Slide 1Chapter ObjectivesA MarketDemandLaw of DemandIndividual DemandDeterminants of DemandSlide 8Slide 9Slide 10SupplyLaw of SupplyIndividual SupplyDeterminants of SupplySlide 15Slide 16Market EquilibriumSlide 18Slide 19Slide 20Government-Set PricesA Market for Human OrgansSlide 23Key TermsNext Chapter Preview…Demand, Supply, and Market EquilibriumChapter 3 Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinChapter Objectives•Demand and its determinants•Supply and its determinants•Supply, demand, & market equilibrium•Changes in supply and demand •Government-set prices3-2A Market•Interaction between buyers and sellers•Buyers demand goods•Sellers supply goods•Assumptions–Standardized good–Competitive market3-3Demand•Schedule or curve•Amount consumers willing and able to purchase at a given price•Other things equal•Individual demand •Market demand3-4Law of Demand•Other things equal, as price falls quantity demanded rises•Explanations:–Diminishing marginal utility–Income effect–Substitution effect3-5Individual Demand 6 5 4 3 2 1 010 20 30 40 50 60 70 80 Quantity Demanded (bushels per week)Price (per bushel)P Qd$543211020355580PQD3-6Determinants of Demand•Factors that shift the demand curve•Cause more or less to be bought at any possible price•Increase or decrease in demand•Tastes•Number of buyers3-7Determinants of Demand•Income–Normal goods–Inferior goods•Price of related goods–Substitute good–Complementary good–Unrelated goods•Consumer expectations3-8Individual Demand 6 5 4 3 2 1 0Quantity Demanded (bushels per week)Price (per bushel)P Qd$543211020355580PQD12 4 6 8 10 12 14 16 18D2D33-9Individual Demand 6 5 4 3 2 1 0Quantity Demanded (bushels per week)Price (per bushel)P Qd$543211020355580PQD12 4 6 8 10 12 14 16 18D2D3Change in DemandChange in Quantity Demanded3-10Supply•Schedule or curve•Amount producers willing and able to sell at a given price•Individual supply•Market supply 3-11Law of Supply•Other things equal, as price rises the quantity supplied rises•Explanations:–Revenue implications–Marginal cost3-12Individual Supply 6 5 4 3 2 1 0Quantity Supplied (bushels per week)Price (per bushel)P Qs$54321605035205PQS110 20 30 40 50 60 703-13Determinants of Supply•Resource prices•Technology•Taxes and subsidies•Prices of other goods•Producer expectations•Number of sellers3-14Individual Supply 6 5 4 3 2 1 0Quantity Supplied (bushels per week)Price (per bushel)P Qs$54321605035205PQS1S2S310 20 30 40 50 60 70 3-15Individual Supply 6 5 4 3 2 1 0Quantity Supplied (bushels per week)Price (per bushel)P Qs$54321605035205PQS1S2S310 20 30 40 50 60 70 Change in Quantity SuppliedChange in Supply3-16Market Equilibrium•Equilibrium price and quantity•Surplus and shortage•Rationing function of price•Efficient allocation–Productive efficiency–Allocative efficiency3-17Market Equilibrium 6 5 4 3 2 1 02 4 6 8 10 12 14 16 18Bushels of Corn (thousands per week)Price (per bushel)P Qd$543212,0004,0007,000 11,00016,000P Qs$5432112,00010,0007,0004,0001,00073DS$4 Price Floor6,000 BushelSurplus$2 Price Ceiling7,000 BushelShortage3-18Market Equilibrium•Change in demand–Shift of the demand curve•Change in supply–Shift of the supply curve•Change in equilibrium price and quantity3-19Market Equilibrium•Supply increase; Demand decrease•Supply decrease; Demand increase•Supply increase; Demand increase•Supply decrease; Demand decreasePriceQuantity????3-20Government-Set Prices•Price ceilings on gasoline–Rationing problem–Black markets•Rent controls•Price floors on wheat–Optimal allocation of resources3-21A Market for Human Organs•Waiting list for transplants•Demand for organs•Supply of organs—two possibilities•Market eliminates shortage •Moral objections•Legalize and regulate?3-22A Market for Human OrgansPQS2S1D1P1P0Q1Q2Q3Supply of OrgansAt Price P1 theShortage is ReducedBy Q1 – Q2 Demand for Organs3-23Key Terms•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•change in quantity demanded•supply•supply schedule•law of supply•supply curve•determinants of supply•change in supply•change in quantity supplied•equilibrium price•equilibrium quantity•surplus•shortage•price ceiling•price floor3-24Next Chapter Preview…The U.S. Economy: Public and Private