The Market Forces of Supply and Demand

Copyright 2004 South-Western
The Market Forces of

Supply and Deand
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.
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.
MARKETS AND COMPETITION
MARKETS AND COMPETITION
uyers determine demand.
Sellers determine supply

Competitive Markets
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.
!erfect "ompetition
!roducts are the same
#umerous buyers and sellers so that each has no

influence over price
uyers and Sellers are price takers
Monopoly
$ne seller, and seller controls price

Competition: Perfect and Otherise
$ligopoly
%ew sellers
#ot always aggressive competition
Monopolistic "ompetition
Many sellers
Slightly differentiated products
&ach seller may set price for its own product

Competition: Perfect and Otherise
DEMAND
Quantity demanded is the amount of a good

that buyers are willing and able to purchase.
'aw of (emand
The law of demand states that, other things equal,

the quantity demanded of a good falls when the
price of the good rises.
The Demand C!rve: The Re"ationship
#eteen Price and $!antit% Demanded
(emand Schedule
The demand schedule is a table that shows the

relationship between the price of the good and the
quantity demanded.
Demand Sched!"e
The Demand C!rve: The Re"ationship
#eteen Price and $!antit% Demanded
(emand "urve
The demand curve is a graph of the relationship

between the price of a good and the quantity
demanded.
&i'!re ( Demand Sched!"e and Demand C!rve
!rice of
"ce-Crea Cone
)
*+,)
*+))
(+,)
(+))
)+,)
( * - . , / 0 1 2 () (( #uantity of
"ce-Crea Cones
-+))
(*
(+ A decrease
in price
+++
*+ +++ increases 3!antit%
of cones demanded+
Market Demand vers!s Individ!a" Demand
Market demand refers to the sum of all

individual demands for a particular good or
service.
)raphically, individual demand curves are

summed hori*ontally to obtain the market
demand curve.
Shifts in the Demand C!rve
"hange in +uantity (emanded
Movement along the demand curve.
"aused by a change in the price of the product.

0
D
Price of Ice-
Cream
Cones
Quantity of Ice-Cream Cones
A ta4 that raises the
price of ice5cream
cones res!"ts in a
movement a"on' the
demand c!rve+
A
B
8
1.00
2.00
4
Chan'es in $!antit% Demanded
"onsumer income
!rices of related goods
Tastes
&,pectations
#umber of buyers
"hange in (emand
A shift in the demand curve, either to the left or

right.
"aused by any change that alters the quantity

demanded at every price.
&i'!re - Shifts in the Demand C!rve
Copyright200$ South%estern&Thoson 'earning
!rice of
"ce-Crea
Cone
#uantity of
"ce-Crea Cones
Increase
in demand
Decrease
in demand
Demand c!rve6 D
-
Demand
c!rve6 D
(
Demand
c!rve6 D
*
)
"onsumer -ncome
As income increases the demand for a normal good

will increase.
As income increases the demand for an inferior

good will decrease.
3.00
2.5
0
2.0
0
1.5
0
1.0
0
0.5
0
2 1 3 4 5 6 7 8 10 12 11
Price of Ice-
Cream Cone
Quantity
of Ice-
Cream
Cones
0
"ncrease
in deand
An increase
in income+++
D
1
D
2
Cons!mer Income
Norma" 7ood

3.00
2.5
0
2.0
0
1.5
0
1.0
0
0.5
0
2 1 3 4 5 6 7 8 10 12 11
!rice of "ce-
Crea Cone
#uantity of
"ce-Crea
Cones
0
Decrease
in deand
An increase
in income+++
D
1
D
2
Cons!mer Income
Inferior 7ood
!rices of .elated )oods
/hen a fall in the price of one good reduces the

demand for another good, the two goods are called
substitutes.
/hen a fall in the price of one good increases the

demand for another good, the two goods are called
complements.
So"ve
0etchup is a complement for burgers. -f the

price of burger rises, what happens to the
market for ketchup1 %or tomatoes1 %or tomato
2uice1 %or orange 2uice1
S8PP9:
Quantity supplied is the amount of a good that

sellers are willing and able to sell.
'aw of Supply
The law of supply states that, other things equal, the

quantity supplied of a good rises when the price of
the good rises.
The S!pp"% C!rve: The Re"ationship #eteen
Price and $!antit% S!pp"ied
Supply Schedule
The supply schedule is a table that shows the

