The Market Forces of
Supply and Demand
Chapter 4
Copyright ? 2001 by Harcourt,Inc.
All rights reserved,Requests for permission to make copies of any part of the
work should be mailed to:
Permissions Department,Harcourt College Publishers,
6277 Sea Harbor Drive,Orlando,Florida 32887-6777.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Market Forces of
Supply and Demand
?Supply and demand are the two words
that economists use most often.
?Supply and demand are the forces that
make market economies work.
?Modern microeconomics is about
supply,demand,and market
equilibrium.
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Markets
?A market is a group of buyers and
sellers of a particular good or service,
?The terms supply and demand refer
to the behavior of people,,, as they
interact with one another in markets,
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Markets
? Buyers determine demand.
? Sellers determine supply.
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Market Type,
A Competitive Market
A competitive market is a market.,,
? with many buyers and sellers.
? that is not controlled by any one person.
? in which a narrow range of prices are
established that buyers and sellers act upon.
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Competition,
Perfect and Otherwise
?Products are the same
?Numerous buyers and sellers so that each
has no influence over price
?Buyers and Sellers are price takers
Perfect Competition
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Competition,
Perfect and Otherwise
?Monopoly
?One seller,and seller controls price
?Oligopoly
?Few sellers
?Not always aggressive competition
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Competition,
Perfect and Otherwise
?Monopolistic Competition
?Many sellers
?Slightly differentiated products
?Each seller may set price for its own
product
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Demand
Quantity demanded
is the amount
of a good that buyers are
willing and able
to purchase.
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Law of Demand
The law of demand states
that there is an inverse
relationship between price
and quantity demanded.
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Demand Schedule
The demand schedule is a table
that shows the relationship
between the price of the good
and the quantity demanded.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Demand Schedule
P rice Qu a n tity
$0,00 12
0,50 10
1,00 8
1,50 6
2,00 4
2,50 2
3,00 0
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Determinants of Demand
?Market price
?Consumer income
?Prices of related goods
?Tastes
?Expectations
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Demand Curve
The demand curve is the downward-
sloping line relating price to quantity
demanded,
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Demand Curve
$3.00
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
P rice Qu a n tity
$0,00 12
0,50 10
1,00 8
1,50 6
2,00 4
2,50 2
3,00 0
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Ceteris Paribus
Ceteris paribus is a Latin phrase that
means all variables other than the
ones being studied are assumed to be
constant,Literally,ceteris paribus
means,other things being equal.”
The demand curve slopes downward
because,ceteris paribus,lower prices
imply a greater quantity demanded!
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Market Demand
?Market demand refers to the sum of
all individual demands for a
particular good or service.
?Graphically,individual demand
curves are summed horizontally to
obtain the market demand curve.
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Determinants of Demand
?Market price
?Consumer income
?Prices of related goods
?Tastes
?Expectations
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Change in Quantity Demanded
versus Change in Demand
Change in Quantity Demanded
?Movement along the demand curve.
?Caused by a change in the price of
the product.
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Changes in Quantity
Demanded
0
D1
Price of
Cigarettes
per Pack
Number of Cigarettes
Smoked per Day
A tax that raises the
price of cigarettes
results in a movement
along the demand
curve.
A
C
20
2.00
$4.00
12
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Change in Quantity Demanded
versus Change in Demand
Change in Demand
?A shift in the demand curve,either
to the left or right.
?Caused by a change in a
determinant other than the price.
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Changes in Demand
0
D1
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
D3
D2
Increase in
demand
Decrease in
demand
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Consumer Income
?As income increases the demand
for a normal good will increase.
?As income increases the demand
for an inferior good will decrease.
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Consumer Income
Normal Good
$3.00
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
Increase
in demand
An increase
in income...
D1
D2
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Consumer Income
Inferior Good
$3.00
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
Decrease
in demand
An increase
in income...
D1D2
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Prices of Related Goods
Substitutes & Complements
?When a fall in the price of one good
reduces the demand for another good,
the two goods are called substitutes.
