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SAYRE | MORRIS
Seventh Edition
CHAPTER 3
Demand and Supply:
an Elaboration
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3-1
Determinants of
Supply and Demand
Determinants of Demand
Determinants of Supply
Consumer preferences
Prices of productive resources
Consumer incomes
Business taxes
Prices of related products
Technology
Expectations of future prices,
incomes, or availability
Population: its size, income
distribution, and age
Distribution
Prices of substitutes in production
LO1
Future expectations of suppliers
Number of suppliers
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Simultaneous Changes in
Supply and Demand
LO1
• Increase in both demand and supply leads to an increase in
equilibrium quantity; price may rise or fall
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LO2
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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LO3
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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LO3
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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LO3
Price Ceiling
•
Price ceilings cause shortages
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LO3
Allocating Shortages
•
•
•
•
The market (supply and demand)
First come, first served
Producers’ preferences
Rationing
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LO4
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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LO4
Price Floor
•
Price floors cause surpluses
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LO4
Price Floor
•
Minimum wage laws can cause unemployment
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LO4
Dealing with Surpluses
•
•
•
•
•
Store it
Convert it
Sell it abroad at a reduced price (dump)
Donate it
Destroy it
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LO3
Quota
•
A quota, or restricting output, can raise price
without causing a surplus
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LO5
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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LO5
Upward Sloping Demand Curve
• Upward sloping demand curves may be true for some
individuals over a limited range of prices
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LO5
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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