Download Chapter 4: Demand, Supply and Equilibrium

Chapter 4
Demand, Supply,
and Equilibrium
© 2015 Pearson Education, Ltd.
4 Demand, Supply, and Equilibrium
Chapter Outline
4.1
4.2
4.3
4.4
4.5
Markets
How Do Buyers Behave?
How Do Sellers Behave?
Supply and Demand in Equilibrium
What Would Happen if the Government Tried to
Dictate the Price of Gasoline?
© 2015 Pearson Education, Ltd.
4 Demand, Supply, and Equilibrium
Key Ideas
1.
2.
In a perfectly competitive market, (1) sellers
all sell an identical good or service, and (2)
any individual buyer or any individual seller
isn’t powerful enough on his or her own to
affect the market price of that good or service.
The demand curve plots the relationship
between the market price and the quantity of
a good demanded by buyers.
© 2015 Pearson Education, Ltd.
4 Demand, Supply, and Equilibrium
Key Ideas
3. The supply curve plots the relationship
between the market price and the quantity of a
good supplied by sellers.
3. The competitive equilibrium price equates the
quantity demanded and the quantity supplied.
© 2015 Pearson Education, Ltd.
4 Demand, Supply, and Equilibrium
Key Ideas
5. When prices are not free to fluctuate, markets
fail to equate quantity demanded and quantity
supplied.
© 2015 Pearson Education, Ltd.
4 Demand, Supply, and Equilibrium
Evidence-Based Economics Example:
How much
more gasoline
would people
buy if its price
were lower?
© 2015 Pearson Education, Ltd.
4 Demand, Supply, and Equilibrium
Why do brown eggs cost more than
white eggs?
© 2015 Pearson Education, Ltd.
4.1 Markets
The market price is the price at which buyers and sellers
conduct transactions.
© 2015 Pearson Education, Ltd.
4.1 Markets
Competitive Markets
In a perfectly competitive market every buyer pays and every
seller charges the same market price, and no buyer or seller is big
enough to influence that market price, and all sellers sell an identical
good or service.
© 2015 Pearson Education, Ltd.
4.2 How Do Buyers Behave?
How much would you be willing to pay
for an “A” in this course?
© 2015 Pearson Education, Ltd.
4.2 How Do Buyers Behave?
Quantity Demanded
The amount of a good that buyers are willing to
purchase at a given price.
Demand Schedule
A table that reports the quantity demanded at
different prices, holding all else equal.
Demand Curve
Plots the quantity demanded at different prices.
© 2015 Pearson Education, Ltd.
4.2 How Do Buyers Behave?
How much are you willing to pay for an “A”?
Demand Curve for an "A"
Price
Demand Schedule
Price
$155.00
$135.00
$115.00
$95.00
$75.00
$55.00
$35.00
$15.00
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21
Quantity of an "A"
© 2015 Pearson Education, Ltd.
Quantity
Demande
d
$20
20
$30
16
$50
12
$100
7
$150
2
4.2 How Do Buyers Behave?
Willingness to Pay
Why are some students willing to pay more for an
“A” than others? That is, why isn’t the price the
same for everyone?
© 2015 Pearson Education, Ltd.
4.2 How Do Buyers Behave?
From Individual Demand Curves to Aggregated Demand Curves
Market Demand Curve
The sum of the individual demand curves of all
the potential buyers. The market demand curve
plots the relationship between the total quantity
demanded and the market price, holding all else
equal.
© 2015 Pearson Education, Ltd.
4.2 How Do Buyers Behave?
From Individual Demand Curves to Aggregated Demand Curves
Market Demand for an “A”
© 2015 Pearson Education, Ltd.
4.2 How Do Buyers Behave?
Shifting the Demand Curve
Remember your willingness to pay
for an “A”?
What if you had copies of each one
of the tests?
Would you be willing to pay more or
less than before?
© 2015 Pearson Education, Ltd.
