Lecture 2: Demand, Supply, and Market Equilibrium PDF

C H AP TE 3 R Lecture 2 Demand, Supply, and Market Equilibrium Prepared by: Fernando Quijano and Yvonn Quijano © 2004 Prentice Hall Business Publis...

C H AP TE 3 R Lecture 2 Demand, Supply, and Market Equilibrium Prepared by: Fernando Quijano and Yvonn Quijano © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair  C H A P Supply in Product/Output Markets T E R 3: D em an Supply decisions depend d, Su on profit potential. ppl y, an Profit is the difference M d between revenues and ark costs. et Eq uil ibr iu m © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A P Supply in Product/Output Markets T E R 3: D em CLARENCE BROWN'S Quantity supplied an SUPPLY SCHEDULE represents the number of d, FOR SOYBEANS Su units of a product that a QUANTITY ppl y, SUPPLIED firm would be willing and an PRICE (THOUSANDS able to offer for sale at a d (PER OF BUSHELS M BUSHEL) PER YEAR) particular price during a ark $ 2 0 given time period. et 1.75 10 Eq 2.25 20 uil 3.00 30 A supply schedule is a ibr iu 4.00 45 table showing how much 5.00 45 m of a product firms will supply at different prices. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A Price and Quantity Supplied: The Law of Supply P T E R 3: D A supply curve is a graph illustrating how much of a em product a firm will supply per period of time at different an d, prices. Su ppl y, 6 Price of soybeans per bushel ($) CLARENCE BROWN'S an SUPPLY SCHEDULE 5 d FOR SOYBEANS M QUANTITY 4 ark SUPPLIED et PRICE (THOUSANDS 3 Eq (PER OF BUSHELS uil BUSHEL) PER YEAR) 2 ibr $ 2 0 1 iu 1.75 10 m 2.25 20 0 3.00 30 4.00 45 0 10 20 30 40 50 5.00 45 Thousands of bushels of soybeans produced per year © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A Price and Quantity Supplied: The Law of Supply P T E R 3: D 6 The law of supply Price of soybeans per bushel ($) em an d, 5 states that there is a Su ppl 4 positive relationship y, an 3 between price and 2 d quantity of a good M 1 ark supplied. et 0 0 10 20 30 40 Eq uil Thousands of bushels of soybeans 50 This means that ibr iu produced per year supply curves typically m have a positive slope. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A P Other Determinants of Supply T E R 3: D em The price of the good or service. an d, Su The cost of producing the good, ppl y, which in turn depends on: an d The price of required inputs M ark (labor, capital, and land), et Eq The technologies that can be uil ibr used to produce the product, iu m The prices of related products. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A Shift of Supply Versus Movement Along a Supply Curve P T E R 3: D em A higher price causes higher an quantity supplied, and a d, move along the supluy Su curve. ppl y, an d M A change in determinants of ark supply other than price causes an et Eq increase in supply, or a shift of uil the entire supply curve, from SA to ibr SB. iu m © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A Shift of Supply Curve for Soybeans P T Following Development of a New Seed Strain E R 3: D em In this example, since the an factor affecting supply is not d, Su the price of soybeans but a ppl technological change in y, an soybean production, there is d M a shift of the supply curve ark rather than a movement et Eq along the supply curve. uil ibr iu m The technological advance means that more output can be supplied for at any given price level. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A Shift of Supply Versus Movement Along a Supply Curve P T E R 3: D To summarize: em an Change in price of a good or service d, Su leads to ppl y, an Change in quantity supplied M d (Movement along the curve). ark et Change in costs, input prices, technology, or prices of Eq uil related goods and services ibr leads to iu m Change in supply (Shift of curve). © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A From Individual Supply to Market Supply P T E R 3: D em The supply of a good or service can an d, be defined for an individual firm, or Su ppl for a group of firms that make up a y, an market or an industry. d M Market supply is the sum of all the ark et quantities of a good or service Eq uil supplied per period by all the firms ibr iu selling in the market for that good or m service. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A From Individual Supply to Market Supply P T E R 3: D em As with market demand, market an d, supply is the horizontal summation Su ppl of individual firms’ supply curves. y, an d M ark et Eq uil ibr iu m © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A P Market Equilibrium T E R 3: D em an Market equilibrium is d, Su the condition that exists ppl y, when quantity supplied an and quantity demanded d M are equal. ark et Eq At equilibrium, there is no uil ibr tendency for the market iu m price to change. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A P Market Equilibrium T E R 3: D em Only in equilibrium is an d, quantity supplied Su ppl equal to quantity y, demanded. an d M At any price level ark et other than P0, such Eq uil as P1, quantity ibr iu supplied does not m equal quantity demanded. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A P Excess Demand T E R 3: D em Excess demand, or an shortage, is the condition d, Su that exists when quantity ppl demanded exceeds y, an quantity supplied at the d M current price. ark et When quantity demanded Eq uil exceeds quantity supplied, ibr price tends to rise until iu m equilibrium is restored. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A P Excess Supply T E R 3: D em Excess supply, or surplus, an is the condition that exists d, Su when quantity supplied ppl exceeds quantity demanded y, an at the current price. d M ark When quantity supplied et exceeds quantity demanded, Eq uil price tends to fall until ibr iu equilibrium is restored. m © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A P Changes in Equilibrium T E R 3: D em an d, Su ppl y, an d M ark et Eq uil ibr iu m Higher demand leads to Higher supply leads to higher equilibrium price and lower equilibrium price and higher equilibrium quantity. higher equilibrium quantity. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A P Changes in Equilibrium T E R 3: D em an d, Su ppl y, an d M ark et Eq uil ibr iu m Lower demand leads to Lower supply leads to lower price and lower higher price and lower quantity exchanged. quantity exchanged. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A P Relative Magnitudes of Change T E R 3: D em an d, Su ppl y, an d M ark et Eq uil ibr iu m The relative magnitudes of change in supply and demand determine the outcome of market equilibrium. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A P Relative Magnitudes of Change T E R 3: D em an d, Su ppl y, an d M ark et Eq uil ibr iu m When supply and demand both increase, quantity will increase, but price may go up or down. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A P Review Terms and Concepts T E R 3: D capital market income perfect substitutes em an complements, inferior goods product or output markets d, complementary goods Su input or factor markets profit ppl demand curve labor market quantity demanded y, an demand schedule land market quantity supplied d entrepreneur M law of demand shift of a demand curve ark equilibrium et law of supply substitutes Eq excess demand or shortage uil market demand supply curve ibr excess supply or surplus market supply supply schedule iu factors of production m movement along a wealth or net worth firm demand curve households normal goods © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A P T E R 3: D em canceled slides an d, Su ppl y, an d M ark et Eq uil ibr iu m © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48  C H A P T E R 3: D em an d, Thank you all. Su ppl y, an d M ark et Eq uil ibr iu m © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 0 of 48