Chapter 3 Demand, supply, and the market David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith 3.2 Some key terms  Market – a set of arrangements by which buyers and sellers are in contact to exchange goods or services  Demand – the quantity of a good buyers wish to purchase at each conceivable price  Supply – the quantity of a good sellers wish to sell at each conceivable price  Equilibrium price – price at which quantity supplied = quantity demanded 3.3 The Demand curve shows the relation between price and quantity demanded holding other things constant  “Other things” include: – the price of related goods – consumer incomes – consumer preferences  Changes in these other things affect the position of the demand curve D Quantity Price 3.4 The Supply curve shows the relation between price and quantity supplied holding other things constant  “Other things” include: – technology – input costs – government regulations  Changes in these other things affect the position of the demand curve Quantity Price S 3.5 Market equilibrium  Market equilibrium is at E 0 where quantity demanded equals quantity supplied – with price P 0 and quantity Q 0 D 0 D 0 S S Q 0 P 0 E 0 P r i c e Quantity 3.6 Market equilibrium  If price were above P 0 there would be excess supply – producers wish to supply more than consumers wish to demand D 0 D 0 S S Q 0 P 0 E 0 P r i c e Quantity 3.7 A shift in demand D 0 D 0 S S Q 0 P 0 E 0 P r i c e Quantity If the price of a substitute good increases more will be demanded at each price D 1 D 1 The demand curve shifts from D 0 D 0 to D 1 D 1. E 1 Q 1 P 1 The market moves to a new equilibrium at E 1 . 3.8 A shift in supply D D Q 0 P 0 E 0 P r i c e Quantity Suppose safety regulations are tightened, increasing producers’ costs S 0 S 0 S 1 S 1 The supply curve shifts to S 1 S 1 If price stayed at P 0 there would be excess demand Q 1 P 1 E 2 So the market moves to a new equilibrium at E 2 . 3.9 Two ways in which demand may increase  (1) A movement along the demand curve from A to B  represents consumer reaction to a price change  this could follow a supply shift A B P 0 P 1 Q 0 Q 1 Quantity P r i c e D 3.10 Two ways in which demand may increase  (2) A movement of the demand curve from D 0 to D 1  leads to an increase in demand at each price  e.g. at P 0 quantity demanded increases from Q 0 to Q 1 A B P 0 Q 0 Q 1 C D 0 D 1 Quantity P r i c e [...]... may try to protect the poor, setting a price ceiling at P1 S P2 E P0 P1 A B D S Q1 Q0 Quantity which is below P0, the equilibrium price level RATIONING is needed to cope with the resulting excess demand 3. 11 What, How and For Whom The market: – decides how much of a good should be produced by finding the price at which the quantity demanded equals the quantity supplied – tells us for whom the goods are... consumers willing to pay the equilibrium price – determines what goods are being produced there may be goods for which no consumer is prepared to pay a price at which firms would be willing to supply 3. 12 . Chapter 3 Demand, supply, and the market David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith 3. 2 Some key. conceivable price  Equilibrium price – price at which quantity supplied = quantity demanded 3. 3 The Demand curve shows the relation between price and quantity demanded holding other things. curve Quantity Price S 3. 5 Market equilibrium  Market equilibrium is at E 0 where quantity demanded equals quantity supplied – with price P 0 and quantity Q 0 D 0 D 0 S S Q 0 P 0 E 0 P r i c e Quantity 3. 6 Market