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Chapter 4Demand, Supply, and Equilibrium

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Chapter Outline

4.1 Markets4.2 How Do Buyers Behave?4.3 How Do Sellers Behave?4.4 Supply and Demand in Equilibrium4.5 What Would Happen if the Government Tried to Dictate the Price of Gasoline?

4 Demand, Supply, and Equilibrium

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Key Ideas

1. In a perfectly competitive market, (1) sellers all sell an identical good or service, and (2) any individual buyer or any individual seller isn’t powerful enough on his or her own to affect the market price of that good or service.

2. The demand curve plots the relationship between the market price and the quantity of a good demanded by buyers.

4 Demand, Supply, and Equilibrium

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Key Ideas

3. The supply curve plots the relationship between the market price and the quantity of a good supplied by sellers.

4. The competitive equilibrium price equates the quantity demanded and the quantity supplied.

4 Demand, Supply, and Equilibrium

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Key Ideas

5. When prices are not free to fluctuate, markets fail to equate quantity demanded and quantity supplied.

4 Demand, Supply, and Equilibrium

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Evidence-Based Economics Example:

4 Demand, Supply, and Equilibrium

How much more gasoline would people buy if its price were lower?

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Why do brown eggs cost more than white eggs?

4 Demand, Supply, and Equilibrium

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4.1 Markets

The market price is the price at which buyers and sellers conduct transactions.

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4.1 MarketsCompetitive Markets

In a perfectly competitive market every buyer pays and every seller charges the same market price, no buyer or seller is big enough to influence that market price, and all sellers sell an identical good or service.

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4.2 How Do Buyers Behave?

How much would you be willing to pay for an “A” in this course?

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4.2 How Do Buyers Behave?

Quantity Demanded The amount of a good that buyers are willing to purchase at a given price.

Demand ScheduleA table that reports the quantity demanded at different prices, holding all else equal.

Demand CurvePlots the quantity demanded at different prices.

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How much are you willing to pay for an “A”?

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21$15.00

$35.00

$55.00

$75.00

$95.00

$115.00

$135.00

$155.00

Demand Curve for an "A"

Quantity of an "A"

Price

Demand Schedule

PriceQuantity Demanded

$20 20

$30 16

$50 12

$100 7

$150 2

4.2 How Do Buyers Behave?

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4.2 How Do Buyers Behave?Willingness to Pay

Why are some students willing to pay more for an

“A” than others? That is, why isn’t the price the

same for everyone?

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4.2 How Do Buyers Behave?From Individual Demand Curves to Aggregated Demand Curves

Market Demand Curve The sum of the individual demand curves of all

the potential buyers. The market demand curve plots the relationship between the total quantity demanded and the market price, holding all else equal.

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4.2 How Do Buyers Behave?From Individual Demand Curves to Aggregated Demand Curves

Market Demand for an “A”

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Remember your willingness to pay for an “A”?

What if you had copies of each one of the tests?

Would you be willing to pay more or less than before?

4.2 How Do Buyers Behave?Shifting the Demand Curve

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4.2 How Do Buyers Behave?Shifting the Demand Curve

Shifts of the Demand Curveoccur when one of the following changes:

1. tastes and preferences2. income and wealth3. availability and prices of related goods4. number and scale of buyers5. buyers’ expectations about the future

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1 2 3 4 5 6 7 8 9 101112131415161718192021$15.00

$35.00

$55.00

$75.00

$95.00

$115.00

$135.00

$155.00

Demand Curve for an "A"

Quantity of an "A"

Price

Demand Schedule

Price Quantity Demanded

$20 20

$30 16

$50 12

$100 7

$150 2

0 5 10 15 20$15.00

$35.00

$55.00

$75.00

$95.00

$115.00

$135.00

$155.00 Demand for an "A" Demand Schedule

Price Quantity Demanded

$20 10

$30 8

$50 5

$100 2

$150 0

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4.2 How Do Buyers Behave?Shifting the Demand Curve

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4.2 How Do Buyers Behave?Shifting the Demand Curve

Exhibit 4.4 Shifts of the Demand Curve vs. Movement Along the Demand Curve

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4.2 How Do Buyers Behave?Shifting the Demand Curve

Exhibit 4.3 Market Demand Curve for Oil

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4 What Would Happen If the Government Tried to Dictate the Price of Gasoline

Evidence-Based Economics Example:

How much more gasoline would people buy if its price were lower?

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4 What Would Happen If the Government Tried to Dictate the Price of Gasoline

Exhibit 4.5 The Quantity of Gasoline Demanded (per person) and the Price of Gasoline in Brazil, Mexico, and Venezuela

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4.3 How Do Sellers Behave?

