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Chapter 3:
Demand, Supply, and
Market Equilibrium
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved
Markets
 Markets bring together buyers
(“demanders”) and sellers (“suppliers”).
 Some markets are local while others are
national or international.
 Markets help to determine the prices and
quantities bought and sold of millions of
goods and services.
LO: 3-1
3-2
Demand
 Demand is a schedule or curve that shows the
various amounts of a product that consumers
will buy at each of a series of possible prices
during a specific period.
 The Law of Demand states that, all else equal,
as price falls, the quantity demanded rises, and
vice versa.
LO: 3-1
3-3
Demand Curve
P
6
P
$5
LO: 3-1
Qd
10
4
20
3
35
2
55
1
80
Price (per latte)
5
4
3
2
1
0
D
10
20
30
40
50
60
70
80
Q
Quantity Demanded (lattes per month)
3-4
Market Demand
 Individual demand is the demand schedule or curve
of a single consumer.
 Market demand is the sum of all the individual
demands.
 Market demand is determined by:





Consumers’ tastes (preferences)
The number of consumers in the market
Consumers’ incomes
The prices of related goods
Expected prices
LO: 3-1
3-5
Demand Can Increase
or Decrease
P
6
5
Price (per latte)
Shifts of the
demand
curve are
changes in
demand
4
3
2
D2
1
D1
D3
0
LO: 3-1
2
4
6
8
10
12
14
16
18 Q
Quantity Demanded (lattes per month)
3-6
Demand Can Increase
or Decrease
P
6
5
Price (per latte)
Movements
along the
demand
curves are
changes in
quantity
demanded
Change in Quantity
Demanded
4
3
2
D2
1
D1
D3
0
LO: 3-1
Change in Demand
2
4
6
8
10
12
14
16
18 Q
Quantity Demanded (lattes per month)
3-7
Supply
 Supply is a schedule or curve showing the amounts
of a product that producers will make available for
sale at each of a series of possible prices during a
specific period.
 The Law of Supply states that, all else equal, as
price rises, the quantity supplied rises, and vice
versa.
 Shifts of the supply curve are changes in supply.
 Movements along the supply curve are changes in
quantity supplied.
LO: 3-2
3-8
Supply Curve
P
6
S
P
$5
LO: 3-2
Qs
60
4
50
3
35
2
20
1
5
Price (per latte)
5
4
3
2
1
0
10
20
30
40
50
60
70
Q
Quantity Supplied (lattes per month)
3-9
Market Supply
 Market supply is derived from individual supply by
“horizontally adding” the supply curves of the
individual producers.
 Market supply is determined by:






Resource prices
Technology
Taxes and subsidies
Prices of other goods
Expected price
The number of sellers in the market
LO: 3-2
3-10
Market Equilibrium
 In a competitive market neither buyers nor sellers
can set the price.
 Intersection of demand and supply curves determine
equilibrium price and equilibrium quantity.
Equilibrium price in the
competitive market is the
price at which quantity
supplied is equal to quantity
demanded.
Equilibrium quantity is the
quantity demanded and
quantity supplied that occur
at equilibrium price in the
competitive market
LO: 3-3
3-11
Market Supply
 Any price above the equilibrium price would create a
surplus, or excess supply.
 Surpluses drive prices down to equilibrium: as prices fall, the
incentive to produce declines and the incentive for consumers to
buy increases.
 Any price below the equilibrium price would create a
shortage, or excess demand.
 Shortages push prices up to equilibrium: as prices rise, the
incentive to produce increases and the incentive for consumers
to buy decreases.
Excess supply is a situation when Excess demand is a situation
quantity supplied exceeds quantity when quantity demanded exceeds
demanded.
quantity supplied.
LO: 3-3
3-12
Government-Set Prices
 Government occasionally concludes that market prices
are unfairly high to buyers or unfairly low to sellers.
 Government may then place legal limits on how high or
low a price or prices may go, creating price ceilings or
price floors.
 Price ceiling limits price increase and thus creates a
shortage of the product.
 Price floor limits price decrease and thus creates surplus
of the product.
 Government-controlled prices distort resource
allocations and cause negative side effects.
LO: 3-5
3-13
Market Equilibrium
Market
demand
6,000 Cups
Surplus
Qd
$5
2,000
4
4,000
3
7,000
2
11,000
1 16,000
Price (per latte)
5
P
S
$4 Price Floor
4
3
$2 Price Ceiling
2
7,000 Cups
Shortage
1
0
LO: 3-3
Market
supply
6
2
4
6 7 8
10
P
Qs
$5
12,000
4
10,000
3
7,000
2
4,000
1
1,000
D
12
14
16
18
Cups of latte (thousands per month)
3-14
Changes in Demand,
Supply, and Equilibrium
 Changes in demand when supply is constant:
 An increase in demand will result in a higher
equilibrium price and quantity;
 A decline in demand will result in a lower
equilibrium price and quantity.
 Changes in supply when demand is constant:
 An increase in supply will result in a lower
equilibrium price and higher equilibrium quantity;
 A decline in supply will result in a higher
equilibrium price and lower equilibrium quantity.
LO: 3-4
3-15
When Demand and Supply
Both Change
Price
 Supply increase;
Demand decrease
 Supply decrease;
Demand increase
 Supply increase;
Demand increase
 Supply decrease;
Demand decrease
Quantity
?
?
?
?
LO: 3-4
3-16