The Market Forces of Supply and Demand

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.
MARKETS AND COMPETITION
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
Buyers 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.
Competition: Perfect and Otherwise
Perfect Competition
Products are the same
Numerous buyers and sellers so that each has no
influence over price
Buyers and Sellers are price takers
Monopoly
One seller, and seller controls price
Competition: Perfect and Otherwise
Oligopoly
Few sellers
Not always aggressive competition
Monopolistic Competition
Many sellers
Slightly differentiated products
Each seller may set price for its own product
DEMAND
Quantity demanded is the amount of a good that
buyers are willing and able to purchase.
Law of Demand
The law of demand states that, other things equal, the
quantity demanded of a good falls when the price of the
good rises.
WHAT DETERMINES THE QUANTITY AN
INDIVIDUAL DEMANDS?
Price
Income
Prices of Related Goods
Tastes
Expectations
WHAT DETERMINES THE QUANTITY AN
INDIVIDUAL DEMANDS?
• Price
 law of demand: the claim that, other things equal, the
quantity demanded of a good falls when the price of the
good rises.
• 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.
WHAT DETERMINES THE QUANTITY AN
INDIVIDUAL DEMANDS?
• 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
• Tastes
• Expectations
The Demand Curve: The Relationship between
Price and Quantity Demanded
Demand Schedule
The demand schedule is a table that shows the
relationship between the price of the good and the
quantity demanded.
Catherine’s Demand Schedule
The Demand Curve: The Relationship between
Price and Quantity Demanded
Demand Curve
The demand curve is a graph of the relationship
between the price of a good and the quantity
demanded.
 Price of
Ice-Cream Cone
$3.00

2.50

1. A decrease
2.00
in price ...

1.50

1.00

0.50

0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
Copyright © 2004 South-Western
ceteris paribus a Latin phrase, translated as “other
things being equal,” used as a reminder that all
variables other than the ones being studied are
assumed to be constant.
Market Demand versus Individual Demand
Market demand refers to the sum of all individual
demands for a particular good or service.

Graphically, individual demand curves are summed

horizontally to obtain the market demand curve.
Changes in Quantity Demanded
Movement along the demand curve.
(caused by a change in the price of the
product)
Price of Ice-
Cream A tax that raises the
Cones
price of ice-cream
B cones results in a
$2.00
movement along the
demand curve.

1.00 A

D
0 4 8 Quantity of Ice-Cream Cones
Shifts in the Demand Curve
 Consumer income
 Prices of related goods

 Tastes

 Expectations

 Number of buyers
Shifts in the Demand Curve
Change in Demand
A shift in the demand curve, either to the left or right.
Caused by any change that alters the quantity
demanded at every price.
 Price of
Ice-Cream
Cone

Increase
in demand

Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0 Quantity of
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning
Variables That Influence Buyers

Copyright©2004 South-Western
SUPPLY
Quantity supplied is the amount of a good that sellers
are willing and able to sell.
Law 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.
WHAT DETERMINES THE QUANTITY AN
INDIVIDUAL SUPPLIES?
Price
Input prices
Technology
Expectations
The Supply Curve: The Relationship between
Price and Quantity Supplied
Supply Schedule
The supply schedule is a table that shows the
relationship between the price of the good and the
quantity supplied.
Ben’s Supply Schedule
The Supply Curve: The Relationship between Price and
Quantity Supplied
Supply Curve
The supply curve is the graph of the relationship
between the price of a good and the quantity supplied.
 Price of
Ice-Cream
Cone
$3.00

2.50
1. An
increase
in price ... 2.00

1.50

1.00

0.50

0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity of cones supplied.
Copyright©2003 Southwestern/Thomson Learning
Market Supply versus Individual Supply
Market supply refers to the sum of all individual
supplies for all sellers of a particular good or service.

Graphically, individual supply curves are summed

horizontally to obtain the market supply curve.
Changes in Quantity Supply
Movement along the supply curve.
(caused by a change in the price of the
product)
Movement along the supply curve
Price of Ice-
Cream S
Cone
C
$3.00
A rise in the price
of ice cream
cones results in a
movement along
A the supply curve.
1.00

Quantity of
Ice-Cream
0 1 5 Cones
Shifts in the Supply Curve
Input prices
Technology
Expectations
Number of sellers
Shifts in the Supply Curve
Change in Supply
A shift in the supply curve, either to the left or right.
Caused by a change in a determinant other than price.
 Price of
Ice-Cream Supply curve, S3
Supply
Cone
curve, S1
Supply
Decrease curve, S2
in supply

