Download Market Demand Schedule for DVDs

CHAPTER 3
Demand, Supply and
Market Equilibrium
1
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?
2
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
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Demand Schedule for DVDs
Price
Quantity
(dollars/dvd) (millions of
dvds/week)
A
1
9
B
2
6
C
3
4
D
4
3
E
5
2
4
Law of Demand
 Ceteris paribus, as price falls, the quantity demanded rises (&
vice-versa)
 Explanation of law of demand:
diminishing marginal utility
2. income effect
3. substitution effect
1.
5
Individual versus Market demand
 The market demand us the horizontal sum of individual
demand curve.
6
Market Demand Schedule for DVDs
Price
(dollars/dvd)
A
B
C
D
E
7
1
2
3
4
5
Quantity demanded
(millions/week)
Buyer 1
Buyer 2
Buyer 3
8
5
3
2
1
7
5
4
3
2
9
6
4
3
2
Total
quantity
demanded
/week
24
16
11
8
5
Changes in Demand
 A change in one or more of the determinants of demand results
in a shift in the demand curve
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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…
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Changes in Demand
Changes in Tastes (preferences)
 positive change shifts D curve right
 more will be demanded at each price
PA
D
D′
QA
10
Changes in Demand
Changes in Number of Buyers:
 decrease will shift curve left
PA
D’
D
QA
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Changes in Demand
Changes in Money Incomes:
 when income increases
 demand for NORMAL goods increases
 demand for INFERIOR goods decreases
12
Changes in Demand
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
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Changes in Demand
Changes in Consumer Expectations:
 about future prices or incomes
14
Change in Quantity Demanded
 when price of the product changes, there is a movement along the
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.
15
Supply
 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.
16
Supply Schedule for DVDs
Price
Quantity
(dollars/dvd) (millions of
dvds/week)
A
1
0
B
2
5
C
3
10
D
4
13
E
5
16
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Law of Supply
 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
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Determinants of Supply
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…
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Changes in Quantity Supplied
 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
S
price
Increase in QS
NOT supply!
Decrease in QS
quantity
20
Market Equilibrium
 Equilibrium price will be established where the supply decisions
of producers and the demand decisions of buyers are mutually
consistent
21
Market Supply & Demand for DVDs
Price
(dollars/dvd)
1
2
3
4
5
22
Quantity
demanded
(millions of
dvds/week)
24
16
11
8
5
Quantity
supplied
(millions of
dvds/week)
0
5
10
13
16
Shortage (-) or
surplus (+)
(millions of
dvds/week)
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.
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 What is the rationing function of prices?
24
Efficient allocation
 Efficient allocation of society’s resources occur in a
competitive market at equilibrium.
 Efficient allocation means:
Productive efficiency
2. Allocative efficiency
1.
25
Complex Cases
 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
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Complex Cases
Change in Change in Effect on
supply
demand
equilibrium
price
Table 3-3
Effect on
equilibrium
quantity
Increase
Decrease
Decrease
Indeterminate
Decrease
Increase
Increase
Indeterminate
Increase
Increase
Indeterminate
Increase
Decrease
Decrease
Indeterminate
Decrease
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3.4 Applications: Government Set Prices
 Price Ceilings: A legally established maximum price for a good
or service.
28
Price Ceilings and Shortages
 Rationing Problem
 Black Markets
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Government Set Prices: Price Floors
 Price Floor: A legally established price above an equilibrium
price
30
Price Floors and Surplus
 Additional consequences
• Distort resource allocation
• Cause shortages or surpluses
• Produce negative side effects
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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)
32
Homework questions
Study questions are end of chapter: 3,6,7, 8, 9,13, 14, 17
The key will be posted on my website.
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