The Market Forces of Supply
and Demand
Chapter 4
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 equilibrium.
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.
The buyers as a group determine the
demand.
The sellers as a group determine the
supply.
Market Type
A competitive market is a market in which
… with many buyers and many sellers
… that is not controlled by any one person
… in which a narrow range of prices are
established that buyers and sellers act
upon.
Competition:
Perfect and otherwise
Perfect competition:
Products are all the same
Numerous buyers and sellers so that each
has no influence over the price
Buyers and sellers are price takers
No entry barriers…
Competition:
Perfect and otherwise
Monopoly:
– One seller,seller controls price
Oligopoly:
– Few sellers
– Not always aggressive competition
Monopolistic Competition:
Many sellers
Slightly differentiated products
Each seller may set price for its own product
Demand
Quantity demanded is the amount of a good
that buyers are willing and able to purchase.
The Law of Demand states that,ceteris paribus,
there is an inverse relationship between price
and quantity demanded (Giffen Goods ).
Ceteris paribus is a Latin phrase that means
all variables other than the ones being studied
are assumed to be constant,Literally,it means
other things being equal.
Demand Schedule and 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
Price Quantit y
$0.00 12
0.50 10
1.00 8
1.50 6
2.00 4
2.50 2
3.00 0
Market Demand
Marker 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.
The Market Demand Curve
Price of Ice-
Cream Cone Price of Ice-Cream Cone Price of Ice-Cream Cone
2.00 2.00 2.00
4 3 7
1.00 1.001.00
8 5 13
Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones
Catherine’s Demand Nicholas’s Demand Market Demand+ =
When the price is $2.00,
Catherine will demand 4
ice-cream cones.
When the price is $2.00,
Nicholas will demand 3
ice-cream cones.
The market demand at
$2.00 will be 7 ice-cream
cones.
When the price is $1.00,
Catherine will demand 8
ice-cream cones.
When the price is $1.00,
Nicholas will demand 5
ice-cream cones.
The market demand at
$1.00,will be 13 ice-cream
cones.
The market demand curve is the horizontal sum
of the i dividual demand curves!
Determinants of Demand
Marker price
Consumer income
Prices of related goods
Tastes
Expectations
Population
Change in Quantity Demanded
vs,Change in Demand
Change in Quantity Demanded
– Movement along the demand curve.
– Caused by a change in the price of the product.
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.
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
Changes in Demand
0
D1
Price of Ice-
Cream Cone
Quantity of
Ice-Cream
Cones
D3
D2
Increase in
demand
Decrease in
demand
Consumer Income
As income increases the demand for a
normal good will increase.
– Necessaries
– Luxuries
As income increases the demand for an
inferior good will decrease.
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
Cones0
Increase
in demand
An increase
in income...
D1
D2
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
Cones0
Decrease
in demand
An increase
in income...
D1D2
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.
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
Supply
Quantity supplied is the amount of a good
that sellers are willing and able to sell,
The Law of Supply states that there is a
positive relationship between price and
quantity supplied,(land,relics,superstar)
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
Price Qua ntity
$0,00 0
0.5 0 0
1.0 0 1
1.5 0 2
2.0 0 3
2.5 0 4
3.0 0 5
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.
Determinants of Supply
Market price
Inputs prices
Technology
Expectations
Number of producers
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.
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.
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.
Change in Supply
Price of Ice-
Cream Cone
Quantity of
Ice-Cream
Cones
0
S1 S
2
S3
Increase in
Supply
Decrease in
Supply
Change in Quantity Supplied
versus Change in Supply
Vari ables t hat
Aff ect Quanti ty
Supp li ed
A Change in T his V ari able,,,
Price Re prese nts a movem en t
alon g the supply c urv e
In put prices Shift s the supply c urv e
Techn ology Shift s the supply c urv e
Expectations Shift s the supply c urv e
Nu mbe r of selle rs Shift s the supply c urv e
Supply and Demand Together
Equilibrium
– A situation in which quantity supplied equals
quantity demanded.
Equilibrium Price
– The price that balances supply and demand,
Equilibrium Quantity
– The quantity that balances supply and
demand,
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
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
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
Three Steps to Analyze 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
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.
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.
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.
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.
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.
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.
– Please refer to the textbook,How prices
allocate resources.
