The Market Forces of

Supply and Demand

THE MARKET FORCES OF SUPPLY AND

DEMAND 1
 Key Concepts
Market, Competitive market
Demand, demand law, demand schedule, quantity
demanded, individual demand curve, market demand
curve, demand curve shifters.
Supply, Supply law, Supply schedule, quantity Supplied,
supply curve, market supply curve, Supply curve shifters.
Market equilibrium, Market disequilibrium, excess supply,
excess demand, effects of the change in demand and supply
on equilibrium price and quantity

THE MARKET FORCES OF SUPPLY AND

DEMAND 2
AFTER READING THIS CHAPTER, YOU SHOULD
BE ABLE TO:
1.Explain the importance of supply and demand
analysis.
2. State the law of demand and draw a demand
curve from a demand table.
3. Distinguish shifts in demand from
movements along a demand curve.
4. State the law of supply and draw a supply
curve from a supply table.
.

THE MARKET FORCES OF SUPPLY AND

DEMAND 3
5. Distinguish shifts in supply from
movements along a supply curve.
6. Explain how the law of demand and the law of
supply interact to bring about equilibrium.
7. Show the effect of a shift in demand and
supply on equilibrium price and quantity.
8. State the limitations of demand and supply
analysis

THE MARKET FORCES OF SUPPLY AND

DEMAND 4
In this chapter,
look for the answers to these questions:
What factors affect buyers’ demand for goods?
What factors affect sellers’ supply of goods?
How do supply and demand determine the price of a
good and the quantity sold?
How do changes in the factors that affect demand or
supply affect the market price and quantity of a good?

How do markets allocate resources?

How do changes in one market affect other
markets?
5
Markets and Competition
A market is a group of buyers and sellers of a particular
product.
A competitive market is one with many buyers and
sellers, each has a negligible effect on price.
In a perfectly competitive market:
All goods exactly the same
Buyers & sellers so numerous that no one can
affect market price – each is a “price taker”
In this chapter, we assume markets are perfectly
competitive.

THE MARKET FORCES OF SUPPLY AND

DEMAND 6
 Demand

THE MARKET FORCES OF SUPPLY AND

DEMAND 7
What Is Demand?

THE MARKET FORCES OF SUPPLY AND

DEMAND 8
THE MARKET FORCES OF SUPPLY AND
DEMAND 9
THE MARKET FORCES OF SUPPLY AND
DEMAND 10
The Demand Schedule
Demand schedule: Price Quantity
of of apples
a table that shows the
apples demanded
relationship between the price
of a good and the quantity 0.00 16
demanded 1.00 14
2.00 12
Example:
Dabir’s demand for apples. 3.00 10
4.00 8
5.00 6
 Notice that Dabir’s 6.00 4
preferences obey the
Law of Demand.
THE MARKET FORCES OF SUPPLY AND
DEMAND 11
 Dabir’s Demand Schedule & Curve
Price of Price
Quantity
apples of
$6.00 of apples
apple
demanded
$5.00 s
0.00 16
$4.00
1.00 14
$3.00 2.00 12
$2.00 3.00 10

$1.00 4.00 8
5.00 6
$0.00
6.00 4
0 5 10 15 Quantity
of apples
THE MARKET FORCES OF SUPPLY AND
DEMAND 12
Market Demand versus Individual Demand
The quantity demanded in the market is the sum of the
quantities demanded by all buyers at each price.
Suppose Dabir and Khabir are the only two buyers in the
Latte market. (Qd = quantity demanded)
Price Dabir’s Qd Khabir’s Qd Market Qd
$0.00 16 + 8 = 24
1.00 14 + 7 = 21
2.00 12 + 6 = 18
3.00 10 + 5 = 15
4.00 8 + 4 = 12
5.00 6 + 3 = 9
6.00 4 + 2 = 6 13
 The Market Demand Curve for Apples
Qd
P P
(Market)
$6.00
$0.00 24
$5.00 1.00 21
$4.00 2.00 18
$3.00 3.00 15
4.00 12
$2.00
5.00 9
$1.00 6.00 6
$0.00 Q
0 5 10 15 20 25
THE MARKET FORCES OF SUPPLY AND
DEMAND 14
Demand Curve Shifters
The demand curve shows how price affects quantity
demanded, other things being equal.
These “other things” are non-price determinants of
demand (i.e., things that determine buyers’ demand
for a good, other than the good’s price).
Changes in them shift the D curve.

