CHAPTER 3
INDIVIDUAL MARKETS
Demand & Supply
p S
D
q
1
In
In this
this chapter
chapter you
you will
will learn
learn
What markets are
What demand is and what factors affect
it
What supply is and what factors affect it
How demand and supply together
determine market equilibrium
2
CHAPTER
CHAPTER 33 TOPICS
TOPICS
MARKETS
DEMAND
SUPPLY
SUPPLY & DEMAND: MARKET
EQUILIBRIUM
3
MARKETS
MARKETS
HOW ARE PRICES DETERMINED IN A
MARKET SYSTEM?
...BY INTERACTION BETWEEN BUYERS
SELLERS IN MARKETS
BY MARKETS WE MEAN…
4
INSTITUTIONS THAT
BRING TOGETHER
BUYERS AND SELLERS
POTENTIAL POTENTIAL
BUYERS SELLERS
5
MARKETS
MARKETS
for example:
– corner gas station
– farmer’s market
– Toronto Stock Exchange
– etc.
6
ASSUMPTIONS
ASSUMPTIONS
Competitive markets:
many independent buyers & sellers
standardized products
7
CHAPTER
CHAPTER 33 TOPICS
TOPICS
MARKETS
DEMAND
SUPPLY
SUPPLY & DEMAND: MARKET
EQUILIBRIUM
8
DEMAND
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
9
DEMAND
DEMAND
The information P Qd
can be
presented in a $1 80
demand $2 55
schedule
$3 35
DEMAND $4 20
$5 10
10
DEMAND
DEMAND
The information P Qd
can be
presented in a $1 80
demand $2 55
schedule
$3 35
$4 20
quantity
$5 10
demanded
11
or graphed
P Qd
$1 80
$2 55
$3 35
$4 20
$5 10
© 2002 McGraw-Hill Ryerson Ltd. Chapter 3 12
or graphed
P Qd
Demand
$1 80 Figure 3-1
$2 55 6
5
4
$3 35
price
3
2
$4 20 1
0
0 20 40 60 80 100
$5 10 quantity
© 2002 McGraw-Hill Ryerson Ltd. Chapter 3 13
or graphed
P Qd
Demand
$1 80 Figure 3-1
$2 55 6
5
4
$3 35
price
3
2
$4 20 1
0
0 20 40 60 80 100
$5 10 quantity
© 2002 McGraw-Hill Ryerson Ltd. Chapter 3 14
or graphed
P Qd
Demand
$1 80 Figure 3-1
$2 55 6
5
4
$3 35
price
3
2
$4 20 1
0
0 20 40 60 80 100
$5 10 quantity
© 2002 McGraw-Hill Ryerson Ltd. Chapter 3 15
or graphed
P Qd
Demand
$1 80 Figure 3-1
$2 55 6
5
4
$3 35
price
3
2
$4 20 1
0
0 20 40 60 80 100
$5 10 quantity
© 2002 McGraw-Hill Ryerson Ltd. Chapter 3 16
or graphed
P Qd
Demand
$1 80 Figure 3-1
$2 55 6
5
4
$3 35
price
3
2
$4 20 1
0
0 20 40 60 80 100
$5 10 quantity
© 2002 McGraw-Hill Ryerson Ltd. Chapter 3 17
LAW
LAW OF
OF DEMAND
DEMAND
all else equal, as price falls, the quantity
demanded rises (& vice versa)
supported by:
– concept of diminishing marginal utility
– income effect
– substitution effect
18
INDIVIDUAL VS. MARKET DEMAND
price QD–1st QD–2nd QD–
buyer buyer market
$5 10 + 12 = 22
$4 20 23 43
$3 35 39 74
$2 55 60 115
$1 80 87 167
19
Individual Demand 1 Individual Demand 2
$5 $5
$4 $4
$3 $3
price
price
$2 $2
$1 $1
$0 $0
0 20 3540 60 80 0 20
39
40 60 80
quantity quantity
Market Demand
$5
$4
$3
price
$2
$1
$0
0 50 74 100 150
quantity
© 2002 McGraw-Hill Ryerson Ltd. Chapter 3 20
DETERMINANTS
DETERMINANTS OF
OF DEMAND
DEMAND
PRICE is the most important influence
on the amount of any product
purchased
a change in price yields a movement
along the demand curve & a change in
quantity demanded
21
PA D
P1
movement along the
curve
P2
Q1 Q2 QA
change in price
change in quantity demanded
22
CHANGE IN DEMAND
D D’
PA
QA
when any OTHER determinant
changes
shift in the demand curve
23
CHANGE
CHANGE IN
IN DEMAND
DEMAND
Demand Shifters are changes in:
tastes (preferences)
number of buyers
income
prices of related goods
expectations
let’s examine these more closely…
24
CHANGE
CHANGE IN
IN DEMAND
DEMAND
Changes in tastes (preferences)
positive change shifts D curve right
more will be demanded at each price
D D’
PA
not up
or down
QA
25
CHANGE
CHANGE IN
IN DEMAND
DEMAND
Changes in number of buyers:
increase will shift curve right
D D’
PA
QA
26
CHANGE
CHANGE IN
IN DEMAND
DEMAND
Changes in money incomes:
when income increases
demand for NORMAL goods increases
demand for INFERIOR goods
decreases
27
CHANGE
CHANGE IN
IN DEMAND
DEMAND
Changes in prices of related goods:
when two products are SUBSTITUTES,
price of one & demand for the other are
positively related
28
CHANGE
CHANGE IN
IN DEMAND
DEMAND
Changes in prices of related goods:
when two products are
COMPLEMENTS, price of one &
demand for the other are negatively
related
29
CHANGE
CHANGE IN
IN DEMAND
DEMAND
Changes in prices of related goods:
when products are unrelatedno effect
30
CHANGE
CHANGE IN
IN DEMAND
DEMAND
Changes in expectations:
about future prices or incomes
31
price NOT
Decrease in QD
demand!