?When a fall in the price of one good
increases the demand for another
good,the two goods are called
complements.
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Change in Quantity Demanded
versus Change in Demand
Variables that
Affect Quantity
Demanded
A Change in
This Variable,,,
Price Represents a movement
along the demand curve
Income Shifts the demand curve
Prices of related
goods
Shifts the demand curve
Tastes Shifts the demand curve
Expectations Shifts the demand curve
Number of
buyers
Shifts the demand curve
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Supply
Quantity supplied is the amount of a
good that sellers are willing and able
to sell.
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Law of Supply
The law of supply states that there is a
direct (positive) relationship between
price and quantity supplied.
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Determinants of Supply
?Market price
?Input prices
?Technology
?Expectations
?Number of producers
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Supply Schedule
The supply schedule is a table that
shows the relationship between the
price of the good and the quantity
supplied,
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Supply Schedule
P rice Qua n tity
$0.00 0
0.50 0
1.00 1
1.50 2
2.00 3
2.50 4
3.00 5
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Supply Curve
The supply curve is the upward-
sloping line relating price to quantity
supplied.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Supply Curve
$3.00
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
P rice Qua n tity
$0.00 0
0.50 0
1.00 1
1.50 2
2.00 3
2.50 4
3.00 5
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Market Supply
?Market supply refers to the sum of
all individual supplies for all sellers
of a particular good or service.
?Graphically,individual supply
curves are summed horizontally to
obtain the market supply curve.
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Determinants of Supply
?Market price
?Input prices
?Technology
?Expectations
?Number of producers
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Change in Quantity Supplied
versus Change in Supply
Change in Quantity Supplied
?Movement along the supply curve.
?Caused by a change in the market price
of the product.
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Change in Quantity Supplied
1 5
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
S
1.00 A
C
$3.00 A rise in the price
of ice cream cones
results in a
movement along
the supply curve.
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Change in Quantity Supplied
versus Change in Supply
Change in Supply
?A shift in the supply curve,either to the
left or right.
?Caused by a change in a determinant
other than price.
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Change in Supply
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
S1 S
2
S3
Increase in
Supply
Decrease in
Supply
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Change in Quantity Supplied
versus Change in Supply
V a ria ble s that
Af f e c t Q ua nt ity S upplie d
A Cha nge i n This V a ria ble,,,
Price Re pre sen ts a move men t al on g
the sup pl y curve
Inp ut price s Sh ifts the sup pl y curve
T ech no lo gy Sh ifts the sup pl y curve
Expe ctation s Sh ifts the sup pl y curve
Nu mbe r of sel le rs Sh ifts the sup pl y curve
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Supply and Demand Together
Equilibrium Price
?The price that balances supply and
demand,On a graph,it is the price at
which the supply and demand curves
intersect.
Equilibrium Quantity
?The quantity that balances supply and
demand,On a graph it is the quantity at
which the supply and demand curves
intersect,
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Supply and Demand Together
Price Q uan ti ty
$0,00 0
0.50 0
1.00 1
1.50 4
2.00 7
2.50 10
3.00 13
Price Q ua ntity
$0,00 19
0.50 16
1.00 13
1.50 10
2.00 7
2.50 4
3.00 1
Demand Schedule Supply Schedule
At $2.00,the quantity demanded is
equal to the quantity supplied!
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Supply
Demand
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
Equilibrium of
Supply and Demand
21 3 4 5 6 7 8 9 10 12110
$3.00
2.50
2.00
1.50
1.00
0.50
Equilibrium
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
21 3 4 5 6 7 8 9 10 12110
$3.00
2.50
2.00
1.50
1.00
0.50
Supply
Demand
Surplus
Excess Supply
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Surplus
When the price is above the equilibrium
price,the quantity supplied exceeds the
quantity demanded,There is excess supply
or a surplus,Suppliers will lower the price
to increase sales,thereby moving toward
equilibrium.
