Demand, Supply, and Equilibrium

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

2. The Relationship Between Demand and Total/Marginal Utility • Total Utility • Marginal Utility • The Law of Diminishing Marginal Utility

3. Demand • Amounts of a product consumers are willing and able to buy • Law of Demand = inverse or negative relationship between price and quantity demanded D Price D Quantity

4. Law of Demand • Why? • Price is an obstacle to buying • Diminishing marginal utility

5. Determinants of Demand • Consumer tastes/preferences • # of buyers in the market • Consumers’ incomes • Income Effect • Prices of related goods • Substitute goods • Substitution Effect • Complementary goods • Consumer expectations

6. Supply • Amounts of a product that producers are willing and able to make available for sale • Law of Supply = positive relationship between price and quantity supplied S Price S Quantity

7. Law of Supply • Why? • Price = incentive to sell more product • Increases in marginal cost

8. Determinants of Supply • Resource prices • Technology • Taxes and subsidies • Prices of other goods • Substitution in production • Producer expectations • # of sellers in the market

9. Market Equilibrium • Equilibrium price = “market clearing price” • Equilibrium price (Po) = • A. Productive Efficiency • B. Allocative Efficiency • Market ensures MB ≥ MC • Any price above equilibrium = surplus • Any price below equilibrium = shortage

10. Producer and Consumer Surplus • Consumer Surplus = the sum of the products of the prices and quantities consumers would have been willing to buy ABOVE the equilibrium price • Producer Surplus = the sum of the products of the prices and quantities suppliers would have been willing to sell BELOW the equilibrium price

11. Producer and Consumer Surplus

12. Price Ceilings • Gov’t sets a maximum price sellers may charge consumers • EX: rent controls, usury laws D S Shortage Po Price Pc S D Qs Qo Qd Quantity

13. Price Floors • Gov’t sets a minimum price buyers may pay sellers • EX: crop price supports, minimum wages Surplus D S Pf Po Price S D Qd Qo Qs Quantity

14. Deadweight Loss • A.K.A “allocative inefficiency” • A loss of economic efficiency that can occur when equilibrium for a good or service is not achieved.

15. Consumer and Producer Surplus w/Deadweight Loss • Consumer and Producer Surplus

16. Differences in Qd/Qs and Changes in Demand/Supply • A change in QUANTITY demanded or supply is a MOVEMENT ALONG the demand or supply curve (a move from one point on the curve to another). Almost always caused by a change in price. • A CHANGE in demand or supply is a shift of the ENTIRE demand or supply curve.

17. Fictional Product: Greebies

18. Changes in Supply/Demand/Equilibrium • ∆’s in Demand • Raises or reduces both equilibrium price (Price) and equilibrium quantity (Qty) • ∆’s in Supply • Increase in S = lower Price, higher Qty • Decrease in S = higher Price, lower Qty

19. Graph Shift

20. Changes in Supply/Demand/Equilibrium • S increases, D decreases • Qtydepends on relative increase in S vs. D • S decreases, D increases • Qtydepends on relative increase in S vs. D • S decreases, D decreases • If decrease in S > decrease in D = Price will increase, Qtywill decrease • If decrease in S < decrease in D = Price will decrease, Qty will decrease

21. Changes in Supply/Demand/Equilibrium • S increases, D increases • If increase in S > increase in D = Price will decrease Qty will increase • If increase in S < increase in D = Price will increase, Qty will increase

22. Graph Shift

23. Changes in Demand/Supply/Equilibrium • If increase in S EQUALs the increase in D then Price will stay the same. • If decrease in S EQUALs the decrease in D then Price will stay the same

24. Wrap it up! • Supply and Demand Conclusion

25. Closure: Exit Ticket Activity • Answer question on Socrative