4.2 How Do Buyers Behave?
Shifting the Demand Curve
Shifts of the Demand Curve
occur when one of the following changes:
1. tastes and preferences
2. income and wealth
3. availability and prices of related goods
4. number and scale of buyers
5. buyers’ expectations about the future
© 2015 Pearson Education, Ltd.
Demand Schedule
Demand Curve for an "A"
Price
Price
$155.00
$135.00
$115.00
$95.00
$75.00
$55.00
$35.00
$15.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Quantity of an "A"
Demand for an "A"
Quantity
Demanded
$20
20
$30
16
$50
12
$100
7
$150
2
Demand Schedule
$155.00
Price
$135.00
$115.00
Quantity
Demanded
$95.00
$20
10
$75.00
$30
8
$50
5
$100
2
$150
0
$55.00
$35.00
$15.00
0
5
10
15
20
© 2015 Pearson Education, Ltd.
4.2 How Do Buyers Behave?
Shifting the Demand Curve
© 2015 Pearson Education, Ltd.
4.2 How Do Buyers Behave?
Shifting the Demand Curve
Exhibit 4.4 Shifts of the Demand Curve vs. Movement Along the Demand Curve
© 2015 Pearson Education, Ltd.
4.2 How Do Buyers Behave?
Shifting the Demand Curve
Exhibit 4.3 Market Demand Curve for Oil
© 2015 Pearson Education, Ltd.
4 What Would Happen If the Government Tried to Dictate the Price of
Gasoline
Evidence-Based Economics Example:
How much
more gasoline
would people
buy if its price
were lower?
© 2015 Pearson Education, Ltd.
4 What Would Happen If the Government Tried to Dictate the Price of
Gasoline
Exhibit 4.5 The Quantity of Gasoline Demanded (per person) and the Price of
Gasoline in Brazil, Mexico, and Venezuela
© 2015 Pearson Education, Ltd.
4.3 How Do Sellers Behave?
How much would you have to be paid to
take your clothes off in class?
© 2015 Pearson Education, Ltd.
4.3 How Do Sellers Behave?
Quantity Supplied
The amount of a good that sellers are willing to
sell at a given price.
Supply Schedule
A table that reports the quantity supplied at
different prices.
Supply Curve
Plots the quantity supplied at different prices.
© 2015 Pearson Education, Ltd.
4.3 How Do Sellers Behave?
© 2015 Pearson Education, Ltd.
4.3 How Do Sellers Behave?
Why are more of you willing to take off
your clothes, the higher the price?
Why is the price not the same for
everybody?
© 2015 Pearson Education, Ltd.
4.3 How Do Sellers Behave?
Market Supply Curve
Plots the relationship between the total quantity
supplied and the market price, holding all else
equal.
© 2015 Pearson Education, Ltd.
4.3 How Do Sellers Behave?
From the Individual Supply to the Market Supply Curve
Market Supply for Classroom Nudity
© 2015 Pearson Education, Ltd.
4.3 How Do Sellers Behave?
From the Individual Supply Curve to the Market Supply Curve
Remember what price you required to
take off your clothes in class?
What if you were at a nudist beach?
Would you require more or less to take
off your clothes at the beach?
© 2015 Pearson Education, Ltd.
4.3 How Do Sellers Behave?
Shifting the Supply Curve
Shifts of the Supply Curve
Occur when one of the following changes:
1. input prices
2. technology
3. number and scale of sellers
4. sellers’ expectations about the future
© 2015 Pearson Education, Ltd.
4.3 How Do Sellers Behave?
Shifting the Supply Curve
Shift of Supply Curve for Nudity
© 2015 Pearson Education, Ltd.
4.3 How Do Sellers Behave?
Shifting the Supply Curve
Exhibit 4.8 Market Supply Curve for Oil
© 2015 Pearson Education, Ltd.