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Excess Demand
Quantity of
Ice-Cream Cones
Price of
Ice-Cream
Cone
$2.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Supply
Demand
$1.50
Shortage
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Shortage
When the price is below the equilibrium
price,the quantity demanded exceeds the
quantity supplied,There is excess demand
or a shortage,Suppliers will raise the price
due to too many buyers chasing too few
goods,thereby moving toward equilibrium.
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Three Steps To Analyzing
Changes in Equilibrium
?Decide whether the event shifts the
supply or demand curve (or both).
?Decide whether the curve(s) shift(s) to the
left or to the right.
?Examine how the shift affects
equilibrium price and quantity.
How an Increase in Demand
Affects the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 7 Quantity of
Ice-Cream Cones
Supply
Initial
equilibrium
D1
1,Hot weather increases
the demand for ice cream...
D2
2.,..resulting
in a higher
price...
$2.50
103.,..and a higher
quantity sold.
New equilibrium
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Shifts in Curves versus
Movements along Curves
?A shift in the supply curve is called a change
in supply.
?A movement along a fixed supply curve is
called a change in quantity supplied.
?A shift in the demand curve is called a
change in demand.
?A movement along a fixed demand curve is
called a change in quantity demanded.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
S2
How a Decrease in Supply Affects
the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 1 2 3 4 7 8 9 11 12 Quantity of
Ice-Cream Cones
13
Demand
Initial equilibrium
S1
10
1,An earthquake reduces
the supply of ice cream...
New
equilibrium
2.,..resulting
in a higher
price...
$2.50
3.,..and a lower
quantity sold.
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What Happens to Price and Quantity
When Supply or Demand Shifts?
N o C ha ng e
In S up p l y
A n Inc re a s e
In S up p l y
A D e c re a s e
In S up p l y
N o C ha ng e
In D e m a nd
P sa m e
Q sam e
P do wn
Q u p
P u p
Q do wn
A n Inc re a s e
In D e m a nd
P u p
Q u p
P a m bi gu o u s
Q u p
P u p
Q a m bi gu o u s
A D e c re a s e
In D e m a nd
P do wn
Q do wn
P do wn
Q a m b i gu o u s
P a m bi gu o u s
Q do wn
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?Economists use the model of supply
and demand to analyze competitive
markets.
?The demand curve shows how the
quantity of a good depends upon the
price.
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Summary
?According to the law of demand,as
the price of a good rises,the quantity
demanded falls.
?In addition to price,other
determinants of quantity demanded
include income,tastes,expectations,
and the prices of complements and
substitutes.
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Summary
?The supply curve shows how the
quantity of a good supplied depends
upon the price.
?According to the law of supply,as
the price of a good rises,the quantity
supplied rises.
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Summary
?In addition to price,other
determinants of quantity supplied
include input prices,technology,and
expectations.
?Market equilibrium is determined
by the intersection of the supply and
demand curves.
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Summary
?Supply and demand together
determine the prices of the
economy’s goods and services.
?In market economies,prices are the
signals that guide the allocation of
resources.
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Graphical
Review
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How an Increase in Demand
Affects the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 7 10 Quantity of
Ice-Cream Cones
Supply
Initial
equilibrium
D1
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How an Increase in Demand
Affects the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 7 10 Quantity of
Ice-Cream Cones
Supply
Initial
equilibrium
D1
1,Hot weather increases
the demand for ice cream...
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How an Increase in Demand
Affects the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 7 10 Quantity of
Ice-Cream Cones
Supply
Initial
equilibrium
D1
1,Hot weather increases
the demand for ice cream...
D2
New equilibrium$2.50
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How an Increase in Demand
Affects the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 7 10 Quantity of
Ice-Cream Cones
Supply
Initial
equilibrium
D1
1,Hot weather increases
the demand for ice cream...
D2
New equilibrium
2.,..resulting
in a higher
price...
$2.50
How an Increase in Demand
Affects the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 7 10 Quantity of
Ice-Cream Cones
Supply
Initial
equilibrium
D1
1,Hot weather increases
the demand for ice cream...
