Demand, Supply, and Equilibrium Microeconomics – Unit 2: Nature and Function of Product Markets

DEMAND

The Relationship Between Demand and Total/Marginal Utility What is “Total Utility” What is “Marginal Utility” What is the “The Law of Diminishing

Marginal Utility”

Demand

Quantities of a product consumers are willing and able to buy at specific prices

Law of Demand = inverse or negative relationship between price and quantity demanded

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Quantity

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Discussion Question

With a partner discuss the following:

How are the Law of Diminishing Marginal Utility and the Law of Demand related?

Law of Demand

Why is the Demand Curve downward sloping? ◦ Price is an obstacle to buying ◦ Diminishing marginal utility Consumers need incentives to consume

more What is the incentive in the case of the

demand curve?

Discussion Question With a partner discuss the following

question: What do you think is the difference in the meanings/definitions of: Quantity Demanded And Demand

Demand vs. Quantity Demanded

Quantity Demanded = the quantity of product consumers are willing and able to buy at a specific price

Demand = every combination of prices

and quantities consumers are willing and able to buy (I.E. THE DEMAND CURVE)

Demand Curve

DEMAND

QUANTITY DEMANDED

Price

Quantity

Changes to Quantity Demanded

The ONLY thing that causes changes to Quantity Demanded is PRICE

With a partner discuss the following question:

What are the causes of changes to DEMAND? Or, what causes the Demand Curve to shift?

Determinants of Demand

Consumer tastes/preferences ◦ EX: Demand for bananas would increase if bananas were found to treat headaches

# of buyers in the market ◦ EX: Demand for US made cars would increase if a natural disaster destroyed car factories in Japan

Determinants of Demand

Prices of related goods ◦ Substitute goods EX: Demand for Coke would increase

if the price of Pepsi went up

◦Complementary goods EX: Demand for jelly would decrease if

the price of peanut butter went up

Determinants of Demand

Consumers’ incomes ◦ EX: Demand for luxury cars would

increase if the average income of an American worker went up significantly

Consumer expectations ◦ EX: Demand for iPhone 5C’s would

increase if consumers expected the price of 5C’s was going to go up next month

Changes to Demand (Shift of the Demand Curve)

Determinants of Demand

With your partner, redraw the demand curves on your note pages based on your understanding of “Changes to Demand”

SUPPLY

Supply

Quantity of a product that producers are willing and able to make available for sale at a specific price

Law of Supply = positive relationship between price and quantity supplied

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Quantity

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S

Law of Supply

Why is the Supply Curve upward sloping? ◦ Price is an incentive to sell more product ◦ Increase in Quantity = Increases in marginal

cost (cost of supplying ONE more product)

Discussion Question With a partner discuss the following

question: What do you think is the difference in the meanings/definitions of: Quantity Supplied And Supply

Supply vs. Quantity Supplied

Quantity Supplied = the quantity of product suppliers are willing and able to sell at a specific price

Supply = every combination of prices and

quantities suppliers are willing and able to sell (I.E. THE SUPPLY CURVE)

Supply Curve

SUPPLY

QUANTITY SUPPLIED

Price

Quantity

Changes to Quantity Supplied

The ONLY thing that causes changes to Quantity Supplied is PRICE

With a partner discuss the following question:

What are the causes of changes to SUPPLY? Or, what causes the Supply Curve to shift?

Determinants of Supply Resource prices ◦ Prices of inputs (factors of production!) ???, ???, and ??? ◦ EX: The minimum wage increases which

decreases supply (increase in labor costs = less resources to produce)

Technology ◦ Technology which improves efficiency will

increase supply EX: Installing robots in factories increases the

number of cars produced

Determinants of Supply Taxes and subsidies ◦ Taxes – decrease supply ◦ Subsidies – increase supply

Producer expectations ◦ EX: If Apple thinks the price of cell phones will go

down next year, they will produce/supply more now

# of sellers in the market ◦ EX: If bananas are found to cure headaches, apple

growers will switch to growing bananas, thus increasing supply

Changes in Supply

Determinants of Supply

With your partner, redraw the supply curves on your note pages based on your understanding of “Changes to Supply”

MARKET EQUILIBRIUM

Market Equilibrium

Equilibrium price = “market clearing price” ◦Or the price at which buyers and sellers

agree

Equilibrium quantity = “market clearing quantity” ◦Or the quantity at which buyers and

sellers agree

Market Equilibrium

Market equilibrium ensures ◦MB ≥ MC for each consumer or supplier willing and able to buy or sell at the market price

Discussion Question

What happens to the market equilibrium price and/or quantity if there is a change in the demand or supply curve?

Equilibrium and Changes to Supply and/or Demand When there are changes to either

the demand curve or supply curve or both: ◦ Changes in the market equilibrium price

can occur ◦ Changes in the market equilibrium

quantity can occur ◦ Changes to BOTH market equilibrium

price AND quantity can occur

Discussion Question

Draw a market graph which includes a demand and a supply curve.

Indicate market equilibrium price and quantity

Show a change to demand Show a change in supply Indicate the new market equilibrium price

and quantity

Equilibrium and Changes to Supply and/or Demand

Equilibrium and Changes to Supply and/or Demand

Graph Shift

Market Prices

Market Prices Ensure: ◦ Information is shared among all

consumers and suppliers Key aspect of decision making ◦ Resources are allocated/distributed

efficiently To those consumers who value them the

most To those goods and services valued the

most

Market Prices

Market Prices Ensure: ◦There are incentives to work and produce Higher prices are an incentive for

producers to produce more Higher wages (a price of labor) are an

incentive for workers to seek work or to seek higher paying jobs

Discussion Question

What if the market price is too high? Or too low? What do you think will occur in these instances?

Market Price Failures Prices are too low, shortages result ◦ Higher quantity demanded (“excess demand”)

due to lower price ◦ Less quantity supplied due to lower price

Prices are too high, surpluses result ◦ Higher quantity supplied (“excess supply”) due to

higher price ◦ Less quantity demanded due to higher price

Market price failures occur only in the short term as the market will correct to the proper equilibrium price over time

When do governments intervene in the markets? Price controls ◦ Gov’ts believe or are convinced that

allowing markets to coordinate trade will result in unfairly high prices for consumers or unfairly low prices for producers ◦ Two types of price controls: Price ceilings Price floors

Discussion Question

Can you come up with an example of a price ceiling? A price floor?

Price Ceilings

Gov’t sets a maximum price sellers may charge consumers

EX: rent controls, usury laws

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SHORTAGE = EXCESS DEMAND

Price Floors

Gov’t sets a minimum price buyers may pay sellers

EX: crop price supports, minimum wages

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SURPLUS = EXCESS SUPPLY