SAYRE | MORRIS Seventh Edition

Demand and Supply: an Elaboration

CHAPTER 3

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Determinants of Supply and Demand

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Determinants of Demand Determinants of SupplyConsumer preferences Prices of productive resources

Consumer incomes Business taxes

Prices of related products Technology

Expectations of future prices, incomes, or availability

Prices of substitutes in production

Population: its size, income distribution, and age

Future expectations of suppliers

Distribution Number of suppliers

Simultaneous Changes in Supply and Demand

• Increase in both demand and supply leads to an increase in equilibrium quantity; price may rise or fall

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How Well Do Markets Work?

Problems with markets:1. Markets do not always adjust as quickly as we

would like

2. Markets do not always produce equitable results

3. Competitive markets may not exist for some goods or services

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Price Controls Price Controls • government regulations to set either a maximum

or minimum price for a product

Price Ceiling • a government regulation stipulating the maximum

price that can be charged for a product

Price Floor • a government regulation stipulating the minimum

price that can be charged for a product

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Price Ceiling

• Used when present market price for a particular product is considered too high for many buyers

• The product is felt to be a necessity

• Example: rent control

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Price Ceiling • Price ceilings cause shortages

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Allocating Shortages

• The market (supply and demand)

• First come, first served

• Producers’ preferences

• Rationing

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Price Floor

• Used when present market price for a particular product is considered too low for producers

• Often used in agricultural markets

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Price Floor • Price floors cause surpluses

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Price Floor • Minimum wage laws can cause unemployment

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Dealing with Surpluses

• Store it

• Convert it

• Sell it abroad at a reduced price (dump)

• Donate it

• Destroy it

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Quota• A quota, or restricting output, can raise price

without causing a surplus

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Vertical Demand Curve• A vertical demand curve suggests that price

does not matter

• Same quantity is demanded no matter what the price

• Some goods seen as necessities (eg, insulin) may have a perfectly inelastic (vertical) range

• Eventually, quantity demanded decreases as income is insufficient to pay for the good

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Demand Curve

Price

Quantity

•Price is irrelevant.

•This product is a ultra-necessity. (cigarettes, drugs)

•There is a maximum price for all of us. Our demand is limited by our income.

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Upward Sloping Demand Curve• Upward sloping demand curves may be true for some

individuals over a limited range of prices

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The Demand for Water• The effect of a change in supply depends very much on the

shape of the demand curve

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