D2
New equilibrium
2.,..resulting
in a higher
price...
$2.50
3.,..and a higher
quantity sold.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How an Increase in Demand
Affects the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 7 10 Quantity of
Ice-Cream Cones
Supply
Initial
equilibrium
D1
1,Hot weather increases
the demand for ice cream...
D2
New equilibrium
2.,..resulting
in a higher
price...
$2.50
3.,..and a higher
quantity sold.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How a Decrease in Supply Affects
the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 1 2 3 4 5 6 7 8 9 11 12 Quantity of
Ice-Cream Cones
13
Demand
Initial equilibrium
S1
10
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How a Decrease in Supply Affects
the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 1 2 3 4 5 6 7 8 9 11 12 Quantity of
Ice-Cream Cones
13
Demand
Initial equilibrium
S1
10
1,An earthquake reduces
the supply of ice cream...
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How a Decrease in Supply Affects
the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 1 2 3 4 5 6 7 8 9 11 12 Quantity of
Ice-Cream Cones
13
Demand
Initial equilibrium
S1
10
1,An earthquake reduces
the supply of ice cream...
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How a Decrease in Supply Affects
the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 1 2 3 4 5 6 7 8 9 11 12 Quantity of
Ice-Cream Cones
13
Demand
Initial equilibrium
S1
10
1,An earthquake reduces
the supply of ice cream...
New
equilibrium$2.50
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How a Decrease in Supply Affects
the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 1 2 3 4 5 6 7 8 9 11 12 Quantity of
Ice-Cream Cones
13
Demand
Initial equilibrium
S1
10
1,An earthquake reduces
the supply of ice cream...
New
equilibrium$2.50
2.,..resulting
in a higher
price...
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How a Decrease in Supply Affects
the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 1 2 3 4 7 8 9 11 12 Quantity of
Ice-Cream Cones
13
Demand
Initial equilibrium
S1
10
1,An earthquake reduces
the supply of ice cream...
New
equilibrium$2.50
2.,..resulting
in a higher
price...
3.,..and a lower
quantity sold.
Supply and Demand
Chapter 4
Copyright ? 2001 by Harcourt,Inc.
All rights reserved,Requests for permission to make copies of any part of the
work should be mailed to:
Permissions Department,Harcourt College Publishers,
6277 Sea Harbor Drive,Orlando,Florida 32887-6777.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Market Forces of
Supply and Demand
?Supply and demand are the two words
that economists use most often.
?Supply and demand are the forces that
make market economies work.
?Modern microeconomics is about
supply,demand,and market
equilibrium.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Markets
?A market is a group of buyers and
sellers of a particular good or service,
?The terms supply and demand refer
to the behavior of people,,, as they
interact with one another in markets,
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Markets
? Buyers determine demand.
? Sellers determine supply.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Market Type,
A Competitive Market
A competitive market is a market.,,
? with many buyers and sellers.
? that is not controlled by any one person.
? in which a narrow range of prices are
established that buyers and sellers act upon.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Competition,
Perfect and Otherwise
?Products are the same
?Numerous buyers and sellers so that each
has no influence over price
?Buyers and Sellers are price takers
Perfect Competition
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Competition,
Perfect and Otherwise
?Monopoly
?One seller,and seller controls price
?Oligopoly
?Few sellers
?Not always aggressive competition
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Competition,
Perfect and Otherwise
?Monopolistic Competition
?Many sellers
?Slightly differentiated products
?Each seller may set price for its own
product
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Demand
Quantity demanded
is the amount
of a good that buyers are
willing and able
to purchase.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Law of Demand
The law of demand states
that there is an inverse
relationship between price
and quantity demanded.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Demand Schedule
The demand schedule is a table
that shows the relationship
between the price of the good
and the quantity demanded.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Demand Schedule
P rice Qu a n tity
$0,00 12
0,50 10
1,00 8
1,50 6
2,00 4
2,50 2
3,00 0
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Determinants of Demand
?Market price
?Consumer income
?Prices of related goods
?Tastes
?Expectations
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Demand Curve
The demand curve is the downward-
sloping line relating price to quantity
demanded,
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Demand Curve
$3.00
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
P rice Qu a n tity
$0,00 12
0,50 10
1,00 8
1,50 6
2,00 4
2,50 2
3,00 0
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Ceteris Paribus
Ceteris paribus is a Latin phrase that
means all variables other than the
ones being studied are assumed to be
constant,Literally,ceteris paribus
means,other things being equal.”
