Individual Markets:

• Demand & Supply

3C H A P T E R

MARKETS DEFINED

MARKETS

POTENTIALSELLERS

POTENTIALBUYERS

$54321

DEMAND DEFINED

DEMAND SCHEDULEDEMAND SCHEDULE

Various AmountsVarious Amounts

A Series of Possible PricesA Series of Possible Prices

…a specified time period…other things being equal

P QD

1020355580

LAW OF DEMAND

• As Price Falls…

…Quantity Demanded Rises

• As Price Rises…

…Quantity Demanded Falls

An inverse relationship exists between price and quantity demanded

• Diminishing Marginal Utility

• Income Effect

• Substitution Effect

LAW OF DEMAND

• Demand Curve

• Individual and Market Demand

GRAPHING DEMANDP

Qo

$5

4

3

2

1

P QD

$54321

1020355580

Price of Corn

Quantity of Corn

CORN Plot the Points

10 20 30 40 50 60 70 80

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

Price of Corn

Quantity of Corn

CORN Plot the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

D

Price of Corn

Quantity of Corn

CORN

10 20 30 40 50 60 70 80

What if

Demand

Increases?

GRAPHING DEMAND

P

Qo

$5

4

3

2

1

P QD

$54321

D

Price of Corn

Quantity of Corn

CORN

10 20 30 40 50 60 70 80

D’

Increase

in

Demand

Increase

in Quantity

Demanded1020355580

30406080 +

GRAPHING DEMAND

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

D

Price of Corn

Quantity of Corn

CORN

10 20 30 40 50 60 70 80

What if

Demand

Decreases?

GRAPHING DEMAND

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

D

Price of Corn

Quantity of Corn

CORN

10 20 30 40 50 60 70 80

-- 10204060

D’

Decrease

in

Demand

Decrease

in Quantity

Demanded

GRAPHING DEMAND

DETERMINANTS OF DEMAND

• Tastes• Number of Buyers• Income

– Normal (Superior) & Inferior Goods

• Prices of Related Goods– Substitutes & Complements– Unrelated Goods

• Expectations

SUPPLY DEFINED

SUPPLY SCHEDULESUPPLY SCHEDULE

$12345

P QS

CORN

Various AmountsVarious Amounts

A Series of Possible PricesA Series of Possible Prices

…a specified time period…other things being equal

520355060

LAW OF SUPPLY

• As Price Rises…

…Quantity Supplied Rises

• As Price Falls…

…Quantity Supplied Falls

A direct relationship exists between price and quantity supplied

P

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

Plot the PointsGRAPHING SUPPLY

SP

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

What if

Supply

Increases?

GRAPHING SUPPLY

SP

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

Price of Corn

Quantity of Corn

$54321

60503520 5

P QS

CORN

8070604530

S’Increase

in

Supply

Increase

in Quantity

Supplied

GRAPHING SUPPLY

SP

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

What if

Supply

Decreases?

GRAPHING SUPPLY

SP

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

S’

453020 0 --

Decrease

in

Supply

Decrease

in Quantity

Supplied

GRAPHING SUPPLY

DETERMINANTS OF SUPPLY

• Resource Prices

• Technology

• Taxes & Subsidies

• Prices of Other Goods

• Price Expectations

• Number of Sellers

DETERMINANTS OF SUPPLY

• Resource Prices

• Technology

• Taxes & Subsidies

• Prices of Other Goods

• Price Expectations

• Number of Sellers

Combining

with

Demand

MARKET DEMAND & SUPPLY

$54321

1020355580

$54321

60503520 5

200

B

U

Y

E

R

S

P QD

BUSHELS

OF CORNMARKET

DEMAND

2,0004,0007,000

11,00016,000

200

S

E

L

L

E

R

S

12,00010,000

7,0004,0001,000

P QS

BUSHELS

OF CORNMARKET

SUPPLY

EQUILIBRIUMGraphically…

x x

7

SP

Qo

$5

4

3

2

1

2 4 6 8 10 12 14 16

P QD

$54321

2,0004,0007,000

11,00016,000

$54321

12,00010,000

7,0004,0001,000

D

P QS

Price of Corn

Quantity of Corn

CORN

MARKET

CORN

MARKET

Market Clearing Equilibrium

MARKET DEMAND & SUPPLY

7

SP

Qo

$5

4

3

2

1

2 4 6 8 10 12 14 16

P QD

$54321

2,0004,0007,000

11,00016,000

$54321

12,00010,000

7,0004,0001,000

D

P QS

Price of Corn

Quantity of Corn

CORN

MARKET

CORN

MARKETSurplusAt a $4 price

more is being

supplied than

demanded

MARKET DEMAND & SUPPLY

117

SP

Qo

$5

4

3

2

1

2 4 6 8 10 12 14 16

P QD

$54321

2,0004,0007,000

11,00016,000

$54321

12,00010,000

7,0004,0001,000

D

P QS

Price of Corn

Quantity of Corn

CORN

MARKET

CORN

MARKET

At a $2 price

more is being

demanded than

supplied

Shortage

MARKET DEMAND & SUPPLY

117

SP

Qo

$5

4

3

2

1

2 4 6 8 10 12 14 16

P QD

$54321

2,0004,0007,000

11,00016,000

$54321

12,00010,000

7,0004,0001,000

D

P QS

Price of Corn

Quantity of Corn

CORN

MARKET

CORN

MARKET

Shortage

MARKET DEMAND & SUPPLY Surplus