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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.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4
First Canadian Edition
Market Type: A Competitive Market
A
Competitive Market is a market:
–with many buyers and sellers
–that is not controlled by any one
person
–in which a narrow “range of prices”
are established that buyers and
sellers act upon
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4
First Canadian Edition
Individual Demand Schedule
Cathy’s Demand: Ice Cream Cones
Price Per
Cone
(P)
Daily
Quantity
(Q)
$3.00
$2.50
$2.00
$1.50
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4
0
2
4
6
First Canadian Edition
Individual Demand Curve
Cathy’s Demand: Ice Cream Cones
P
$ Per
Cone
$2.50
$2.00
$1.50
2
4
6
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4
Q # Cones Per Day
First Canadian Edition
Determinants of Demand
Product’s Own Price (Px)
Consumer Income (Y)
Prices of Related Goods (Py)
Tastes (T)
Expectations (Pe)
Number of Consumers (POP)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4
First Canadian Edition
Ceteris Paribus . . .
...implies that all the
relevant variables
(e.g. determinants of
demand) are held
constant, except the
one(s) being studied
at the time.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4
First Canadian Edition
Change in Quantity Demanded
vs. Change in Demand
Change
in Quantity Demanded
Movement along the demand curve.
Caused by a change in the Price of
the product.
Change in Demand
A shift in the demand curve, either to
the left or right. Caused by changes
in Non-Price Factors.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4
First Canadian Edition
The Concept of Supply. . .
Quantity Supplied
P
refers to the amount
(quantity) of a good
that sellers are willing
and able to make
available for sale at
alternative prices for a
given period.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4
Q
First Canadian Edition
Individual Supply Schedule
Sak’s Store: Ice Cream Cones
Price Per
Cone
(P)
Daily
Quantity
(Q)
$3.00
$2.50
$2.00
$1.50
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4
5
4
3
2
First Canadian Edition
Individual Supply Curve
P
Price
Per
Cone
Sak’s Store: Ice Cream Cones
$2.50
$2.00
$1.50
2
3
4
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4
Q # Cones Per Day
First Canadian Edition
Market Supply Schedule
 Market
supply is the sum of all individual
supplies at each possible price.
 Assume the ice cream market has two
firms as follows:
Price Per Cone
$0.00
$0.50
$1.00
$1.50
$2.00
Sak’s IceMart
0 +
0
=
0 +
0
=
1 +
0
=
2 +
2
=
3 +
4
=
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4
Market Supply
0
0
1
4
7
First Canadian Edition
Market Supply Curve
P
Price
Per
Cone
All Sellers
$2.00
$1.50
$1.00
1
4
7
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4
Q # Cones Per Day
First Canadian Edition
Determinants of Supply
Product’s Own Price (Px)
Input Prices (Pf)
Technology (Tech)
Expectations (Pe)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4
First Canadian Edition
Change in Quantity Supplied
vs. Change in Supply
Change
in Quantity Supplied
Movement along the supply curve.
Caused by a change in the Price
of the product.
Change in Supply
A shift in the supply curve, either to
the left or right. Caused by changes in
Non-Price Factors
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4
First Canadian Edition
Supply and Demand Together
Equilibrium
Price
The price at which the supply and demand
curve intersect. Quantity Supplied and
Quantity Demanded are equal.
Equilibrium
Quantity
The quantity at which the supply and
demand curve intersect.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4
First Canadian Edition
Comparative Statics: Analyzing Changes
in Equilibrium
Determine
if an event shifts supply
curve, the demand curve, or both.
Determine if curve(s) shift to left or
right.
Determine how the shift affects
equilibrium price and quantity.
Example Event: Heat Wave
Product: Ice Cream Cones
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4
First Canadian Edition
Heat Wave Will Cause:
“Increase in Demand”
Price
P2
P1


Quantity
Q1
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4
Q2
First Canadian Edition
Changes in Equilibrium
Four Principles
An
Increase in Demand will cause:
Pe
Qe
A Decrease in Demand will cause:
Pe
Qe
An Increase in Supply will cause:
Pe
Qe
A Decrease in Supply will cause:
Pe
Qe
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4
First Canadian Edition