The demand curve slopes downward
because,ceteris paribus,lower prices
imply a greater quantity demanded!
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Market Demand
?Market demand refers to the sum of
all individual demands for a
particular good or service.
?Graphically,individual demand
curves are summed horizontally to
obtain the market demand curve.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Determinants of Demand
?Market price
?Consumer income
?Prices of related goods
?Tastes
?Expectations
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Change in Quantity Demanded
versus Change in Demand
Change in Quantity Demanded
?Movement along the demand curve.
?Caused by a change in the price of
the product.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Changes in Quantity
Demanded
0
D1
Price of
Cigarettes
per Pack
Number of Cigarettes
Smoked per Day
A tax that raises the
price of cigarettes
results in a movement
along the demand
curve.
A
C
20
2.00
$4.00
12
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Change in Quantity Demanded
versus Change in Demand
Change in Demand
?A shift in the demand curve,either
to the left or right.
?Caused by a change in a
determinant other than the price.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Changes in Demand
0
D1
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
D3
D2
Increase in
demand
Decrease in
demand
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Consumer Income
?As income increases the demand
for a normal good will increase.
?As income increases the demand
for an inferior good will decrease.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Consumer Income
Normal Good
$3.00
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
Increase
in demand
An increase
in income...
D1
D2
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Consumer Income
Inferior Good
$3.00
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
Decrease
in demand
An increase
in income...
D1D2
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Prices of Related Goods
Substitutes & Complements
?When a fall in the price of one good
reduces the demand for another good,
the two goods are called substitutes.
?When a fall in the price of one good
increases the demand for another
good,the two goods are called
complements.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Change in Quantity Demanded
versus Change in Demand
Variables that
Affect Quantity
Demanded
A Change in
This Variable,,,
Price Represents a movement
along the demand curve
Income Shifts the demand curve
Prices of related
goods
Shifts the demand curve
Tastes Shifts the demand curve
Expectations Shifts the demand curve
Number of
buyers
Shifts the demand curve
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Supply
Quantity supplied is the amount of a
good that sellers are willing and able
to sell.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Law of Supply
The law of supply states that there is a
direct (positive) relationship between
price and quantity supplied.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Determinants of Supply
?Market price
?Input prices
?Technology
?Expectations
?Number of producers
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Supply Schedule
The supply schedule is a table that
shows the relationship between the
price of the good and the quantity
supplied,
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Supply Schedule
P rice Qua n tity
$0.00 0
0.50 0
1.00 1
1.50 2
2.00 3
2.50 4
3.00 5
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Supply Curve
The supply curve is the upward-
sloping line relating price to quantity
supplied.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Supply Curve
$3.00
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
P rice Qua n tity
$0.00 0
0.50 0
1.00 1
1.50 2
2.00 3
2.50 4
3.00 5
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Market Supply
?Market supply refers to the sum of
all individual supplies for all sellers
of a particular good or service.
?Graphically,individual supply
curves are summed horizontally to
obtain the market supply curve.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Determinants of Supply
?Market price
?Input prices
?Technology
?Expectations
?Number of producers
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Change in Quantity Supplied
versus Change in Supply
Change in Quantity Supplied
?Movement along the supply curve.
?Caused by a change in the market price
of the product.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Change in Quantity Supplied
1 5
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
S
1.00 A
C
$3.00 A rise in the price
of ice cream cones
results in a
movement along
the supply curve.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Change in Quantity Supplied
versus Change in Supply
Change in Supply
?A shift in the supply curve,either to the
left or right.
