Ch4 -THE MARKET FORCES OF SUPPLY AND DEMAND

• Supply and demand are the two words that economists use most
often.
• They are the forces that make market economies work.
• They determine the quantity of each good produced and the price
at which it is sold.
• If you want to know how any event or policy will affect the
economy, you must think first about how it will affect supply and
demand.
• The terms supply and demand refer to the behaviour of people as
they interact with one another in competitive markets.

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MARKETS AND COMPETITION

WHAT IS A MARKET?

• Market: A group of buyers and sellers of a particular good or service.

• Buyers as a group determine the demand for the product.

• Sellers as a group determine the supply of the product. Markets take

many forms:
• Highly organized
• Markets for many agricultural commodities.
• Less organized
• Market for ice cream in a particular town.

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MARKETS AND COMPETITION
WHAT IS COMPETITION?

• Competitive market: A market in which there are many buyers and

many sellers so that each has a negligible impact on the market price.
• Price and quantity are determined by all buyers and sellers as they
interact in the marketplace.
• In this chapter, it is assumed that markets are perfectly competitive.
• Goods offered for sale are all exactly the same.
• Buyers and sellers are so numerous that no single buyer or seller
has any influence over the market price.
• Buyers and sellers are price takers.

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 MARKETS AND COMPETITION

WHAT IS COMPETITION? (CONTINUED)

• At the market price

• Buyers can buy all they want
• Sellers can sell all they want
• Not all goods and services are sold in perfectly competitive markets.
• Monopoly: Only seller in the market and this seller sets the price.
• Other markets fall between perfect competition and monopoly.

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DEMAND
THE DEMAND CURVE: THE RELATIONSHIP BETWEEN PRICE AND QUANTITY DEMANDED

• Quantity demanded: The amount of a good that buyers are willing

and able to purchase.
• Law of demand: The claim that, other things equal, the quantity
demanded of a good falls when the price of the good rises.
• Demand schedule: A table that shows the relationship between the
price of a good and the quantity demanded.
• Demand curve: A graph of the relationship between the price of a
good and the quantity demanded.

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FIGURE 4.1
Catherine’s Demand Schedule and Demand Curve

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DEMAND
MARKET DEMAND VERSUS INDIVIDUAL DEMAND

• Market demand: The sum of all the individual demands for a particular
good or service.

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DEMAND
SHIFTS IN THE DEMAND CURVE

• Any change that increases the

quantity demanded at every price
shifts the demand curve to the right
and is called an increase in
demand.
• Any change that reduces the
quantity demanded at every price
shifts the demand curve to the left
and is called a decrease in demand.

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DEMAND
SHIFTS IN THE DEMAND CURVE
• Factors that shift the demand curve:
• Income:
• Normal good: A good for which, other things equal, an increase in income
leads to an increase in demand.
• Inferior good: A good for which, other things equal, an increase in income
leads to a decrease in demand.
• Prices of related goods:
• Substitutes: Two goods for which an increase in the price of one leads to
an increase in the demand for the other.
• Complements: Two goods for which an increase in the price of one leads
to a decrease in the demand for the other.

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DEMAND
SHIFTS IN THE DEMAND CURVE
• Factors that shift the demand curve (continued):
• Tastes
• Expectations
• Number of buyers

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TABLE 4.1
Variables That Influence Buyers

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FIGURE 4.4
Shifts in the Demand Curve versus Movements along the Demand Curve

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Active Learning
Demand Curve

Draw a demand curve for music downloads. What

happens to it in each of the following scenarios?
Explain?

Burlingham/Shutterstock
A. The price of iPods falls
B. The price of music
downloads falls
C. The price of CDs falls

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SUPPLY
THE SUPPLY CURVE: THE RELATIONSHIP BETWEEN PRICE AND QUANTITY SUPPLIED

• Quantity supplied: The amount of a good that sellers are willing and able to sell.
• Law of supply: The claim that, other things equal, the quantity supplied of a good
rises when the price of the good rises.
• Supply schedule: A table that shows the relationship between the price of a good
and the quantity supplied.
• Supply curve: A graph of the relationship between the price of a good and the
quantity supplied.

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FIGURE 4.5
Ben’s Supply Schedule and Supply Curve

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SUPPLY
MARKET SUPPLY VERSUS INDIVIDUAL SUPPLY

• Market supply: The sum of supplies of all sellers.

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SUPPLY
SHIFTS IN THE SUPPLY CURVE

• Any change that increases the

quantity supplied at every price
shifts the supply curve to the
right and is called an increase in
supply.
• Any change that reduces the
quantity supplied at every price
shifts the supply curve to the left
and is called a decrease in
supply.

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SUPPLY
• Factors that shift the supply curve:
• Input prices
• Technology
• Expectations
• Number of sellers

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SUPPLY AND DEMAND TOGETHER

• Having analyzed supply and demand separately, we now combine them to see
how they determine the price and quantity of a good sold in the market.
• Equilibrium: A situation in which the price has reached the level where quantity
supplied equals quantity demanded
• Equilibrium price: The price that balances quantity supplied and quantity
demanded
• Equilibrium quantity: The quantity supplied and the quantity demanded at the
equilibrium price

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FIGURE 4.8
The Equilibrium of Supply and Demand

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SUPPLY AND DEMAND TOGETHER
EQUILIBRIUM (CONTINUED)

• Surplus: Quantity supplied is greater than quantity demanded.

• Shortage: Quantity demanded is greater than quantity supplied.

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SUPPLY AND DEMAND TOGETHER
EQUILIBRIUM (CONTINUED)

• 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.

Thinkstock
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SUPPLY AND DEMAND TOGETHER
THREE STEPS TO ANALYZING CHANGES IN EQUILIBRIUM

• When analyzing how some event affects the equilibrium in a market, we proceed
in three steps.

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A SHIFT IN DEMAND OR SUPPLY
• A change in demand: A change in supply:

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A SHIFT IN BOTH SUPPLY AND DEMAND

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Conclusion: How Prices Allocate Resources

• Market economies harness the forces of supply and demand to serve that end.
• Supply and demand together determine the prices of the economy’s many
different goods and services; prices in turn are the signals that guide the
allocation of resources.

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