THE MARKET FORCES OF SUPPLY AND

DEMAND 15
Summary: Variables That Influence Buyers
Variable A change in this variable…
Price …causes a movement
along the D curve
# of buyers …shifts the D curve
Income …shifts the D curve
Price of
related goods …shifts the D curve
Tastes …shifts the D curve
Expectations …shifts the D curve
THE MARKET FORCES OF SUPPLY AND
DEMAND 16
Q. Identify whether each of the following trends causes a
change in demand or a change
in quantity demanded for cable TV. In each case,
explain your answer.
a. The monthly rate paid by cable TV subscribers falls.
b The price of satellite TV increases.
c. Because of growing Internet use, people are
choosing to watch less TV.
d. Cable TV providers choose to make more channels
available to their subscribers.
THE MARKET FORCES OF SUPPLY AND
DEMAND 17
ACTIVE LEARNING 1
Demand Curve
Draw a demand curve for music downloads.
What happens to it in each of
the following scenarios? Why?
A. The price of iPods
falls
B. The price of music
downloads falls
C. The price of CDs falls

18
ACTIVE LEARNING 1
A. Price of iPods falls
Music
Music downloads
downloads
Price of
and
and iPods
iPods areare
music
down- complements.
complements.
loads AA fall
fall in
in price
price ofof
iPods
iPods shifts
shifts the
the
P1
demand
demand curve curve for
for
music
music downloads
downloads
to
to the
the right.
right.
D1 D2

Q1 Q2 Quantity of
music downloads
19
ACTIVE LEARNING 1
B. Price of music downloads falls
Price of
music The
The D
D curve
curve
down- does
does not
not shift.
shift.
loads
Move
Move down
down along
along
P1 curve
curve to
to aa point
point with
with
lower
lower P,
P, higher
higher Q.
Q.
P2

D1

Q1 Q2 Quantity of
music downloads
20
ACTIVE LEARNING 1
C. Price of CDs falls
Price of CDs
CDs andand
music music
music downloads
downloads
down-
are
are substitutes.
substitutes.
loads
AA fall
fall in
in price
price of
of CDs
CDs
P1 shifts
shifts demand
demand for
for
music
music downloads
downloads
to
to the
the left.
left.

D2 D1

Q2 Q1 Quantity of
music downloads
21
Supply
The quantity supplied of any good is the amount that
sellers are willing and able to sell.
Law of supply: the claim that the quantity supplied of
a good rises when the price of the good rises, other
things equal

THE MARKET FORCES OF SUPPLY AND

DEMAND 22
The Supply Schedule
Supply schedule: Price Quantity
A table that shows the of of apples
relationship between the price apples supplied
of a good and the quantity $0.00 0
supplied. 1.00 3
Example: 2.00 6
Kabir’ s supply of apples. 3.00 9
4.00 12
5.00 15
 Notice that Kabir’ s supply
6.00 18
schedule obeys the
Law of Supply.
THE MARKET FORCES OF SUPPLY AND
DEMAND 23
Kabir’ s’ Supply Schedule & Curve
Price Quantity
P of of apples
$6.00 apples supplied

$5.00
$0.00 0
1.00 3
$4.00
2.00 6
$3.00 3.00 9
$2.00 4.00 12

$1.00 5.00 15
6.00 18
$0.00 Q
0 5 10 15
THE MARKET FORCES OF SUPPLY AND
DEMAND 24
Market Supply versus Individual Supply
The quantity supplied in the market is the sum of
the quantities supplied by all sellers at each price.
Suppose Kabir and Tobir are the only two sellers in
this market. (Qs = quantity supplied)
Price Kabir Tobir Market Qs
$0.00 0 + 0 = 0
1.00 3 + 2 = 5
2.00 6 + 4 = 10
3.00 9 + 6 = 15
4.00 12 + 8 = 20
5.00 15 + 10 = 25
6.00 18 + 12 = 30 25
 The Market Supply Curve
QS
P
(Market)
P
$6.00 $0.00 0
1.00 5
$5.00
2.00 10
$4.00 3.00 15
$3.00 4.00 20
$2.00 5.00 25
6.00 30
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND
DEMAND 26
Supply Curve Shifters
The supply curve shows how price affects quantity
supplied, other things being equal.
These “other things” are non-price determinants of
supply.
Changes in them shift the S curve.