Increase in QD
quantity
If the price of a good changes, but all other
influences on buyers’ plans are held constant,
there is a change in quantity demanded, but
no change in demand.
32
Figure 3-3
price Increase in D
Decrease in D
D
quantity
If any other determinant of demand changes
(tastes, no. of buyers, income, etc.) there is a
change in demand, and a shift in the demand
curve.
33
CHAPTER
CHAPTER 33 TOPICS
TOPICS
MARKETS
DEMAND
SUPPLY
SUPPLY & DEMAND: MARKET
EQUILIBRIUM
34
SUPPLY
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
35
SUPPLY
SUPPLY
P Qs
The information
could be captured in $1 5
a supply schedule...
$2 20
$3 35
SUPPLY
$4 50
$5 60
36
SUPPLY
SUPPLY
P Qs
The information
could be captured in $1 5
a supply schedule...
$2 20
$3 35
$4 50
quantity
supplied $5 60
37
or graphed
P Qs Supply
6
$1 5 5
$2 20 4
price
3
$3 35 2
$4 50 1
$5 60 0 10 20 30
quantity
40 50 60
© 2002 McGraw-Hill Ryerson Ltd. Chapter 3 38
LAW
LAW OF
OF SUPPLY
SUPPLY
all else being constant, 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
39
INDIVIDUAL VS. MARKET SUPPLY
Price Qs - One 200 Qs-
Firm Firms In Market
Market
$5 60 x 200 12,000
$4 50 x 200 10,000
$3 35 x 200 7,000
$2 20 x 200 4,000
$1 5 x 200 1,000
40
Individual Firm Supply
4
price
0
0 10 20 30 40 50 60
quantity
41
Market Supply
6
5
4
price
3
2
1
0
0 5000 10000
quantity
42
DETERMINANTS
DETERMINANTS OF
OF SUPPLY
SUPPLY
PRICE is the most important
determinant of quantity supplied
a change in price yields a movement
along the supply curve & a change in
quantity supplied
43
PA S
P2
movement along the
P1 curve
Q1 Q2 QA
change in price
change in quantity supplied
44
CHANGE IN SUPPLY
PA S S’
QA
when any OTHER determinant
changes
shift in the SUPPLY curve
45
DETERMINANTS
DETERMINANTS OF
OF SUPPLY
SUPPLY
Supply Shifters are changes in:
resource prices
technology
taxes & subsidies
prices of other goods
price expectations
number of sellers
let’s examine these more closely…
46
DETERMINANTS
DETERMINANTS OF
OF SUPPLY
SUPPLY
Changes in resource prices:
decrease will increase supply & shift
curve right
more will be supplied at each price
PA S S’
not up
or down
QA
47
DETERMINANTS
DETERMINANTS OF
OF SUPPLY
SUPPLY
Changes in technology:
new technology will decrease costs &
increase supply
PA S S’
QA
48
DETERMINANTS
DETERMINANTS OF
OF SUPPLY
SUPPLY
Changes in taxes & subsidies:
increases in taxes will reduce supply
S’ S
PA
QA
49
DETERMINANTS
DETERMINANTS OF
OF SUPPLY
SUPPLY
Changes in prices of other goods:
higher prices of substitutes in
production will reduce supply
S’ S
PA
QA
50
DETERMINANTS
DETERMINANTS OF
OF SUPPLY
SUPPLY
Changes in price expectations:
of the future price of a product
difficult to generalize
51
DETERMINANTS
DETERMINANTS OF
OF SUPPLY
SUPPLY
Changes in number of sellers:
as the number of sellers increases, so
does supply
52
price S
Increase in QS NOT supply!
