Chapter 0414

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The Market Forces ofSupply and Demand

Chapter 4

Copyright 2001 by Harcourt, Inc.

All rights reserved. Requests for permission to make copies of any part of

the

work should be mailed to:Permissions Department, arcourt !ollege Publishers,

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arcourt, +nc. items and derived items copyright #-- by arcourt, +nc.

The Market Forces of

Supply and DemandSupplyanddemandare the two words

that economists use most often.

Supplyanddemandare the forces that

make market economies work.

Modern microeconomics is aboutsuppy, demand, and market

e!uiibrium.

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Markets

" marketis a group of buyers and

seers of a particuar good or ser#ice.$he terms suppy and demand refer

to the beha#ior of peope . . . as they

interact with one another in markets.

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Markets

%uyersdeterminedemand.

&eersdeterminesuppy.

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Market Type:

A Competitive Market

" competiti#e marketis a market. . .

with manybuyers and sellers.

that is not controlled by any one person.

in which a narrow range of pricesare

established that buyers and sellers act upon.

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Competition:

Perfect and Otherwise

'roducts are the same

(umerous buyers and seers so that each

has no infuence o#er price %uyers and &eers are price takers

'erfect Competition

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Competition:


Monopoy

One seller, and seller controls price)igopoy

Few sellers

Not always aggressive competition

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Competition:


Monopoistic Competition

Many sellers

Slightly differentiated products

Each seller may set price for its own

product

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Demand

*uantity demanded

is the amountof a good that buyers are

wiing and abe

to purchase.

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Law of Demand

$he aw of demandstates

that there is an inverserelationshipbetween price

and !uantity demanded.

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Demand Schedule

$he demand schedueis a tabe

that shows the reationshipbetween thepriceof the good

and the!uantitydemanded.

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Demand Schedule

Price Quantity$0.00 12

0.50 101.00 81.50 6

2.00 42.50 23.00 0

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Determinants of Demand

Market price

Consumer income'rices of reated goods

$astes

+pectations

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Demand Cure

$hedemand cur#eisthe downward-

soping ine reating price to !uantitydemanded.

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Demand Cure

$3.002.5

02.001.50

1.00

0.50

21 3 4 5 6 7 8 9 10

12

11

Price of

Ice-CreamCone

Quantity

of Ice-Cream

0


0.50 101.00 8

1.50 62.00 42.50 23.00 0

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Ceteris Pari!us

Ceteris paribusis a atin phrase thatmeans a #ariabes other than the

ones being studied are assumed to be

constant. iteray,ceteris paribus

means /other things being e!ua.

The demand cure slopes downward!ecause" ceteris pari!us" lower prices

imply a #reater $uantity demanded%

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Market Demand

Market demandrefers to the sum of a

indi#idua demands for a particuar

good or ser#ice.

raphicay, indi#idua demand cur#es

are summed horiontallyto obtain the

market demand cur#e.

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Determinants of Demand

Market price

Consumer income'rices of reated goods

$astes

+pectations

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Chan#e in &uantity Demanded

ersus Chan#e in Demand

Change in*uantity emanded Mo#ement aong the demand cur#e.

Caused by a change in thepriceof

the product.

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Chan#es in &uantityDemanded

0

1

Price of

Ciarettes!er Pac"

#umer ofCiarettes %mo"e&

( ta) t*at raises t*e!rice of ciarettes

resu+ts in a

mo,ement a+on t*e&eman& cur,e.

(

C

20

2.00

$4.0

0

12

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Chan#e in &uantity Demanded

ersus Chan#e in Demand

Change in emand " shift in the demand cur#e, either

to the eft or right.

Caused by a change in adeterminant other than the price.

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Chan#es in Demand

0

1

Price of

Ice-CreamCone

Quantity

of Ice-Cream

3

2

Increase in

&eman&

'ecrease in&eman&

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Consumer 'ncome

"s income increases the demand

for a norma goodwi increase."s income increases the demand

for an inferior goodwi decrease.

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Consumer 'ncome(ormal )ood

$3.002.50

2.001.501.00

0.50

21 3 4 5 6 7 8 9 10 1211

Price of

Ice-CreamCone

Quantity

of Ice-Cream0

Increasein &eman&

(nincrease

inincome...

