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Chapter 4
The Market Forces of
Supply and Demand
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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!
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Market: any institution, mechanism, or
arrangement which facilitates exchange.
A
market is the
interaction of buyers
and sellers.
–
–
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Buyers determine
demand...
Sellers determine
supply...
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
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Market Type: Perfect & Otherwise
Perfect
Competitive:
Homogeneous Products
– Buyers and Sellers are Price Takers
–
Monopoly:
–
One Seller, controls price
Oligopoly:
–
Few Sellers, not aggressive competition
Monopolistic
–
Competition:
Many Sellers, differentiated products
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Determinant of Demand:
Market Price
Law of Demand:
There exists an
inverse
relationship
between Price
and Quantity
Demanded.
P
Q
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Demand Schedule and
Demand Curve
Demand
Schedule:
A table that shows the relationship
between the price of the good and
the quantity demanded. (Table 4-1)
Demand Curve:
The downward-sloping line relating
price and quantity demanded. (Figure 4-1)
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Price of Ice Cream
Example: Demand For Ice Cream
Demand
Quantity of Ice Cream
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Change in Quantity Demanded
verses Change in Demand
Change
in Quantity Demanded
Movement along the demand curve.
Caused by a change in the market
price of the product. (Table 4-3)
Change in Demand
A shift in the demand curve, either to
the left or right. (Figure 4-3)
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The Concept of Demand. . .
Quantity
Demanded
refers to the amount
(quantity) of a good
that buyers are
willing and able to
purchase at each
price for a given
point in time.
P
Q
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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.
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Changes in Quantity Demanded
Price
$2.00
Quantity
7
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Changes in Quantity Demanded
Price
$2.00
$1.00
Quantity
7
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13
Change in Demand
Price
$2.00
Quantity
7
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Change in Demand
Price
$2.00
Quantity
7
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10
Determinants of Demand
What
factors
determine how
much ice cream
you will buy?
What factors
determine how
much will you
really purchase?
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Determinants of Demand
1.
2.
3.
4.
5.
Consumer Income
Prices of Related Goods
Tastes
Expectations
Number of Consumers
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Determinant of Demand:
Income
income increases P
the demand for a
normal good will
increase.
As
Q
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Determinant of Demand:
Income
income increases P
the demand for a
normal good will
increase.
As income increases
the demand for a
inferior good
decrease.
As
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Q
Determinant of Demand:
Prices of Related Goods
When the fall in
price of one good
reduces the
demand for
another good, the
two goods are
substitutes.
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Determinant of Demand:
Prices of Related Goods
When the fall in
price of one good
increases the
demand for
another good, the
two goods are
complements.
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Tastes and Preferences
 If
tastes change in
favor of a service or
product, the
demand will
increase (shift to
the right).
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Tastes and Preferences
 If
tastes change
against a product or
service, the demand
for that product or
service will fall
(shift to the left).
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Expectations about future prices
If
you expect the price of a product to
rise in the future, the demand for the
product will go up (shift to the right).
If
you expect the price of a product to
fall in the future, the demand for the
product will go down (shift to the left).
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Number of Consumers
 If
the number of
consumers
increase, the
demand curve will
shift to the right
(increase). If the
number decreases,
the demand will fall.
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Determinant of Supply:
Market Price
Law of Supply
There exists an
direct (positive)
relationship
between Price
and Quantity
Supplied.
P
Q
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Supply: Schedule and Curve
Supply
Schedule
A table that shows the relationship
between the price of the good and
the quantity supplied. (Table 4-4)
Supply Curve
The upward-sloping line relating price
and quantity supplied. (Figure 4-4)
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Supply of Ice Cream
Price
Quantity
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Change in Quantity Supplied verses
Change in Supply
Change
in Quantity Supplied
Movement along the supply curve.
Caused by a change in the market
price of the product. (Table 4-6)
Change in Supply
A shift in the supply curve, either to
the left or right. (Figure 4-7)
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The Concept of Supply. . .
P
Quantity Supplied
refers to the amount
(quantity) of a good
that sellers are willing
and able to make
available for sale at
each possible price for
a given point in time.
Q
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Changes in Quantity Supplied
Price
$2.00
Quantity
7
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Changes in Quantity Supplied
Price
$2.00
$1.00
Quantity
1
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7
Determinants of Supply
1.
2.
3.
4.
Input Prices
Technology
Expectations
Number of Producers
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Change in Supply
Price
$2.00
Quantity
7
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Change in Supply
Price
$2.00
Quantity
7
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11
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.
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Forces of Demand. . .
Price
Quantity
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Forces of Demand and Supply. . .
Price
Quantity
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Forces of Demand and Supply At Rest
Market Equilibrium
Price
$2.00
Quantity
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7
Actions of buyers and sellers that move
toward equilibrium.
Excess
Supply
Price is above equilibrium price, therefore
producers are unable to sell all they want
at the going price.
Excess
Demand
Price is below equilibrium price, therefore
consumers are unable to buy all they
want at the going price.
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Actions of buyers and sellers that move
toward equilibrium.
Price
Quantity
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Actions of buyers and sellers that move
toward equilibrium.
Price
Excess Supply
Quantity
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Actions of buyers and sellers that move
toward equilibrium.
Price
Quantity
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Actions of buyers and sellers that move
toward equilibrium.
Price
Excess
Demand
Quantity
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Comparative Statics: Analyzing Changes
in Equilibrium
Determine
if event shifts supply curve,
the demand curve, or both.
Determine if curve(s) shift to left or
right.
Determine how shift affects
equilibrium price and quantity.
Example: Demand for ice cream given
hot weather.
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Change in demand due to hot weather
Price
Pe
Equilibrium
Quantity
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Qe
Change in demand due to hot weather
Price
Pe
Quantity
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Qe
Change in demand due to hot weather
Price
New
Equilibrium
Pe
Pe
Quantity
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Qe
Qe