THE MARKET FORCES OF SUPPLY AND

DEMAND 27
Summary: Variables that Influence Sellers
Variable A change in this variable…
Price …causes a movement
along the S curve
Input Prices …shifts the S curve
Technology …shifts the S curve
# of Sellers …shifts the S curve
Expectations …shifts the S curve

THE MARKET FORCES OF SUPPLY AND

DEMAND 28
Q. Identify whether each of the following trends causes a
change in supply or a change in quantity supplied for
Pacific salmon.
a. More sophisticated equipment makes it possible for
salmon fishers to increase their catch.
b. Rising temperatures in the Pacific Ocean radically
reduce the salmon stock.
c. The price of another commonly caught Pacific fish
species increases.
d. The price of Pacific salmon increases.

THE MARKET FORCES OF SUPPLY AND

DEMAND 29
ACTIVE LEARNING 2
Supply Curve
Draw a supply curve for tax
return preparation software.
What happens to it in each
of the following scenarios?
A. Retailers cut the price of
the software.
B. A technological advance
allows the software to be
produced at lower cost.
C. Professional tax return preparers raise the
price of the services they provide.
30
ACTIVE LEARNING 2
A. Fall in price of tax return software
Price of
tax return SS curve
curve does
does
S1
software
not
not shift.
shift.
P1 Move
Move downdown
along
along thethe curve
curve
P2 to
to aa lower
lower PP
and
and lower
lower Q.
Q.

Q2 Q1 Quantity of tax
return software
31
ACTIVE LEARNING 2
B. Fall in cost of producing the software
Price of
tax return
S1
SS curve
curve shifts
shifts
software S2
to
to the
the right:
right:
P1
at
at each
each price,
price,
QQ increases.
increases.

Q1 Q2 Quantity of tax
return software
32
ACTIVE LEARNING 3
C. Professional preparers raise their price
Price of
tax return
S1 This
This shifts
shifts the
the
software
demand
demand curve
curve for
for
tax
tax preparation
preparation
software,
software, not
not the
the
supply
supply curve.
curve.

Quantity of tax
return software
33
Supply and Demand Together

P
$6.00 D S Equilibrium:
P has reached
$5.00
the level where
$4.00 quantity supplied
$3.00 equals
quantity demanded
$2.00
$1.00

$0.00 Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND
DEMAND 34
Equilibrium price:
the price that equates quantity supplied
with quantity demanded
P
$6.00 D S
P QD QS
$5.00 $0 24 0
$4.00 1 21 5
$3.00 2 18 10
3 15 15
$2.00
4 12 20
$1.00
5 9 25
$0.00 Q 6 6 30
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND
DEMAND 35
Equilibrium quantity:
the quantity supplied and quantity demanded
at the equilibrium price
P
$6.00 D S
P QD QS
$5.00 $0 24 0
$4.00 1 21 5
$3.00 2 18 10
3 15 15
$2.00
4 12 20
$1.00
5 9 25
$0.00 Q 6 6 30
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND
DEMAND 36
Surplus (a.k.a. excess supply):
when quantity supplied is greater than
quantity demanded
P Example:
$6.00 D Surplus S
If P = $5,
$5.00
then
$4.00 QD = 9 Apples
$3.00 and
QS = 25
$2.00
apples in a
resulting
$1.00 surplus of 16
$0.00 QApples
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND
DEMAND 37
Surplus (a.k.a. excess supply):
when quantity supplied is greater than
quantity demanded
P
$6.00 D Surplus S Facing a surplus,
sellers try to increase
$5.00 sales by cutting price.
$4.00 This causes
$3.00 QD to rise and QS to fall…
$2.00 …which reduces the
surplus.
$1.00

$0.00 Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND
DEMAND 38
Surplus (a.k.a. excess supply):
when quantity supplied is greater than
quantity demanded
P
$6.00 D Surplus S Facing a surplus,
sellers try to increase
$5.00 sales by cutting price.
$4.00 This causes
$3.00 QD to rise and QS to fall.
$2.00 Prices continue to fall
until market reaches
$1.00 equilibrium.
$0.00 Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND
DEMAND 39
Shortage (a.k.a. excess demand):
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Example:
If P = $1,
$5.00
then
$4.00
QD = 21apples
$3.00 and
$2.00
QS = 5 apples
resulting in a
$1.00
shortage of 16
$0.00
Shortage apples
0 5 10 15 20 25 30 35 Q