1

2

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Consumer 'ncome'nferior )ood

$3.002.50

2.001.501.00

0.50

21 3 4 5 6 7 8 9 10 1211

Price of

Ice-CreamCone

Quantity

of Ice-Cream0

'ecreasein &eman&

(n

increasein

income...

12

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Prices of *elated )oods

Su!stitutes + Complements4hen a fa in the price of one good

reducesthe demand for another good,

the two goods are caed substitutes.4hen a fa in the price of one good

increasesthe demand for another

good, the two goods are caedcompements.

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Chan#e in &uantity Demandedersus Chan#e in Demand

aria+es t*at(ect Quantity

'eman&e&

( C*ane in/*is aria+e . . .

Price e!resents a mo,ement

a+on t*e &eman& cur,e

Income %*ifts t*e &eman& cur,e

Prices of re+ate&oo&s

%*ifts t*e &eman& cur,e

/astes %*ifts t*e &eman& cur,e

)!ectations %*ifts t*e &eman& cur,e

#umer of

uyers

%*ifts t*e &eman& cur,e

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Supply

*uantity suppiedis the amount of a

good that seers are wiing and abeto se.

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Law of Supply

$heaw of suppystates that there is a

direct !positive" relationshipbetweenprice and !uantitysuppied.

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Determinants of Supply

Market price

Input prices$echnoogy

+pectations

(umber of producers

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Supply Schedule

$hesuppy schedueisa tabe that

shows the reationship between theprice of the good and the !uantity

suppied.

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Supply Schedule


0.50 01.00 11.50 2

2.00 32.50 43.00 5

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Supply Cure

$hesuppy cur#eis the upward-soping ine reating price to !uantity

suppied.

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Supply Cure

$3.002.502.00

1.501.00

0.50

21 3 4 5 6 7 8 9 10 1211

Price of

Ice-CreamCone

Quantity

of Ice-Cream0


0.50 0

1.00 11.50 22.00 32.50 4

3.00 5

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Market Supply

Market suppyrefers to the sum of

a indi#idua suppies for a seers

of a particuar good or ser#ice.

raphicay, indi#idua suppy

cur#es are summed horiontallytoobtain the market suppy cur#e.

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Determinants of Supply

Market price

Input prices$echnoogy

+pectations

(umber of producers

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Chan#e in &uantity Supplied

ersus Chan#e in Supply

Change in *uantity &uppied Mo#ement aong the suppy cur#e.

Caused by a change in the market price

of the product.

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1 5

Price of

Ice-CreamCone

Quantity

of Ice-Cream0

&

1.00

(

C$3.00

" rise in the price

of ice cream conesresuts in a

mo#ement aong

the suppy cur#e.

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ersus Chan#e in Supply

Change in &uppy

" shift in the suppy cur#e, either to the

eft or right.

Caused by a change in a determinant

other than price.

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Chan#e in Supply

Price of

Ice-CreamCone

Quantity

of Ice-Cream0

&1 &2&3

Increasein %u!!+y

'ecreasein %u!!+y

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ersus Chan#e in SupplyVariables thatAffect Quantity Supplied A Change in This Variable . . .

Price Represents a movement alongthe 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

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Supply and Demand To#ether

+!uiibrium 'rice $he price that baances suppy and

demand. )n a graph, it is the price at

which the suppy and demand cur#esintersect.

+!uiibrium *uantity

$he !uantity that baances suppy anddemand. )n a graph it is the !uantity at

which the suppy and demand cur#es

intersect.

