Demand, Supply, and EquilibriumMicroeconomics – Unit 2: Nature and Function of Product Markets
The Relationship Between Demand and Total/Marginal Utility Total Utility Marginal Utility The Law of Diminishing Marginal Utility
Demand
Amounts of a product consumers are willing and able to buy
Law of Demand = inverse or negative relationship between price and quantity demanded
Pric
e
Quantity
D
D
Law of Demand
Why?◦ Price is an obstacle to buying◦ Diminishing marginal utility
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
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
Pric
e
Quantity
S
S
Law of Supply
Why?◦ Price = incentive to sell more product◦ Increases in marginal cost
Determinants of Supply
Resource prices Technology Taxes and subsidies Prices of other goods◦ Substitution in production
Producer expectations # of sellers in the market
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
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
Producer and Consumer Surplus
Calculating Producer and Consumer Surplus Calculating Producer and Consumer
Surplus
Price Ceilings
Gov’t sets a maximum price sellers may charge consumers
EX: rent controls, usury lawsPr
ice
Quantity
S
SD
D
Po
Pc
QoQs Qd
Shortage
Price Floors
Gov’t sets a minimum price buyers may pay sellers
EX: crop price supports, minimum wagesPr
ice
Quantity
S
SD
D
Po
Pf
QoQd Qs
Surplus
Maximum and Minimum Price Controls Complete the Worksheet on Maximum
and Minimum Price Controls
Equilibrium Price and Quantity
Complete the Worksheet on Equilibrium Price and Quantity
Greebies
Changes in Supply/Demand/Equilibrium ∆’s in Demand◦ Raises or reduces both equilibrium price (Po)
and equilibrium quantity (Qo) ∆’s in Supply◦ Increase in S = lower Po, higher Qo
◦ Decrease in S = higher Po, lower Qo
Graph Shift
Changes in Supply/Demand/Equilibrium S increases, D decreases◦ Qo depends on relative increase in S vs. D
S decreases, D increases◦ Qo depends on relative increase in S vs. D
S decreases, D decreases◦ If decrease in S > decrease in D = Po will
increase, Qo will decrease◦ If decrease in S < decrease in D = Po will
decrease, Qo will decrease
Changes in Supply/Demand/Equilibrium S increases, D increases◦ If increase in S > increase in D = Po will
decrease Qo will increase◦ If increase in S < increase in D = Po will
increase, Qo will increase
Graph Shift
Changes in Demand/Supply/Equilibrium If increase in S EQUALs the increase in D
then Po will stay the same. If decrease in S EQUALs the decrease in
D then Po will stay the same
Closure: Exit Ticket Activity
Download/access Socrative App Enter class K4AJ490T Answer question on Socrative App
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