How much would you have to be paid to take your clothes off in class?

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4.3 How Do Sellers Behave?

Quantity SuppliedThe amount of a good that sellers are willing to sell at a given price.

Supply ScheduleA table that reports the quantity supplied at

different prices.

Supply CurvePlots the quantity supplied at different prices.

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4.3 How Do Sellers Behave?

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4.3 How Do Sellers Behave?

Why are more of you willing to take off your clothes, the higher the price?

Why is the price not the same for everybody?

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4.3 How Do Sellers Behave?

Market Supply CurvePlots the relationship between the total quantity supplied and the market price, holding all else equal.

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4.3 How Do Sellers Behave?From the Individual Supply to the Market Supply Curve

Market Supply for Classroom Nudity

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4.3 How Do Sellers Behave?From the Individual Supply Curve to the Market Supply Curve

Remember what price you required to take off your clothes in class?

What if you were at a nudist beach?

Would you require more or less to take off your clothes at the beach?

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4.3 How Do Sellers Behave?Shifting the Supply Curve

Shifts of the Supply Curve

Occur when one of the following changes:

1. input prices 2. technology3. number and scale of sellers4. sellers’ expectations about the future

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4.3 How Do Sellers Behave?Shifting the Supply Curve

Shift of Supply Curve for Nudity

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4.3 How Do Sellers Behave?Shifting the Supply Curve

Exhibit 4.8 Market Supply Curve for Oil

4.3 How Do Sellers Behave?Shifting Supply Curve

Exhibit 4.7 Aggregation of Supply Schedules and Supply Curves

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4.4 Supply and Demand in Equilibrium

Competitive EquilibriumThe point at which the market comes to an agreement about what the price will be (competitive equilibrium price) and how much will be exchanged (competitive equilibrium

quantity) at that price.

Excess DemandOccurs when consumers want more than suppliers provide at a given price. This situation results in a shortage.

Excess SupplyOccurs when suppliers provide more than consumers want at a given price. This situation results in a surplus.

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4.4 Supply and Demand in Equilibrium

Exhibit 4.10 Demand Curve and Supply Curve for Oil

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4.4 Supply and Demand in Equilibrium

Exhibit 4.11 Excess Supply

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4.4 Supply and Demand in Equilibrium

Exhibit 4.12 Excess Demand

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It’s time to revisit the question:

Why do brown eggs cost more than white eggs?

4.4 Supply and Demand in EquilibriumCurve Shifting in Competitive Equilibrium

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4.4 Supply and Demand in EquilibriumCurve Shifting in Competitive Equilibrium

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4.4 Supply and Demand in EquilibriumCurve Shifting in Competitive Equilibrium

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4.4 Supply and Demand in EquilibriumCurve Shifting in Competitive Equilibrium

Ready for another one?

Why do the price of roses increase right before

Valentine’s Day?

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4.4 Supply and Demand in EquilibriumCurve Shifting in Competitive Equilibrium

Change in Demand for Roses

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4.4 Supply and Demand in EquilibriumCurve Shifting in Competitive Equilibrium

Then why doesn’t the price of beer increase right before Super Bowl Sunday?

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4.4 Supply and Demand in EquilibriumCurve Shifting in Competitive Equilibrium

Change in Markets for Roses and Beer

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4.4 Supply and Demand in EquilibriumCurve Shifting in Competitive Equilibrium

Both the Demand Curve and Supply Curve Shift Right

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4.4 Supply and Demand in EquilibriumCurve Shifting in Competitive Equilibrium

The Demand Curve Shifts Right and the Supply Curve Shifts Left

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4.4 Supply and Demand in EquilibriumCurve Shifting in Competitive Equilibrium

The Demand Curve Shifts Left and the Supply Curve Shifts Right

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4.4 Supply and Demand in EquilibriumCurve Shifting in Competitive Equilibrium

Both the Demand Curve and the Supply Curve Shift Left

4.4 Supply and Demand in EquilibriumCurve Shifting in Competitive Equilibrium

Effects of Shifts of Demand and SupplyChange in

SupplyChange in Demand

Incr. Demand

Decr. Demand

Incr. Supply Equil. P ?

Equil. Q

Equil. P

Equil. Q ?

Decr. Supply

Equil. P

Equil. Q ?

Equil. P ?

Equil. Q

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4.5 What Would Happen If the Government Tried to Dictate the Price of Gasoline?

Alternative Example: “One more question: Why is there a parking problem on campus?”

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4.5 What Would Happen If the Government Tried to Dictate the Price of Gasoline?