Essay on Chapter 3

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Chapter 3
Demand, Supply, and Market
Equilibrium
McGraw-Hill/Irwin

Copyright © 2015 by McGraw-Hill Education. All rights reserved.

Markets
• Interaction between buyers and sellers
• Markets may be
• Local
• National
• International
• Price is discovered in the interactions of buyers and sellers
LO1

Demand
• Demand
• Demand schedule or demand curve
• Amount consumers are willing and able to purchase at a given price
• Other things equal
• Individual demand
• Market demand
LO2

Law of Demand
• Law of demand
• Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls
• Explanations
• Price acts as an obstacle to buyers
• Law of diminishing marginal utility
• Income effect and substitution effect
LO2

The Demand Curve
P

Individual demand for corn
Qd
10

4

20

3

35

2

55

1

80

5

Price (per bushel)

P
$5

6

4
3
2

D

1
0

10

20

30

40

50

60

70

Quantity demanded (bushels per week)
LO2

80

Q

Market Demand
Market Demand for Corn, Three Buyers

Price per bushel
$5

Joe

Jen

Jay

10

12

8

Total
Qd
per week
30

4

20

23

17

60

3

35

39

26

100

2

55

60

39

154

1

80

87

54

221

Quantity Demanded

LO2

Changes in Demand

P
$5

Qd
2000

4

4000

3

7000

2

11,000

1

16,000

P6
5

Price (per bushel)

Market Demand for Corn,
200 Buyers, (D1)

Increase in demand
Increase in Demand

4
3
2
1

D2

Decrease
Decrease
in demandin Demand

0

2

4

6

8

10

D1
D3
12

14

16

18

Q

Quantity demanded (thousands of bushels per week)
LO2

Changes in Demand
P
6

Change in demand

Price (per bushel)

5

Change in quantity demanded 4
3
2
1
0

D2
D1

Decrease in Demand
D3
2

4

6

8

10

12

14

16

18 Q

Quantity demanded (thousands of bushels per week)
LO2

Determinants of Demand
•
•
•
•

LO2

Determinants of demand
Change in consumer tastes and preferences
Change in the number of buyers
Change in income
• Normal goods
• Inferior goods

Determinants of Demand
• Change in prices of related goods
• Complementary good
• Substitute good
• Change in consumer expectations
• Future prices
• Future income

LO2

Determinants of Demand
Determinants of Demand: Factors That Shift the Demand Curve
Determinant

Examples

Change in buyers’ tastes

Physical fitness rises in popularity, increasing the demand for jogging shoes and bicycles; cell phone popularity rises, reducing the demand for land-line phones.

Change in the number of buyers

A decline in the birthrate reduces the demand for children’s toys. Change in income

A rise in incomes increases the demand for normal goods such as restaurant meals, sports tickets, and necklaces while reducing the demand for inferior goods such as cabbage, turnips, and inexpensive wine.

Change in the prices of related goods

A reduction in airfares reduces the demand for bus transportation (substitute goods); a decline in the price of
DVD players increases the demand for DVD movies
(complementary goods).

Change in consumer expectations

Inclement weather in South America creates an expectation of higher future coffee bean prices, thereby increasing today’s demand for coffee beans.

Supply
• Supply
• Supply schedule or a supply curve
• Amount producers are willing and able to sell at a given price
• Individual supply
• Market supply

LO3

Law of Supply
• Law of supply
• Other things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls
• Explanation
• Price acts as an incentive to producers
• At some point, costs will rise

LO3

The Supply Curve
P

4

50

3

35

2

20

1

5

5
4

Price (per bushel)

Supply of Corn
P
Qs
$5
60

S1

3
2
1
0

10

20

30

40

50

60

Quantity supplied (bushels per week)
LO3

70

Q

Changes in Supply
P

4

10,000

3

7000

2

4000

1

1000

S3

S1

5
4

Price (per bushel)

Market Supply of Corn,
200 Producers, (S1)
P
Qs
$5
12,000

$6

Decrease in supply

S2

3
2

Increase in supply

1
0

2
LO3

4

6

8

10

12

14

16

Quantity supplied (thousands
Show More

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