?Caused by a change in a determinant
other than price.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Change in Supply
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
S1 S
2
S3
Increase in
Supply
Decrease in
Supply
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Change in Quantity Supplied
versus Change in Supply
V a ria ble s that
Af f e c t Q ua nt ity S upplie d
A Cha nge i n This V a ria ble,,,
Price Re pre sen ts a move men t al on g
the sup pl y curve
Inp ut price s Sh ifts the sup pl y curve
T ech no lo gy Sh ifts the sup pl y curve
Expe ctation s Sh ifts the sup pl y curve
Nu mbe r of sel le rs Sh ifts the sup pl y curve
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Supply and Demand Together
Equilibrium Price
?The price that balances supply and
demand,On a graph,it is the price at
which the supply and demand curves
intersect.
Equilibrium Quantity
?The quantity that balances supply and
demand,On a graph it is the quantity at
which the supply and demand curves
intersect,
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Supply and Demand Together
Price Q uan ti ty
$0,00 0
0.50 0
1.00 1
1.50 4
2.00 7
2.50 10
3.00 13
Price Q ua ntity
$0,00 19
0.50 16
1.00 13
1.50 10
2.00 7
2.50 4
3.00 1
Demand Schedule Supply Schedule
At $2.00,the quantity demanded is
equal to the quantity supplied!
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Supply
Demand
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
Equilibrium of
Supply and Demand
21 3 4 5 6 7 8 9 10 12110
$3.00
2.50
2.00
1.50
1.00
0.50
Equilibrium
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
21 3 4 5 6 7 8 9 10 12110
$3.00
2.50
2.00
1.50
1.00
0.50
Supply
Demand
Surplus
Excess Supply
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Surplus
When the price is above the equilibrium
price,the quantity supplied exceeds the
quantity demanded,There is excess supply
or a surplus,Suppliers will lower the price
to increase sales,thereby moving toward
equilibrium.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Excess Demand
Quantity of
Ice-Cream Cones
Price of
Ice-Cream
Cone
$2.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Supply
Demand
$1.50
Shortage
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Shortage
When the price is below the equilibrium
price,the quantity demanded exceeds the
quantity supplied,There is excess demand
or a shortage,Suppliers will raise the price
due to too many buyers chasing too few
goods,thereby moving toward equilibrium.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Three Steps To Analyzing
Changes in Equilibrium
?Decide whether the event shifts the
supply or demand curve (or both).
?Decide whether the curve(s) shift(s) to the
left or to the right.
?Examine how the shift affects
equilibrium price and quantity.
How an Increase in Demand
Affects the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 7 Quantity of
Ice-Cream Cones
Supply
Initial
equilibrium
D1
1,Hot weather increases
the demand for ice cream...
D2
2.,..resulting
in a higher
price...
$2.50
103.,..and a higher
quantity sold.
New equilibrium
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Shifts in Curves versus
Movements along Curves
?A shift in the supply curve is called a change
in supply.
?A movement along a fixed supply curve is
called a change in quantity supplied.
?A shift in the demand curve is called a
change in demand.
?A movement along a fixed demand curve is
called a change in quantity demanded.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
S2
How a Decrease in Supply Affects
the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 1 2 3 4 7 8 9 11 12 Quantity of
Ice-Cream Cones
13
Demand
Initial equilibrium
S1
10
1,An earthquake reduces
the supply of ice cream...
New
equilibrium
2.,..resulting
in a higher
price...
$2.50
3.,..and a lower
quantity sold.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
What Happens to Price and Quantity
When Supply or Demand Shifts?
N o C ha ng e
In S up p l y
A n Inc re a s e
In S up p l y
A D e c re a s e
In S up p l y
N o C ha ng e
In D e m a nd
P sa m e
Q sam e
P do wn
Q u p
P u p
Q do wn
A n Inc re a s e
In D e m a nd
P u p
Q u p
P a m bi gu o u s
Q u p
P u p
Q a m bi gu o u s
A D e c re a s e
In D e m a nd
P do wn
Q do wn
P do wn
Q a m b i gu o u s
P a m bi gu o u s
Q do wn
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?Economists use the model of supply
and demand to analyze competitive
markets.
