Chapter 03 The Market Forces of Supply and Demand
Chapter 03 The Market Forces of Supply and Demand
Chapter 03 The Market Forces of Supply and Demand
CHAPTER
3 In this chapter,
look for the answers to these questions:
What factors affect buyers’ demand for goods?
The Market Forces of What factors affect sellers’ supply of goods?
How do supply and demand determine the price of
Supply and Demand 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?
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Market Demand versus Individual Demand The Market Demand Curve for Lattes
The quantity demanded in the market is the sum of the Qd
quantities demanded by all buyers at each price. P P
(Market)
Suppose Helen and Ken are the only two buyers in $0.00 24
the Latte market. (Qd = quantity demanded) 1.00 21
Price Helen’s Qd Ken’s Qd Market Qd 2.00 18
$0.00 16 + 8 = 24 3.00 15
1.00 14 + 7 = 21 4.00 12
2.00 12 + 6 = 18 5.00 9
3.00 10 + 5 = 15 6.00 6
4.00 8 + 4 = 12 Q
5.00 6 + 3 = 9
6.00 4 + 2 = 6 6 THE MARKET FORCES OF SUPPLY AND DEMAND 7
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Q1 Q2 Quantity of Q1 Q2 Quantity of
music downloads music downloads
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D2 D1
Q2 Q1 Quantity of
music downloads
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EXAMPLE 1: A Shift in Demand Terms for Shift vs. Movement Along Curve
Change in supply: a shift in the S curve
Notice: P occurs when a non-price determinant of supply
When P rises,
S1 changes (like technology or costs)
producers supply
a larger quantity P2 Change in the quantity supplied:
of hybrids, even a movement along a fixed S curve
though the S curve P1 occurs when P changes
has not shifted.
Change in demand: a shift in the D curve
Always be careful occurs when a non-price determinant of demand
D1 D2
to distinguish b/w changes (like income or # of buyers)
a shift in a curve Q
Q1 Q2 Change in the quantity demanded:
and a movement
along the curve. a movement along a fixed D curve
occurs when P changes
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Exercise Exercise
Use the three-step method to analyze the effects
of each event on the equilibrium price and
quantity of ice cream.
Event A: During one summer, the weather
is very hot.
Event B: During another summer, a
hurricane destroys part of sugarcane crop and
drives up the price of sugar.
Event C: Heat wave and the hurricane
occur during the same summer.
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Exercise Exercise
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Exercise CONCLUSION:
How Prices Allocate Resources
Scientists reveal that eating oranges decreases the
risk of diabetes, and at the same time, farmers use One of the Ten Principles from Chapter 1:
a new fertilizer that makes orange trees produce Markets are usually a good way
more oranges. Illustrate and explain what effect to organize economic activity.
these changes have on the equilibrium price and In market economies, prices adjust to balance
quantity of oranges. supply and demand. These equilibrium prices
are the signals that guide economic decisions
and thereby allocate scarce resources.
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A competitive market has many buyers and sellers, Besides price, demand depends on buyers’ incomes,
each of whom has little or no influence tastes, expectations, the prices of substitutes and
on the market price. complements, and number of buyers.
If one of these factors changes, the D curve shifts.
Economists use the supply and demand model to
analyze competitive markets. The upward-sloping supply curve reflects the Law of
Supply, which states that the quantity sellers supply
The downward-sloping demand curve reflects the depends positively on the good’s price.
Law of Demand, which states that the quantity
buyers demand of a good depends negatively on
Other determinants of supply include input prices,
technology, expectations, and the # of sellers.
the good’s price.
Changes in these factors shift the S curve.
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The intersection of S and D curves determines the We can use the supply-demand diagram to
market equilibrium. At the equilibrium price, analyze the effects of any event on a market:
quantity supplied equals quantity demanded. First, determine whether the event shifts one or
both curves. Second, determine the direction of
If the market price is above equilibrium,
the shifts. Third, compare the new equilibrium to
a surplus results, which causes the price to fall.
the initial one.
If the market price is below equilibrium,
a shortage results, causing the price to rise. In market economies, prices are the signals that
guide economic decisions and allocate scarce
resources.
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