relationship between the price of the good and the
quantity supplied.
S!pp"% Sched!"e
The S!pp"% C!rve: The Re"ationship #eteen
Price and $!antit% S!pp"ied
Supply "urve
The supply curve is the graph of the relationship

between the price of a good and the quantity
supplied.
&i'!re , S!pp"% Sched!"e and S!pp"% C!rve
!rice of
"ce-Crea
Cone
)
*+,)
*+))
(+,)
(+))
( * - . , / 0 1 2 () ((
#uantity of
"ce-Crea Cones
;-+))
(*
)+,)
(+ An
increase
in price +++
*+ +++ increases 3!antit% of cones s!pp"ied+
Market S!pp"% vers!s Individ!a" S!pp"%
Market supply refers to the sum of all

individual supplies for all sellers of a particular
good or service.
)raphically, individual supply curves are

summed hori*ontally to obtain the market
supply curve.
Shifts in the S!pp"% C!rve
-nput prices
Technology
&,pectations
#umber of sellers
"hange in +uantity Supplied
Movement along the supply curve.
"aused by a change in anything that alters the

quantity supplied at each price.
1 5
!rice of "ce-
Crea
Cone
#uantity of
"ce-Crea
Cones 0
S
1.00
A
C
!3.0
0
A rise in the price
of ice cream
cones res!"ts in a
movement a"on'
the s!pp"% c!rve+
Chan'e in $!antit% S!pp"ied
"hange in Supply
A shift in the supply curve, either to the left or right.

"aused by a change in a determinant other than

price.
&i'!re 0 Shifts in the S!pp"% C!rve
!rice of
"ce-Crea
Cone
#uantity of
"ce-Crea Cones
)
Increase
in s!pp"%
Decrease
in s!pp"%
S!pp"% c!rve6 S
-
c!rve6
S!pp"%
S
(
S!pp"%
c!rve6 S
*
So"ve
$ver the past 34 years, technological advances
have reduced the cost of computer chips. 5ow
do you think this has affected the market for
computers1 %or computer software 1 %or
typewriters1
S8PP9: AND DEMAND
TO7ET<ER
Equilibrium refers to a situation in which the
price has reached the level where quantity
supplied equals quantity demanded.
S8PP9: AND DEMAND
TO7ET<ER
Equilibrium Price
The price that balances quantity supplied and

quantity demanded.
$n 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.
$n a graph it is the quantity at which the supply and

demand curves intersect.
At ;*+))6 the 3!antit% demanded
is e3!a" to the 3!antit% s!pp"ied=
S8PP9: AND DEMAND
TO7ET<ER
"eman#
$c%e#u&e
$u''&y
$c%e#u&e
&i'!re 1 The E3!i"i#ri!m of S!pp"% and Demand
!rice of
"ce-Crea
Cone
) ( * - . , / 0 1 2 () (( (*
#uantity of "ce-Crea Cones
(-
E3!i"i#ri!m
3!antit%
E3!i"i#ri!m price
E3!i"i#ri!m
S!pp"%
Demand
;*+))
&i'!re 2 Markets Not in E3!i"i#ri!m
!rice of
"ce-Crea
Cone
)
S!pp"%
Demand
(a) *+cess Supply
$!antit%
demanded
$!antit%
s!pp"ied
S!rp"!s
#uantity of
"ce-Crea
Cones
.
;*+,)
()
*+))
0
E3!i"i#ri!m
Surplus
/hen price 6 equilibrium price, then quantity

supplied 6 quantity demanded.
There is e,cess supply or a surplus.
Suppliers will lower the price to increase sales, thereby

moving toward equilibrium.
E3!i"i#ri!m
Shortage
/hen price 7 equilibrium price, then quantity

demanded 6 the quantity supplied.
There is e,cess demand or a shortage.
Suppliers will raise the price due to too many buyers

chasing too few goods, thereby moving toward
equilibrium.
&i'!re 2 Markets Not in E3!i"i#ri!m
!rice of
"ce-Crea
Cone
)
#uantity of
"ce-Crea
Cones
S!pp"%
Demand
(,) *+cess Deand
$!antit%
s!pp"ied
$!antit%
demanded
(+,)
()
;*+))
0 .
Shorta'e
E3!i"i#ri!m
Law of supply and demand
The claim that the price of any good ad2usts to bring

the quantity supplied and the quantity demanded for
that good into balance.
Three Steps to Ana"%>in' Chan'es in
E3!i"i#ri!m
(ecide whether the event shifts the supply or