THE MARKET FORCES OF SUPPLY AND

DEMAND 40
Shortage (a.k.a. excess demand):
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Facing a shortage,
sellers raise the price,
$5.00
causing QD to fall
$4.00 and QS to rise,
$3.00 …which reduces the
shortage.
$2.00
$1.00
Shortage
$0.00 Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND
DEMAND 41
Shortage (a.k.a. excess demand):
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Facing a shortage,
sellers raise the price,
$5.00
causing QD to fall
$4.00 and QS to rise.
$3.00 Prices continue to rise
$2.00 until market reaches
equilibrium.
$1.00
Shortage
$0.00 Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND
DEMAND 42
Three Steps to Analyzing Changes in Eq’m

To
Todetermine
determinethe
theeffects
effectsof
ofany
anyevent,
event,

1.1. Decide
Decidewhether
whetherevent
eventshifts
shiftsSScurve,
curve,
D
Dcurve,
curve,or
orboth.
both.

2. Decide
2. Decidein
inwhich
whichdirection
directioncurve
curveshifts.
shifts.
3.3. Use
Usesupply-demand
supply-demanddiagram
diagramto
tosee
see
how
howthe
theshift
shiftchanges
changeseq’m
eq’mPPand
andQ.
Q.

THE MARKET FORCES OF SUPPLY AND

DEMAND 43
EXAMPLE: The Market for Hybrid Cars
P
price of
S1
hybrid cars

P1

D1
Q
Q1
quantity of
hybrid cars
THE MARKET FORCES OF SUPPLY AND
DEMAND 44
EXAMPLE 1: A Shift in Demand
EVENT TO BE
ANALYZED: P
Increase in price of gas. S1
STEP 1: P2
D curve shifts
because
STEP 2: price of gas P1
affects demand for
D shifts right
hybrids.
because
STEP 3: high gas
S curve
price doeshybrids
makes not D1 D2
The shift
shift, causes
because an
price
more attractive Q
increase
of gas in price
does not cars. Q1 Q2
relative to other
and quantity
affect cost of of
hybrid cars.
producing hybrids.
THE MARKET FORCES OF SUPPLY AND
DEMAND 45
EXAMPLE 1: A Shift in Demand
Notice: P
When P rises,
S1
producers supply
a larger quantity P2
of hybrids, even
though the S curve P1
has not shifted.
Always be careful
D1 D2
to distinguish b/w
a shift in a curve Q
Q1 Q2
and a movement
along the curve.
THE MARKET FORCES OF SUPPLY AND
DEMAND 46
Terms for Shift vs. Movement Along Curve
Change in supply: a shift in the S curve
occurs when a non-price determinant of supply
changes (like technology or costs)
Change in the quantity supplied:
a movement along a fixed S curve
occurs when P changes
Change in demand: a shift in the D curve
occurs when a non-price determinant of demand
changes (like income or # of buyers)
Change in the quantity demanded:
a movement along a fixed D curve
occurs when P changes
47
EXAMPLE 2: A Shift in Supply
EVENT: New technology
reduces cost of producing P
hybrid cars. S1 S2
STEP 1:
S curve shifts
because
STEP 2: event affects P1
cost of production.
S shifts right P2
D curve does
because event not
STEPbecause
shift, 3:
reduces cost, D1
The shift causes
production technology
makes production Q
price
is not to
onefallof the Q1 Q2
more profitable at
and quantity
factors that to rise.
affect
any given price.
demand.
THE MARKET FORCES OF SUPPLY AND
DEMAND 48
EXAMPLE 3: A Shift in Both Supply
EVENTS: and Demand
price of gas rises AND P
new technology reduces S1 S2
production costs
STEP 1: P2
Both curves shift.
P1
STEP 2:
Both shift to the right.
STEP 3: D1 D2
Q rises, but effect Q
on P is ambiguous: Q1 Q2
If demand increases more
than supply, P rises.
THE MARKET FORCES OF SUPPLY AND
DEMAND 49
EXAMPLE 3: A Shift in Both Supply
EVENTS: and Demand
price of gas rises AND P
new technology reduces S1 S2
production costs

STEP 3, cont.
P1
But if supply
increases more P2
than demand,
D1 D2
P falls.
Q
Q1 Q2

THE MARKET FORCES OF SUPPLY AND

DEMAND 50
ACTIVE LEARNING 3
Shifts in supply and demand
Use the three-step method to analyze the effects of
each event on the equilibrium price and quantity of
music downloads.
Event A: A fall in the price of CDs
Event B: Sellers of music downloads negotiate a
reduction in the royalties they must pay
for each song they sell.
Event C: Events A and B both occur.

