Demand, Supply, and Market

Equilibrium
Chapter 3
Markets
• Markets bring together buyers (demanders) and sellers (suppliers).
• To keep things simple, our focus will be on markets consisting of large
numbers of independently acting buyers and sellers of standardized
products.
Demand
Demand is a schedule or a curve that shows the various amounts of a
product that consumers are willing and able to purchase at each of a
series of possible prices during a specified period of time.
• Demand shows the quantities of a product that consumers will be
willing and able to purchase at various possible prices, other things
equal.
*Note, that willingness alone is not effective in the market (if there is not enough money to satisfy wants, it is
not reflected in the market).
Law of Demand
• Other things equal, as price falls, the quantity demanded rises, and as
price rises, the quantity demanded falls.
• In short, there is a negative or inverse relationship between price and
quantity demanded.
Why the inverse relationship between price
and quantity demanded?
1. Common sense (people ordinary do buy more of a product at a low
price than at a high price).
2. Diminishing marginal utility (successive units of a particular product
yield less and less marginal utility, thus consumers will buy additional
units only if the price of those units is progressively reduced).
3. income and substitution effects.
The Demand Curve
Market Demand and Change in Demand
• By adding the quantities demanded by all consumers at each of the
various possible prices, we can get from individual demand to market
demand (horizontal summation or multiplying the amounts by the
number of buyers).
• When factors other than price, called determinants of demand,
change, the demand curve shifts to the right or left.
• A change in the demand schedule or, graphically, a shift in the
demand curve is called a change in demand.
• A change in quantity demanded is a movement from one point to
another on a fixed demand curve.
Market Demand
Change in Demand
Determinants of Demand
Supply
Supply is a schedule or curve showing the various amounts of a product
that producers are willing and able to make available for sale at each of
a series of possible prices during a specific period.
Law of Supply
• Other things equal, firms will produce and offer for sale more of
• their product at a high price than at a low price.
• To a supplier, price represents revenue, which serves as an incentive
to produce and sell a product.
• Beyond some quantity of production, marginal cost increases. The
firm will not produce the more costly units unless it receives a higher
price for them.
The Supply Curve
Market Supply
• Market supply is derived from individual supply in exactly the same
way that market demand is derived from individual demand.
• We sum the quantities supplied by each producer at each price.
Determinants of Supply
• resource prices,
• technology,
• taxes and subsidies,
• prices of other goods,
• producer expectations, and
• the number of sellers in the market.
Changes in Supply
Market Equilibrium
• Buyers and suppliers interact and lead to the equilibrium (market-
clearing) price and quantity in a competitive market.
Equilibrium
Changes in demand and supply and the
effects on price and quantity
Effects of Changes in Both Supply and
Demand
Price Ceiling
• A price ceiling is a maximum price that sellers may charge for a good,
usually set by government.
Price ceiling
Price Floor
• A price floor is a minimum price below which exchange is not
permitted.
• The result will be excess supply (a surplus).
• The minimum wage is probably the most famous example of a price
floor. A minimum wage is a price floor set for the price of labor.
Price Floors
Practice Question
• Suppose the market demand for pizza is given by and the market supply for pizza is given
by
Qd = 300 - 20P and the market supply for pizza is given by
Qs = 20P - 100, where P = price (per pizza).
a. Graph the supply and demand schedules for pizza using $5 through $15 as the value of
P.
b. In equilibrium, how many pizzas would be sold and at what price?
c. What would happen if suppliers set the price of pizza at $15? Explain the market
adjustment process.
d. Suppose the price of hamburgers, a substitute for pizza, doubles. This leads to a
doubling of the demand for pizza. (At each price, consumers demand twice as much
pizza as before.) Write the equation for the new market demand for pizza.
e. Find the new equilibrium price and quantity of pizza.