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The Market Forces of Supply and Demand
Markets
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.
And Economics, especially Microeconomics is about how supply and demand interact in markets.
Market Types or Structures
• Competitive Markets– Products are the same,price takers
• Monopoly
• Monopolistic Competition
• Oligopoly
Demand Curve
$3.002.50
2.001.501.00
0.50
21 3 4 5 6 7 8 9 10
12
11
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
0
Why does the Demand Curve Slope Downward?
• Law of Demand– Inverse relationship between price and
quantity.
• Law of Diminishing Marginal Utility.– Utility is the extra satisfaction that one
receives from consuming a product.– Marginal means extra.– Diminishing means decreasing.
Market 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.
Ceteris Paribus
Ceteris paribus is a Latin phrase that means all variables other than the
ones being studied are assumed to be constant. Literally, ceteris
paribus means “other things being equal.”
The demand curve slopes downward because, ceteris paribus, lower prices
imply a greater quantity demanded!
Two Simple Rules for Movements vs. Shifts
• Rule One– When an independent variable changes and that
variable does not appear on the graph, the curve on the graph will shift.
• Rule Two– When an independent variable does appear on the
graph, the curve on the graph will not shift, instead a movement along the existing curve will occur.
• Let’s apply these rules to the following cases of supply and demand!
Change in Quantity Demanded versus Change in Demand
Change in Quantity Demanded Movement along the demand curve. Caused by a change in the price of
the product.
Changes in Quantity Demanded
0
D1
Price of Cigarettes per Pack
Number of Cigarettes Smoked per Day
A tax that raises the price of cigarettes
results in a movement along the
demand curve.
A
C
20
2.00
$4.00
12
Change in Quantity Demanded versus Change in Demand
Change in Demand A shift in the demand curve, either to
the left or right. Caused by a change in a
determinant other than the price.
Determinants of Demand
Market price Consumer income Prices of related goods Tastes Expectations What are some examples?
Consumer IncomeNormal Good
$3.002.50
2.001.501.00
0.50
21 3 4 5 6 7 8 9 10
12
11
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
0
Increasein demand
An increase
in income...
D1
D2
Consumer IncomeInferior Good
$3.002.50
2.001.501.00
0.50
21 3 4 5 6 7 8 9 10
12
11
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
0
Decreasein demand
An increase
in income...
D1D2
Prices of Related GoodsSubstitutes & Complements
When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes.
When a fall in the price of one good increases the demand for another good, the two goods are called complements.
Change in Quantity Demanded versus Change in Demand
Variables that Affect Quantity
Demanded
A Change in This Variable . . .
Price Represents a movementalong the demand curve
Income Shifts the demand curve
Prices of relatedgoods
Shifts the demand curve
Tastes Shifts the demand curve
Expectations Shifts the demand curve
Number ofbuyers
Shifts the demand curve
Supply Curve
$3.002.502.00
1.501.00
0.50
21 3 4 5 6 7 8 9 10
12
11
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
0
Law of Supply
The law of supply states that there is a direct (positive) relationship between price and quantity
supplied.
Supply
Quantity supplied is the amount of a good that sellers are willing and able
to sell.
Change in Quantity Supplied
1 5
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
0
S
1.00A
C$3.00
A rise in the price of ice cream cones
results in a movement along the supply curve.
Market 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.
Determinants of Supply
Market price Input prices Technology Expectations Number of producers What are some examples?
Change in Supply
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
0
S1 S2
S3
Increase in Supply
Decrease in Supply
Change in Quantity Supplied versus Change in Supply
Variables that Affect Quantity Supplied
A Change in This Variable . . .
Price Represents a movement along the supply curve
Input prices Shifts the supply curve
Technology Shifts the supply curve
Expectations Shifts the supply curve
Number of sellers Shifts the supply curve
Supply
Demand
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
Equilibrium of Supply and Demand
21 3 4 5 6 7 8 9 10 12110
$3.002.502.00
1.501.00
0.50
Equilibrium
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
21 3 4 5 6 7 8 9 10
12110
$3.002.50
2.00
1.501.00
0.50
Supply
Demand
Surplus
Excess Supply
Excess Demand
Quantity ofIce-Cream Cones
Price ofIce-Cream
Cone
$2.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Supply
Demand
$1.50
Shortage
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.
Examine how the shift affects equilibrium price and quantity.
How an Increase in Demand Affects the Equilibrium
Price ofIce-Cream
Cone
2.00
0 7 Quantity ofIce-Cream Cones
Supply
Initialequilibrium
D1
1. Hot weather increasesthe demand for ice cream...
D2
2. ...resultingin a higherprice...
$2.50
103. ...and a higherquantity sold.
New equilibrium
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
S2
How a Decrease in Supply Affects the Equilibrium
Price ofIce-Cream
Cone
2.00
0 1 2 3 4 7 8 9 11 12 Quantity ofIce-Cream Cones
13
Demand
Initial equilibrium
S1
10
1. An earthquake reducesthe supply of ice cream...
Newequilibrium
2. ...resultingin a higherprice...
$2.50
3. ...and a lowerquantity sold.