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.
4-1
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.
4-2
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.
4-3
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.
4-4
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.
4-5
FIGURE 4.1
Catherine’s Demand Schedule and Demand Curve
4-6
DEMAND
MARKET DEMAND VERSUS INDIVIDUAL DEMAND
• Market demand: The sum of all the individual demands for a particular
good or service.
4-7
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.
4-8
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.
4-9
DEMAND
SHIFTS IN THE DEMAND CURVE
• Factors that shift the demand curve (continued):
• Tastes
• Expectations
• Number of buyers
4-10
TABLE 4.1
Variables That Influence Buyers
4-11
FIGURE 4.4
Shifts in the Demand Curve versus Movements along the Demand Curve
4-12
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
4-13
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.
4-14
FIGURE 4.5
Ben’s Supply Schedule and Supply Curve
4-15
SUPPLY
MARKET SUPPLY VERSUS INDIVIDUAL SUPPLY
• Market supply: The sum of supplies of all sellers.
4-16
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.
4-17
SUPPLY
• Factors that shift the supply curve:
• Input prices
• Technology
• Expectations
• Number of sellers
4-18
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
4-19
FIGURE 4.8
The Equilibrium of Supply and Demand
4-20
SUPPLY AND DEMAND TOGETHER
EQUILIBRIUM (CONTINUED)
• Surplus: Quantity supplied is greater than quantity demanded.
• Shortage: Quantity demanded is greater than quantity supplied.
4-21
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
4-22
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.
4-23
A SHIFT IN DEMAND OR SUPPLY
• A change in demand: A change in supply:
4-24
A SHIFT IN BOTH SUPPLY AND DEMAND
4-25
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.
4-26