?The demand curve shows how the
quantity of a good depends upon the
price.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?According to the law of demand,as
the price of a good rises,the quantity
demanded falls.
?In addition to price,other
determinants of quantity demanded
include income,tastes,expectations,
and the prices of complements and
substitutes.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?The supply curve shows how the
quantity of a good supplied depends
upon the price.
?According to the law of supply,as
the price of a good rises,the quantity
supplied rises.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?In addition to price,other
determinants of quantity supplied
include input prices,technology,and
expectations.
?Market equilibrium is determined
by the intersection of the supply and
demand curves.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?Supply and demand together
determine the prices of the
economy’s goods and services.
?In market economies,prices are the
signals that guide the allocation of
resources.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Graphical
Review
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How an Increase in Demand
Affects the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 7 10 Quantity of
Ice-Cream Cones
Supply
Initial
equilibrium
D1
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How an Increase in Demand
Affects the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 7 10 Quantity of
Ice-Cream Cones
Supply
Initial
equilibrium
D1
1,Hot weather increases
the demand for ice cream...
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How an Increase in Demand
Affects the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 7 10 Quantity of
Ice-Cream Cones
Supply
Initial
equilibrium
D1
1,Hot weather increases
the demand for ice cream...
D2
New equilibrium$2.50
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How an Increase in Demand
Affects the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 7 10 Quantity of
Ice-Cream Cones
Supply
Initial
equilibrium
D1
1,Hot weather increases
the demand for ice cream...
D2
New equilibrium
2.,..resulting
in a higher
price...
$2.50
How an Increase in Demand
Affects the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 7 10 Quantity of
Ice-Cream Cones
Supply
Initial
equilibrium
D1
1,Hot weather increases
the demand for ice cream...
D2
New equilibrium
2.,..resulting
in a higher
price...
$2.50
3.,..and a higher
quantity sold.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How an Increase in Demand
Affects the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 7 10 Quantity of
Ice-Cream Cones
Supply
Initial
equilibrium
D1
1,Hot weather increases
the demand for ice cream...
D2
New equilibrium
2.,..resulting
in a higher
price...
$2.50
3.,..and a higher
quantity sold.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How a Decrease in Supply Affects
the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 1 2 3 4 5 6 7 8 9 11 12 Quantity of
Ice-Cream Cones
13
Demand
Initial equilibrium
S1
10
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How a Decrease in Supply Affects
the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 1 2 3 4 5 6 7 8 9 11 12 Quantity of
Ice-Cream Cones
13
Demand
Initial equilibrium
S1
10
1,An earthquake reduces
the supply of ice cream...
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How a Decrease in Supply Affects
the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 1 2 3 4 5 6 7 8 9 11 12 Quantity of
Ice-Cream Cones
13
Demand
Initial equilibrium
S1
10
1,An earthquake reduces
the supply of ice cream...
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How a Decrease in Supply Affects
the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 1 2 3 4 5 6 7 8 9 11 12 Quantity of
Ice-Cream Cones
13
Demand
Initial equilibrium
S1
10
1,An earthquake reduces
the supply of ice cream...
New
equilibrium$2.50
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How a Decrease in Supply Affects
the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 1 2 3 4 5 6 7 8 9 11 12 Quantity of
Ice-Cream Cones
13
Demand
Initial equilibrium
S1
10
1,An earthquake reduces
the supply of ice cream...
New
equilibrium$2.50
2.,..resulting
in a higher
price...
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How a Decrease in Supply Affects
the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 1 2 3 4 7 8 9 11 12 Quantity of
Ice-Cream Cones
13
Demand
Initial equilibrium
S1
10
1,An earthquake reduces
the supply of ice cream...
New
equilibrium$2.50
2.,..resulting
in a higher
price...
3.,..and a lower
quantity sold.
