Amounts
CORN

P $1 2 3 4 5

QS 5 20 35 50 60

SUPPLY DEFINED
SUPPLY SCHEDULE
CORN

P Various Amounts $1 A Series of Possible Prices 2 3 4 5

QS 5 20 35 50 60

a specified time period other things being equal

LAW OF SUPPLY
A direct relationship exists between price and quantity supplied

As Price Rises Quantity Supplied Rises As Price Falls Quantity Supplied Falls

GRAPHING SUPPLY
Price of Corn

Plot the Points

CORN

$5

P $5 4 3 2 1
20 30 40 50 60 70 80 Quantity of Corn

QS 60 50 35 20 5

o 5 10

GRAPHING SUPPLY
Price of Corn

Plot the Points

CORN

$5

P $5 4 3 2 1
10 20 30 40 50 60 70 80 Quantity of Corn

QS 60 50 35 20 5

GRAPHING SUPPLY
Price of Corn

Plot the Points

CORN

$5

P $5 4 3 2 1
10 20 3035 40 50 60 70 80 Quantity of Corn

QS 60 50 35 20 5

GRAPHING SUPPLY
Price of Corn

Plot the Points

CORN

$5

P $5 4 3 2 1
10 20 30 40 50 60 70 80 Quantity of Corn

QS 60 50 35 20 5

GRAPHING SUPPLY
Price of Corn

Plot the Points

CORN

$5

P $5 4 3 2 1
10 20 30 40 50 60 70 80 Quantity of Corn

QS 60 50 35 20 5

GRAPHING SUPPLY
Price of Corn

$5

CORN

P QS $5 4 3 2 1 60 50 35 20 5

Connect the Points

10 20 30 40 50 60 70 80 Quantity of Corn

GRAPHING SUPPLY
Price of Corn

$5

CORN

What if Supply Increases?

10 20 30 40 50 60 70 80 Quantity of Corn

P QS $5 4 3 2 1
Q

60 50 35 20 5

GRAPHING SUPPLY
Price of Corn

$5

Increase in Supply

S
CORN

P QS $5 4 3 Increase 2 in Quantity 1
Supplied Q

60 80 50 70 35 60 20 45 5 30

10 20 30 40 50 60 70 80 Quantity of Corn

GRAPHING SUPPLY
Price of Corn

$5

CORN

What if Supply Decreases?

10 20 30 40 50 60 70 80 Quantity of Corn

P QS $5 4 3 2 1
Q

60 50 35 20 5

GRAPHING SUPPLY
Price of Corn Decrease

S S
CORN

$5

in Supply

P QS $5 4 3 Decrease 2 in Quantity 1 Supplied 60 45 50 30 35 20 20 0 5 --

10 20 30 40 50 60 70 80 Quantity of Corn

DETERMINANTS OF SUPPLY Resource Prices Technology Taxes & Subsidies Prices of Other Goods Price Expectations Number of Sellers

DETERMINANTS OF SUPPLY Resource Prices Technology Combining Taxes & with Subsidies Prices DemandGoods of Other Price Expectations Number of Sellers

MARKET DEMAND & SUPPLY

BUSHELS OF CORN

P $5 4 3 2 1

QD 10 20 35 55 80

MARKET

BUSHELS OF CORN

200 DEMAND B 2,000

P QS $5 4 3 2 1 60 50 35 20 5

MARKET

200 SUPPLY S 12,000

U Y E R S

4,000 7,000 11,000 16,000

E L L E R S

10,000 7,000 4,000 1,000

EQUILIBRIUM

MARKET DEMAND & SUPPLY

Price of Corn CORN MARKET

$5

CORN MARKET

P QD $5 2,000 4 4,000 3 7,000 2 11,000 1 16,000

P Market $5 Clearing Equilibrium 4 3 2 1

D
2 4 6

Q
S 12,000 10,000 7,000 4,000 1,000

78

10 12 14 16

Quantity of Corn

MARKET DEMAND & SUPPLY

Price of Corn CORN MARKET

$5

Surplus

S
At a $4 price

CORN MARKET

P QD $5 2,000 4 4,000 3 7,000 2 11,000 1 16,000

P more is being $5 supplied than 4 demanded 3 2 1

D
2 4 6

Q
S 12,000 10,000 7,000 4,000 1,000

78

10 12 14 16

Quantity of Corn

MARKET DEMAND & SUPPLY

Price of Corn CORN MARKET

$5

S
At a $2 price

CORN MARKET

P QD $5 2,000 4 4,000 3 7,000 2 11,000 1 16,000

P more is being $5 demanded than 4 3 supplied 2 1 Shortage

D
2 4 6

Q
S 12,000 10,000 7,000 4,000 1,000

78

101112 14 16

Quantity of Corn

MARKET DEMAND & SUPPLY

Price of Corn CORN MARKET

$5

Surplus

CORN MARKET

P QD $5 2,000 4 4,000 3 7,000 2 11,000 1 16,000

Shortage
2 4 6

P $5 4 3 2 1
D Q

Q
S 12,000 10,000 7,000 4,000 1,000

78

101112 14 16

Quantity of Corn

MARKET EQUILIBRIUM
Equilibrium Price & Quantity Rationing Function of Prices Changes in Demand Changes in Quantity Demanded Changes in Supply Changes in Quantity Supplied

Multiple Shifts

Complex Cases

Supply Increases; Demand Decreases

Prices Decrease Quantity Indeterminate

Supply Decreases; Demand Increases

Price Increases Quantity Indeterminate

Multiple Shifts

Complex Cases

Supply Increases; Demand Increases

Prices Indeterminate Quantity Increases

Supply Decreases; Demand Decreases

Price Indeterminate Quantity Decreases

Government Set Prices Price Ceilings

Shortages Rationing Problem Black Markets Rent Controls

Price Floors
Surpluses

Government Set Prices Price Ceilings

Shortages Rationing Problem Black Markets Rent Controls

Price Floors
Surpluses

Key Terms
market 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
Copyright McGraw-Hill/Irwin, 2005

change in quantity demanded supply supply schedule law of supply supply curve determinants of supply change in supply change in quantity supplied surplus shortage equilibrium price equilibrium quantity rationing function of prices price ceiling and floor
BACK END

Next:

Chapter 4