Ch_03_ppt

The Market Forces of
Supply and Demand

3
Copyright © 2014 Cengage Learning
MARKETS AND COMPETITION
Supply and demand are the two words that

economists use most often.
Supply and demand are the forces that make
market economies work.
The terms supply and demand refer to the
behaviour of people as they interact with one
another in markets.
• Buyers determine demand
• Sellers determine supply

Competitive Markets
A market is a group of buyers and sellers of a

particular good or service.
A competitive market is a market in which there
are many buyers and sellers so that each has a
negligible impact on the market price.

DEMAND
Quantity demanded is the amount of a good that

buyers are willing and able to purchase.
Law of Demand is the claim that, other things equal,
the quantity demanded of a good falls when the price
of the good rises.

The Demand Curve: The Relationship
between Price and Quantity Demanded
Demand schedule is a table that shows the relationship
between the price of the good and the quantity
demanded.

The Demand Curve: The Relationship between
Price and Quantity Demanded
Price of milk per litre (€) Quantity of milk demanded
(litres per month)
Rachel’s 0.00 20
Demand 0.10 18
Schedule 0.20 16
0.30 14
0.40 12
0.50 10
0.60 8
0.70 6
0.80 4
0.90 2

The Demand Curve: The Relationship
between Price and Quantity Demanded
Demand Curve
• The demand curve is a graph of the relationship
between the price of a good and the quantity
demanded.

Figure 1. Rachel’s Demand Schedule and Demand Curve
Copyright©2014 Cengage
Market Demand versus Individual 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.

Shifts Versus Movements Along the
Demand Curve
Change in Quantity Demanded
• Movement along the demand curve.
• Caused by a change in the price of the product.
A shift in the demand curve is caused by a factor
affecting demand other than a change in price.

Changes in Quantity Demanded
Price of milk
A tax that raises the
price milk results in a
B movement along the
€1.20
demand curve.
A
€0.60
D
0 4 8 Quantity of milk
Shifts Versus Movements Along the
Demand Curve
Assume the price of milk falls.
• More will be demanded because of the income and
substitution effects.
• The income effect. Assume that incomes remain
constant then a fall in the price of milk means that
consumers can now afford to buy more with their
income.
• The substitution effect. Milk is lower in price
compared to other similar products so some
consumers will choose to substitute the more
expensive drinks with the now cheaper milk.
Shifts in the Demand Curve
A shift in the demand curve, to the left or right.
• Caused by any change that alters the quantity
demanded at every price.
Shifts caused by factors other than price.
• Consumer income.
• Prices of related goods (substitutes and
complements).
• Tastes and preferences.
• Number of buyers (population).
• Expectations of consumers.
Figure 3. Shifts in the Demand Curve
Price of
milk
Increase
in demand
Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0 Quantity of milk
Consumer Income
• As income increases the demand for a normal good
will increase.
• As income increases the demand for an inferior
good will decrease.

Consumer Income
Normal Good
Price of milk
€ 1.20 An increase
1.00 in income...
Increase
0.80 in demand
0.60
0.40
0.20
D2
D1 Quantity of
milk
0 1 2 3 4 5 6 7 8 9 10 11 12
Consumer Income
Inferior Good
Price inferior
good
€ 1.50
An increase
1.00
in income...
Decrease
in demand
0.50
D2 D1 Quantity of
inferior
0 1 2 3 4 5 6 7 8 9 10 11 12 good
Prices of Related Goods

• 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.

Table 1. Variables That Influence Buyers
Test your understanding:
Demand
 What is the law of demand?
 Explain whether the law of demand shows a negative
or positive relationship?
 Distinguish between a ‘change in demand’ and a
‘change in quantity demanded’?
 What are the non-price determinants of demand?

Demand
 Using diagrams, show the impact of each of the
following on the demand curve for product A.
a. The number of consumers in the market for product A
increases.
b. Consumer income increases and product A is an inferior
good.
c. Consumer income decreases and product A is a normal
good.
d. A news report claims that use of product A has harmful
effects on health.
e. The price of substitute good B falls.
f. The price of complementary good B increases.
SUPPLY
Quantity supplied is the amount of a good that sellers

are willing and able to sell.
 Law of supply is the claim that, other things equal, the
quantity supplied of a good rises when the price of the
good rises.