demand curve 8or both9.
(ecide whether the curve8s9 shift8s9 to the left

or to the right.
:se the supply;and;demand diagram to see

how the shift affects equilibrium price and
quantity.
&i'!re () <o an Increase in Demand Affects the
E3!i"i#ri!m
!rice of
"ce-Crea
Cone
) #uantity of
"ce-Crea Cones
S!pp"%
Initia"
e3!i"i#ri!m
D
D
-+ + + + and a hi'her
3!antit% so"d+
*+ + + + res!"tin'
in a hi'her
price + + +
(+ <ot eather increases
the demand for ice cream + + +
*+))
0
Ne e3!i"i#ri!m ;*+,)
()
&i'!re (( <o a Decrease in S!pp"% Affects the E3!i"i#ri!m
!rice of
"ce-Crea
Cone
) #uantity of
"ce-Crea Cones
Demand
Ne
e3!i"i#ri!m
Initia" e3!i"i#ri!m
S
(
S
*
*+ + + + res!"tin'
in a hi'her
price of ice
cream + + +
(+ An increase in the
price of s!'ar red!ces
the s!pp"% of ice cream+ + +
-+ + + + and a "oer
3!antit% so"d+
*+))
0
;*+,)
.
Ta#"e . ?hat <appens to Price and $!antit% ?hen S!pp"%
or Demand Shifts@
Copyright2004 South-Western
So"ve
:sing (emand and Supply diagrams, show the effect

of the following events on the market for personal
computers
A9 The price of computer chips fall.
9 There is a rise in computer incomes
"9 The price of computer software rises
(9 :niversities require incoming students to have their

own personal computer
So"ve
Suppose the price of movie tickets is determined by market
forces. (( and SS are given as follows<
Price DD SS
= >4,444 ?,444
? ?,444 ?,444
>3 @,444 ?,444
>@ =,444 ?,444
34 3,444 ?,444
>9 (raw the dd and ss curves. /hat is unusual about
this supply curve1 /hy might this be true.
39 /hat are the equilibrium price and quantity.
A9 Suppose the new dd schedule is
price DD
= =444
? A444
>3 3444
>@ >444
34 4
Add the old demand schedule and new

demand schedule to calculate the new demand
schedule . /hat will be the new equilibrium
price and quantity.

The Market Forces of Supply and Demand

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Copyright 2004 South-Western

The Market Forces of

Supply and demand are the two words that

Supply and demand are the forces that make

Modern microeconomics is about supply,

A market is a group of buyers and sellers of a

The terms supply and demand refer to the

uyers determine demand.

Sellers determine supply

A competitive market is a market in which there

!roducts are the same

#umerous buyers and sellers so that each has no

uyers and Sellers are price takers

$ne seller, and seller controls price

#ot always aggressive competition

Slightly differentiated products

&ach seller may set price for its own product

Quantity demanded is the amount of a good

The law of demand states that, other things equal,

The demand schedule is a table that shows the

The demand curve is a graph of the relationship

Market demand refers to the sum of all

)raphically, individual demand curves are

"hange in +uantity (emanded

Movement along the demand curve.

"aused by a change in the price of the product.

!rices of related goods

A shift in the demand curve, either to the left or

"aused by any change that alters the quantity

As income increases the demand for a normal good

As income increases the demand for an inferior

!rices of .elated )oods

/hen a fall in the price of one good reduces the

/hen a fall in the price of one good increases the

0etchup is a complement for burgers. -f the

Quantity supplied is the amount of a good that

The law of supply states that, other things equal, the

The supply schedule is a table that shows the

The supply curve is the graph of the relationship

Market supply refers to the sum of all

)raphically, individual supply curves are

"hange in +uantity Supplied

Movement along the supply curve.

"aused by a change in anything that alters the

A shift in the supply curve, either to the left or right.

"aused by a change in a determinant other than

The price that balances quantity supplied and

$n a graph, it is the price at which the supply and

The quantity supplied and the quantity demanded at

$n a graph it is the quantity at which the supply and

/hen price 6 equilibrium price, then quantity

There is e,cess supply or a surplus.

Suppliers will lower the price to increase sales, thereby

/hen price 7 equilibrium price, then quantity

There is e,cess demand or a shortage.

Suppliers will raise the price due to too many buyers

Law of supply and demand

The claim that the price of any good ad2usts to bring

(ecide whether the event shifts the supply or

(ecide whether the curve8s9 shift8s9 to the left

:se the supply;and;demand diagram to see

:sing (emand and Supply diagrams, show the effect

A9 The price of computer chips fall.