4.3 How Do Sellers Behave?
Shifting Supply Curve
Exhibit 4.7 Aggregation of Supply Schedules and Supply Curves
© 2015 Pearson Education, Ltd.
4.4 Supply and Demand in Equilibrium
Competitive Equilibrium
The point at which the market comes to an agreement about
what the price will be (competitive equilibrium price) and
how much will be exchanged (competitive equilibrium
quantity) at that price.
Excess Demand
Occurs when consumers want more than suppliers provide at
a given price. This situation results in a shortage.
Excess Supply
Occurs when suppliers provide more than consumers want at
a given price. This situation results in a surplus.
© 2015 Pearson Education, Ltd.
4.4 Supply and Demand in Equilibrium
Exhibit 4.10 Demand Curve and Supply Curve for Oil
© 2015 Pearson Education, Ltd.
4.4 Supply and Demand in Equilibrium
Exhibit 4.11 Excess Supply
© 2015 Pearson Education, Ltd.
4.4 Supply and Demand in Equilibrium
Exhibit 4.12 Excess Demand
© 2015 Pearson Education, Ltd.
4.4 Supply and Demand in Equilibrium
Curve Shifting in Competitive Equilibrium
It’s time to revisit the
question:
Why do brown eggs cost
more than white eggs?
© 2015 Pearson Education, Ltd.
4.4 Supply and Demand in Equilibrium
Curve Shifting in Competitive Equilibrium
© 2015 Pearson Education, Ltd.
4.4 Supply and Demand in Equilibrium
Curve Shifting in Competitive Equilibrium
© 2015 Pearson Education, Ltd.
4.4 Supply and Demand in Equilibrium
Curve Shifting in Competitive Equilibrium
Ready for another one?
Why do the price of roses
increase right before
Valentine’s Day?
© 2015 Pearson Education, Ltd.
4.4 Supply and Demand in Equilibrium
Curve Shifting in Competitive Equilibrium
Change in Demand for Roses
© 2015 Pearson Education, Ltd.
4.4 Supply and Demand in Equilibrium
Curve Shifting in Competitive Equilibrium
Then why doesn’t the
price of beer increase
right before Super
Bowl Sunday?
© 2015 Pearson Education, Ltd.
4.4 Supply and Demand in Equilibrium
Curve Shifting in Competitive Equilibrium
Change in Market for Roses and Beer
© 2015 Pearson Education, Ltd.
4.4 Supply and Demand in Equilibrium
Curve Shifting in Competitive Equilibrium
Both the Demand Curve and Supply Curve
Shift Right
© 2015 Pearson Education, Ltd.
4.4 Supply and Demand in Equilibrium
Curve Shifting in Competitive Equilibrium
The Demand Curve Shifts Right and the
Supply Curve Shifts Left
© 2015 Pearson Education, Ltd.
4.4 Supply and Demand in Equilibrium
Curve Shifting in Competitive Equilibrium
The Demand Curve Shifts Left and the Supply
Curve Shifts Right
© 2015 Pearson Education, Ltd.
4.4 Supply and Demand in Equilibrium
Curve Shifting in Competitive Equilibrium
Both the Demand Curve and the Supply Curve
Shift Left
© 2015 Pearson Education, Ltd.
4.4 Supply and Demand in Equilibrium
Curve Shifting in Competitive Equilibrium
Change in Supply
Effects of Shifts of Demand and Supply
Change in Demand
Incr.
Decr.
Demand
Demand
Incr. Supply Equil. P ?
Equil. P
Decr.
Supply
Equil. Q
Equil. P
Equil. Q ?
Equil. P ?
Equil. Q ?
Equil. Q
© 2015 Pearson Education, Ltd.
4.5 What Would Happen If the Government Tried to Dictate the Price of
Gasoline?
One more question: Why is there a parking
problem on campus?
© 2015 Pearson Education, Ltd.
4.5 What Would Happen If the Government Tried to Dictate the Price of
Gasoline?
© 2015 Pearson Education, Ltd.