The Supply Curve: The Relationship
between Price and Quantity Supplied
Supply Schedule
• The supply schedule is a table that shows the
relationship between the price of the good and the
quantity supplied.

Price of milk per litre (€) Quantity of milk supplied
(litres per month)
Richard’s 0.00 0
0.10 0
Supply
0.20 2
Schedule
0.30 4
0.40 6
0.50 8
0.60 10
0.70 12
0.80 14
0.90 16
1.00 18

Supply Curve
• The supply curve is the graph of the relationship
between the price of a good and the quantity
supplied.

Figure 5. Richard’s Supply Schedule and Supply Curve
Market Supply versus Individual Supply
Market supply refers to the sum of all individual

supplies for all sellers of a particular good or service.

The Market Supply
Graphically, individual supply curves are summed

horizontally to obtain the market supply curve.

Shifts in the Supply Curve
Input prices
Technology
Expectations
Number of sellers

Change in Quantity Supplied

• Movement along the supply curve.
• Caused by a change in anything that alters the
quantity supplied at each price.

Change in Quantity Supplied
Price of
milk S
C
€1.50
A rise in the price
milk results in a
movement along
the supply curve.
A
€0.60
Quantity of
milk
0 1 5
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.

Figure 7. Shifts in the Supply Curve
Price of
milk Supply curve, S3
Supply
curve, S1
Supply
Decrease curve, S2
in supply
Increase
in supply
0 Quantity of milk
Table 2. Variables That Influence Sellers
Supply
 What is the law of supply?
 Explain whether the law of supply shows a negative
or positive relationship?
 Distinguish between a ‘change in supply’ and a
‘change in quantity supplied’?
 What are the non-price determinants of supply?

Supply
 Using diagrams, show the impact of each of the
following on the supply curve for product A.
a. The number of firms in the industry producing product
A decreases.
b. The price of oil, a key input in the production of product
A, increases.
c. Firms expect that the price of product A will fall in the
future.
d. A new technology is adopted by firms in the industry
producing A.

SUPPLY AND DEMAND TOGETHER
Equilibrium Price
• The price that balances quantity supplied and
quantity demanded.
• On a graph, it is the price at which the supply and
demand curves intersect.
Equilibrium Quantity
• The quantity supplied and the quantity demanded at
the equilibrium price.
• On a graph it is the quantity at which the supply and
demand curves intersect.
Figure 8. The Equilibrium of Supply and Demand
Figure 9. Markets Not in Equilibrium
(a) Excess Supply

Price
of milk Supply
Surplus
€ 0.70
0.60
Demand
0 4 7 10 Quantity of milk
Quantity Quantity
demanded supplied
Equilibrium
Surplus
• When price > equilibrium price, then quantity
supplied > quantity demanded.
oThere is excess supply or a surplus.
oSuppliers will lower the price to increase sales,
thereby moving toward equilibrium.

Equilibrium
Shortage
• When price < equilibrium price, then quantity
demanded > the quantity supplied.
oThere is excess demand or a shortage.
o Suppliers will raise the price due to too many
buyers chasing too few goods, thereby moving
toward equilibrium.

Figure 9. Markets Not in Equilibrium
(b) Excess Demand

Price of
Ice-Cream Supply
Cones
€ 2.00
1.50
Shortage
Demand
0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
supplied demanded Cones
Equilibrium
Law of supply and demand

• The claim that the price of any good adjusts to
bring the quantity supplied and the quantity
demanded for that good into balance.

Three Steps to Analysing Changes in
Equilibrium
① Decide whether the event shifts the supply or
demand curve (or both).
② Decide whether the curve(s) shift(s) to the left or
to the right.
③ Use the supply and demand diagram to see how
the shift affects equilibrium price and quantity.