Increase
in supply

0 Quantity of
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning
Variables That Influence Sellers

Copyright©2004 South-Western
SUPPLY AND DEMAND TOGETHER
Equilibrium: a situation in which supply and demand
have been brought into balance
Equilibrium refers to a situation in which the price
has reached the level where quantity supplied equals
quantity demanded.
SUPPLY AND DEMAND TOGETHER
Equilibrium Price
 The price that balances supply and demand.
 On a graph, it is the price at which the supply and demand
curves intersect.
Equilibrium Quantity
the quantity supplied and the quantity demanded
when the price has adjusted to balance supply and
demand
The quantity supplied and the quantity demanded at
the equilibrium price.
On a graph it is the quantity at which the supply and
demand curves intersect.
SUPPLY AND DEMAND TOGETHER
Demand Schedule Supply Schedule

At $2.00, the quantity demanded

is equal to the quantity supplied!
 Price of
Ice-Cream
Cone Supply

Equilibrium price Equilibrium

$2.00

Equilibrium Demand
quantity

0 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning
 (a) Excess Supply
Price of
Ice-Cream Supply
Cone Surplus
$2.50

2.00

Demand

0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
demanded supplied Cones

Copyright©2003 Southwestern/Thomson Learning

Equilibrium
Surplus
a situation in which quantity supplied is greater than
quantity demanded
When price > equilibrium price, then
quantity supplied > quantity demanded.
 There is excess supply or a surplus.
 Suppliers will lower the price to increase sales, thereby
moving toward equilibrium.
Equilibrium
Shortage
a situation in which quantity demanded is greater
than quantity supplied
When price < equilibrium price, then
quantity demanded > the quantity supplied.
There is excess demand or a shortage.
 Suppliers will raise the price due to too many buyers chasing
too few goods, thereby moving toward equilibrium.
 (b) Excess Demand
Price of
Ice-Cream Supply
Cone

$2.00

1.50
Shortage

Demand

0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
supplied demanded Cones

Copyright©2003 Southwestern/Thomson Learning

Equilibrium
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.
Three Steps to Analyzing Changes in Equilibrium
Decide whether the event shifts the supply or
demand curve (or both).
Decide whether the curve(s) shift(s) to the left or to
the right.
Use the supply-and-demand diagram to see how the
shift affects equilibrium price and quantity.
 Price of
Ice-Cream 1. Hot weather increases
Cone the demand for ice cream . . .

Supply

$2.50 New equilibrium

2.00
2. . . . resulting
Initial
in a higher
equilibrium
price . . .
D

0 7 10 Quantity of
3. . . . and a higher Ice-Cream Cones
quantity sold.
Copyright©2003 Southwestern/Thomson Learning
Three Steps to Analyzing Changes in Equilibrium
Shifts in Curves versus Movements along Curves
A shift in the supply curve is called a change in supply.
A movement along a fixed supply curve is called a
change in quantity supplied.
A shift in the demand curve is called a change in
demand.
A movement along a fixed demand curve is called a
change in quantity demanded.
 Price of
Ice-Cream
Cone 1. An earthquake reduces
the supply of ice cream. . .
S2
S1

New
$2.50 equilibrium

2.00 Initial equilibrium

2. . . . resulting
in a higher
price of ice
cream . . . Demand

0 4 7 Quantity of
3. . . . and a lower Ice-Cream Cones
quantity sold.
Copyright©2003 Southwestern/Thomson Learning
Summary
Economists use the model of supply and demand to
analyze competitive markets.
In a competitive market, there are many buyers and
sellers, each of whom has little or no influence on the
market price.
Summary
The demand curve shows how the quantity of a good
depends upon the price.
According to the law of demand, as the price of a good
falls, the quantity demanded rises. Therefore, the
demand curve slopes downward.
In addition to price, other determinants of how much
consumers want to buy include income, the prices of
complements and substitutes, tastes, expectations, and
the number of buyers.
If one of these factors changes, the demand curve shifts.
Summary
The supply curve shows how the quantity of a good
supplied depends upon the price.
According to the law of supply, as the price of a good
rises, the quantity supplied rises. Therefore, the supply
curve slopes upward.
In addition to price, other determinants of how much
producers want to sell include input prices, technology,
expectations, and the number of sellers.
If one of these factors changes, the supply curve shifts.
Summary
Market equilibrium is determined by the intersection
of the supply and demand curves.
At the equilibrium price, the quantity demanded
equals the quantity supplied.
The behavior of buyers and sellers naturally drives
markets toward their equilibrium.