51
ACTIVE LEARNING 3
A. Fall in price of CDs
The market for
STEPS
P music downloads
1. D curve shifts S1
2. D shifts left
P1
3. P and Q both
P2
fall.

D2 D1
Q
Q2 Q1
52
ACTIVE LEARNING 3
B. Fall in cost of royalties

STEPS The market for

P music downloads
1. S curve shifts
S1 S2
2. S shifts right
P1
3. P falls,
Q rises. P2

(Royalties are part

of sellers’ costs) D1
Q
Q1 Q2
53
ACTIVE LEARNING 3
C. Fall in price of CDs and
fall in cost of royalties
STEPS
STEPS
1.
1. Both
Both curves
curves shift
shift (see
(see parts
parts AA && B).
B).
2.
2. D
D shifts
shifts left,
left, SS shifts
shifts right.
right.
3.
3. PP unambiguously
unambiguously falls. falls.
Effect
Effect on
on Q Q is
is ambiguous:
ambiguous:
The
The fall
fall in
in demand
demand reduces
reduces Q,Q,
the
the increase
increase in in supply
supply increases
increases Q.
Q.

54
Define demand and supply in a market using words,
tables and diagrams.
Explain the difference between changes in demand/
supply and changes in quantity demanded/ supplied.
List four shift factors of demand and explain how each
affects demand.
Distinguish the effect of a shift factor of demand on
the demand curve from the effect of a change in price
on the demand curve.
Explain the market equilibrium graphically.
Use the concepts of shortages and surpluses to
illustrate the natural tendency of a market to move
toward equilibrium.
THE MARKET FORCES OF SUPPLY AND
DEMAND 55
Q.Suppose the market demand for pizza is given by Qd= 300-20p and the
market supply for pizza is given by Qs= 20p-100, where P= Price( per
pizza)

 Graph the supply and demand curve for pizza using $5 through $15 as
the value of p
 In equilibrium, how many pizza would be sold and at what price?
 What would happen if suppliers set the price of pizza at $15? Explain
the market adjustment process.
 Suppose the price of hamburgers, a substitute for pizza, doubles. This
leads the doubling of the demand for pizza ( at each price consumers
demand twice as much pizza as before) write equation for the new
market demand for pizza
 Find the new equilibrium price and quantity of pizza from the
equations.

THE MARKET FORCES OF SUPPLY AND

DEMAND 56
Q.Draw hypothetical supply and demand curves for tea.
Show how the equilibrium price and quantity will be
affected by each of the following occurrences:
a. Bad weather wreaks havoc with the tea crop.
b. A medical report implying tea is bad for your health
is published.
c. A technological innovation lowers the cost of
producing tea.
d. Consumers’ income falls. (Assume tea is a normal
good.)
THE MARKET FORCES OF SUPPLY AND
DEMAND 57
CONCLUSION:
How Prices Allocate Resources
One of the Ten Principles from Chapter 1:
Markets are usually a good way
to organize economic activity.

 In market economies, prices adjust to balance

supply and demand. These equilibrium prices
are the signals that guide economic decisions
and thereby allocate scarce resources.

THE MARKET FORCES OF SUPPLY AND

DEMAND 58
CHAPTER SUMMARY

A competitive market has many buyers and sellers,

each of whom has little or no influence
on the market price.
Economists use the supply and demand model to
analyze competitive markets.
The downward-sloping demand curve reflects the
Law of Demand, which states that the quantity
buyers demand of a good depends negatively on the
good’s price.

59
CHAPTER SUMMARY

Besides price, demand depends on buyers’ incomes,

tastes, expectations, the prices of substitutes and
complements, and number of buyers.
If one of these factors changes, the D curve shifts.
The upward-sloping supply curve reflects the Law of
Supply, which states that the quantity sellers supply
depends positively on the good’s price.
Other determinants of supply include input prices,
technology, expectations, and the # of sellers. Changes
in these factors shift the S curve.
60
CHAPTER SUMMARY

The intersection of S and D curves determines the

market equilibrium. At the equilibrium price,
quantity supplied equals quantity demanded.
If the market price is above equilibrium,
a surplus results, which causes the price to fall.
If the market price is below equilibrium,
a shortage results, causing the price to rise.

61
CHAPTER SUMMARY

We can use the supply-demand diagram to analyze

the effects of any event on a market:
First, determine whether the event shifts one or both
curves. Second, determine the direction of the shifts.
Third, compare the new equilibrium to the initial
one.
In market economies, prices are the signals that
guide economic decisions and allocate scarce
resources.

62