Exercise #4
Problems and Applications:
– #1,#2,#4,#8,#11
and Demand
Chapter 4
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 equilibrium.
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.
The buyers as a group determine the
demand.
The sellers as a group determine the
supply.
Market Type
A competitive market is a market in which
… with many buyers and many sellers
… that is not controlled by any one person
… in which a narrow range of prices are
established that buyers and sellers act
upon.
Competition:
Perfect and otherwise
Perfect competition:
Products are all the same
Numerous buyers and sellers so that each
has no influence over the price
Buyers and sellers are price takers
No entry barriers…
Competition:
Perfect and otherwise
Monopoly:
– One seller,seller controls price
Oligopoly:
– Few sellers
– Not always aggressive competition
Monopolistic Competition:
Many sellers
Slightly differentiated products
Each seller may set price for its own product
Demand
Quantity demanded is the amount of a good
that buyers are willing and able to purchase.
The Law of Demand states that,ceteris paribus,
there is an inverse relationship between price
and quantity demanded (Giffen Goods ).
Ceteris paribus is a Latin phrase that means
all variables other than the ones being studied
are assumed to be constant,Literally,it means
other things being equal.
Demand Schedule and 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
Price Quantit y
$0.00 12
0.50 10
1.00 8
1.50 6
2.00 4
2.50 2
3.00 0
Market Demand
Marker 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.
The Market Demand Curve
Price of Ice-
Cream Cone Price of Ice-Cream Cone Price of Ice-Cream Cone
2.00 2.00 2.00
4 3 7
1.00 1.001.00
8 5 13
Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones
Catherine’s Demand Nicholas’s Demand Market Demand+ =
When the price is $2.00,
Catherine will demand 4
ice-cream cones.
When the price is $2.00,
Nicholas will demand 3
ice-cream cones.
The market demand at
$2.00 will be 7 ice-cream
cones.
When the price is $1.00,
Catherine will demand 8
ice-cream cones.
When the price is $1.00,
Nicholas will demand 5
ice-cream cones.
The market demand at
$1.00,will be 13 ice-cream
cones.
The market demand curve is the horizontal sum
of the i dividual demand curves!
Determinants of Demand
Marker price
Consumer income
Prices of related goods
Tastes
Expectations
Population
Change in Quantity Demanded
vs,Change in Demand
Change in Quantity Demanded
– Movement along the demand curve.
– Caused by a change in the price of the product.
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.
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
Changes in Demand
0
D1
Price of Ice-
Cream Cone
Quantity of
Ice-Cream
Cones
D3
D2
Increase in
demand
Decrease in
demand
Consumer Income
As income increases the demand for a
normal good will increase.
– Necessaries
– Luxuries
As income increases the demand for an
inferior good will decrease.
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
Cones0
Increase
in demand
An increase
in income...
D1
D2
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
Cones0
Decrease
in demand
An increase
in income...
D1D2
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.
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
Supply
Quantity supplied is the amount of a good
that sellers are willing and able to sell,
The Law of Supply states that there is a
positive relationship between price and
quantity supplied,(land,relics,superstar)
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
Price Qua ntity
$0,00 0
0.5 0 0
1.0 0 1
1.5 0 2
2.0 0 3
2.5 0 4
3.0 0 5
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.
Determinants of Supply
Market price
Inputs prices
Technology
Expectations
Number of producers
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.
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.
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.
Change in Supply
Price of Ice-
Cream Cone
Quantity of
Ice-Cream
Cones
0
S1 S
2
S3
Increase in
Supply
Decrease in
Supply
Change in Quantity Supplied
versus Change in Supply
Vari ables t hat
Aff ect Quanti ty
Supp li ed
A Change in T his V ari able,,,
Price Re prese nts a movem en t
alon g the supply c urv e
In put prices Shift s the supply c urv e
Techn ology Shift s the supply c urv e
Expectations Shift s the supply c urv e
Nu mbe r of selle rs Shift s the supply c urv e
Supply and Demand Together
Equilibrium
– A situation in which quantity supplied equals
quantity demanded.
Equilibrium Price
– The price that balances supply and demand,
Equilibrium Quantity
– The quantity that balances supply and
demand,
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
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
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
Three Steps to Analyze 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
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.
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.
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.
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.
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.
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.
– Please refer to the textbook,How prices
allocate resources.
Exercise #4
Problems and Applications:
– #1,#2,#4,#8,#11