Decrease in QS
quantity
If the price of a good changes, but all other
influences on producers’ plans are held
constant, there is a change in quantity
supplied, but no change in supply.
53
Figure 3-4
Decrease in S S
price
Increase in S
quantity
If any other determinant of supply changes
(resource prices, technology, etc.) there is a
change in supply, and a shift in the supply
curve.
54
CHAPTER
CHAPTER 33 TOPICS
TOPICS
MARKETS
DEMAND
SUPPLY
SUPPLY & DEMAND: MARKET
EQUILIBRIUM
55
EQUILIBRIUM
EQUILIBRIUM
equilibrium price will be established
where the supply decisions of
producers and the demand decisions of
buyers are mutually consistent
surpluses drive prices down
shortages drive prices up
56
EQUILIBRIUM
EQUILIBRIUM
let’s look at the process of adjustment
to equilibrium graphically
57
Equilibrium
Equilibrium
Figure 3-5
6000-bushel
6 surplus
S
5
Price (per bushel)
4
3 $4 is not the
2 equilibrium
1 price D
0
0 2 4 6 8 10 12 14 16 18
Bushels of corn (thousands per week)
58
Equilibrium
Equilibrium
Figure 3-5
6
S
5
Price (per bushel)
4
3 $2 is not the
2 equilibrium
1 price D
0 7000-bushel
0 2 4 6 8
shortage 10 12 14 16 18
Bushels of corn (thousands per week)
59
Equilibrium
Equilibrium
Figure 3-5
$3 is the
6 equilibrium
5 price S
Price (per bushel)
4
3
2
1 QD=QS D
0
0 2 4 6 8 10 12 14 16 18
Bushels of corn (thousands per week)
60
Changes
Changes in
in Supply,
Supply, Demand
Demand &&
Equilibrium
Equilibrium
changes in demand or supply will affect
the equilibrium price and quantity
61
INCREASE IN DEMAND
P D1 D2 S
p1
q1 q3 Q
An increase in demand will cause:
a shortage at the original price p
1
Chapter 3 62
INCREASE IN DEMAND
P D1 D2 S price has increased
from p1 to p2,
p2 quantity traded has
p1 increased from q1
to q2
q1 q2 q3 Q
Consumers will bid price up to pNOT
2
an
increase
QS will increase, QD will decrease in
new equilibrium reached at p2supply
2, q22
Chapter 3 63
DECREASE IN DEMAND
P D2 D1 S
p1
q3 q1 Q
An decrease in demand will cause:
a surplus at the original price p
1
Chapter 3 64
DECREASE IN DEMAND
P D2 D1 S price has
decreased from p1
p1
to p2,
p2
quantity traded
has decreased
q3 q2 q1 from q1 to q2
Q
Producers will drop price to p2 NOT a
decrease
QS will decrease, QD will increase in
new equilibrium reached at p2supply
2 , q2
2
Chapter 3 65
INCREASE IN SUPPLY
D S1
P
S2
p1
q1 q3 Q
An increase in supply will cause:
a surplus at the original price p
1
Chapter 3 66
INCREASE IN SUPPLY
D S1
P price has
S2
decreased from p1
p1
p2 to p2,
quantity traded
has increased
q1 q2 q3 from
Q q1 to q2
Producers will drop price to p2
QS will decrease, QD will increase
new equilibrium reached at p2, q2
Chapter 3 67
DECREASE IN SUPPLY
D S2
P
S1
p1
q3 q1 Q
An decrease in supply will cause:
a shortage at the original price p
1
Chapter 3 68
DECREASE IN SUPPLY
D S2
P price has
S1
increased from p1
p2
to p2,
p1
quantity traded
has decreased
q3 q2 q1 from
Q q1 to q2
Consumers will bid price up to p2
QS will increase, QD will decrease
new equilibrium reached at p2, q2
Chapter 3 69
Complex
Complex Cases
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
70
Complex
Complex Cases
Cases
Table 3-9
Change in Change in Effect on Effect on
supply demand equilibrium equilibrium
price quantity
Increase Decrease Decrease Indeterminate
Decrease Increase Increase Indeterminate
Increase Increase Indeterminate Increase
Decrease Decrease Indeterminate Decrease
71
Complex
Complex Cases
Cases
A Reminder: “Other Things Equal”
Application: Pink Salmon
72
CHAPTER
CHAPTER 33 TOPICS
TOPICS
MARKETS
DEMAND
SUPPLY
SUPPLY & DEMAND: MARKET
EQUILIBRIUM
73
OO N
G S
M I N
CO
Elasticity
Chapter 4
74
MERRY CHRISTMAS EVERYONE!
75