Figure 10. How an Increase in Demand Affects the Equilibrium
Price
of milk 1. Hot weather increases
the demand for milk. . .
Supply
€ 0.80 New equilibrium
0.60
2. . . . resulting
Initial
in a higher equilibrium
price . . .
D
0 7 10 Quantity of
3. . . . and a higher milk
quantity sold.
Figure 11. How a Decrease in Supply Affects the Equilibrium
Price of
milk 1. An increase in the
animal feed reduces
the supply of milk. .
S2
S1
New
€ 0.80 equilibrium
0.60 Initial equilibrium
2. . . . resulting
in a higher
price of milk
Demand
0 4 7 Quantity of milk
3. . . . and a lower
quantity sold.
Table 4. What Happens to Price and Quantity When Supply or
Demand Shifts?
Market Equilibrium
1. Explain each of the following statements using supply and
demand diagrams.
a. When there is a drought in southern Europe, the price of soft
fruit rises in supermarkets throughout Europe.
b. When a report is published linking a product with an increased
risk of cancer, the price of the product concerned tends to fall.
2. Technological advances have reduced the cost of producing
mobile phones. How do you think this affected the market for
mobile phones? For software used on mobile phones? For
landlines?

Market Equilibrium
3. Using supply and demand diagrams, show the effect of the
following events on the market for sweatshirts.
a. A drought in Egypt damages the cotton crop.
b. The price of leather jacket falls.
c. New knitting machines are invented.
4. Market research has revealed the following information about
the market for chocolate bars: Qd=1600-300p, and the supply
schedule is Qs=1400+700p. Calculate the equilibrium price
and quantity in the market for chocolate bars.

Summary
① Economists use the model of supply and demand to
analyse competitive markets.
② In a competitive market, there are many buyers and
sellers, each of whom has little or no influence on the
market price.

Summary
③ 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
falls, the quantity demanded rises. Therefore, the
demand curve slopes downward.
• In addition to price, other determinants of how much
consumers want to buy include income, the prices of
complements and substitutes, tastes, expectations, and
the number of buyers.
• If one of these factors changes, the demand curve shifts.

Summary
④ 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. Therefore, the supply
curve slopes upward.
• In addition to price, other determinants of how much
producers want to sell include input prices, technology,
expectations, and the number of sellers.
• If one of these factors changes, the supply curve shifts.

Summary
⑤ Market equilibrium is determined by the intersection of
the supply and demand curves.
⑥ At the equilibrium price, the quantity demanded equals
the quantity supplied.
⑦ The behaviour of buyers and sellers naturally drives
markets toward their equilibrium.
⑧ To analyse how any event influences a market, we use the
supply and demand diagram to examine how the even
affects the equilibrium price and quantity.
⑨ In market economies, prices are the signals that guide
economic decisions and thereby allocate resources.

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The Market Forces of

Supply and Demand

Supply and demand are the two words that

Copyright © 2014 Cengage Learning

A market is a group of buyers and sellers of a

Copyright © 2014 Cengage Learning

Quantity demanded is the amount of a good that

Copyright © 2014 Cengage Learning

Copyright © 2014 Cengage Learning

Copyright © 2014 Cengage Learning

Copyright © 2014 Cengage Learning

Market demand refers to the sum of all individual

Copyright © 2014 Cengage Learning

Copyright © 2014 Cengage Learning

Copyright © 2014 Cengage Learning

Prices of Related Goods

Copyright © 2014 Cengage Learning

Copyright © 2014 Cengage Learning

Quantity supplied is the amount of a good that sellers

Copyright © 2014 Cengage Learning

Copyright © 2014 Cengage Learning

Copyright © 2014 Cengage Learning

Copyright © 2014 Cengage Learning

Market supply refers to the sum of all individual

Copyright © 2014 Cengage Learning

Graphically, individual supply curves are summed

Copyright © 2014 Cengage Learning

Copyright © 2014 Cengage Learning

Change in Quantity Supplied

Copyright © 2014 Cengage Learning

Copyright © 2014 Cengage Learning

Copyright © 2014 Cengage Learning

Copyright © 2014 Cengage Learning

(a) Excess Supply

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Copyright © 2014 Cengage Learning

(b) Excess Demand

Law of supply and demand

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Copyright © 2014 Cengage Learning

€ 0.80 New equilibrium

0.60 Initial equilibrium

Copyright © 2014 Cengage Learning

Copyright © 2014 Cengage Learning

Copyright © 2014 Cengage Learning

Copyright © 2014 Cengage Learning

Copyright © 2014 Cengage Learning

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