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Supply and Demand To#ether

Price Quantity

$0.00 0

0.50 0

1.00 11.50 4

2.00 7

2.50 10

3.00 13

Price Quantity

$0.00 19

0.50 16

1.00 131.50 10

2.00 7

2.50 4

3.00 1

'eman&

%c*e&u+e

%u!!+y

%c*e&u+e

,t -./00" the $uantity demanded is

e$ual to the $uantity supplied%

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%u!!+y

'eman&

Price of

Ice-CreamCone

Quantity

of Ice-Cream

1$uili!rium ofSupply and Demand

21 3 4 5 6 7 8 9 10 12110

$3.00

2.502.00

1.5

01.00

0.50

ui+irium

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Price of

Ice-CreamCone

Quantity

of Ice-Cream21 3 4 5 6 7 8 9 10 12110

$3.002.50

2.00

1.5

01.00

0.50

%u!!+y

'eman&

%ur!+us

12cess Supply

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Surplus

4hen the price is abovethe e!uiibrium

price, the !uantity suppied eceeds the

!uantity demanded. $here isecess suppy

or asurpus. &uppiers wi ower the price

to increase saes, thereby mo#ing toward

e!uiibrium.

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12cess Demand

Quantity ofIce-Cream Cones

Price ofIce-Cream

Cone

$2.00

0 1 2 3 4 5 ! " # 10 11 12 13

%u!!+y

'eman&

$1.50

%*ortae

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Shorta#e

4hen the price is belowthe e!uiibrium

price, the !uantity demanded eceeds the

!uantity suppied. $here isecess demand

or ashortage. &uppiers wi raise the price

due to too many buyers chasing too few

goods, thereby mo#ing toward e!uiibrium.

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Three Steps To ,naly3in#

Chan#es in 1$uili!rium ecide whether the e#ent shifts the

suppy or demand cur#e 5or both6.

ecide whether the cur#e5s6 shift5s6 to the

eft or to the right.

+amine how the shift affectse!uiibrium price and !uantity.


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ow an 'ncrease in Demand,ffects the 1$uili!rium

Price ofIce-Cream

Cone

2.00

0 7 Quantity ofIce-Cream Cones

%u!!+y

Initia+eui+irium

D1

1. ot eat*er increasest*e &eman& for ice cream...

'2

2. ...resu+tin

in a *i*er!rice...

$2.50

10

3. ...an& a *i*eruantity so+&.

#e eui+irium

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Shifts in Cures ersusMoements alon# Cures

" shift in the suppy cur#e is caed achange

in supply.

" mo#ement aong a fied suppy cur#e iscaed achange in #uantity supplied.

" shift in the demand cur#e is caed a

change in demand. " mo#ement aong a fied demand cur#e is

caed achange in #uantity demanded.

D i S l ,ff t

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%2

ow a Decrease in Supply ,ffectsthe 1$uili!rium

Price ofIce-Cream

Cone

2.00

0 1 2 3 4 7 8 9 11 12 Quantity of

Ice-Cream Cone

13

'eman&

Initia+ eui+irium

S1

10

1. (n eart*ua"e re&ucest*e su!!+y of ice cream...

#eeui+irium

2. ...resu+tin

in a *i*er!rice...

$2.50

3. ...an& a +oeruantity so+&.

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5hat appens to Price and &uantity5hen Supply or Demand Shifts6

#o C*aneIn %u!!+y

(n IncreaseIn %u!!+y

( 'ecreaseIn %u!!+y

#o C*aneIn 'eman& P sameQ same P downQ up P upQ down(n IncreaseIn 'eman&

P upQ up

P ambiuousQ up

P upQ ambiuous

( 'ecrease

In 'eman&

P downQ down

P downQ ambiuous

P ambiuousQ down

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Summary

+conomists use the mode of suppy

and demand to anay7e competiti#e

markets.

$he demand cur#e shows how the

!uantity of a good depends upon the

price.

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Summary

"ccording to the aw of demand, as the

price of a good rises, the !uantity

demanded fas. In addition to price, other

determinants of !uantity demanded

incude income, tastes, epectations,and the prices of compements and

substitutes.

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Summary

$he suppy cur#e shows how the

!uantity of a good suppied depends

upon the price.

"ccording to the aw of suppy, as

the price of a good rises, the !uantity

suppied rises.

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Summary

In addition to price, other

determinants of !uantity suppied

incude input prices, technoogy, andepectations.

Market e!uiibrium is determined

by the intersection of the suppy anddemand cur#es.

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Summary

&uppy and demand together

determine the prices of the

economy8s goods and ser#ices. In market economies, prices are the

signas that guide the aocation of

resources.

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raphica9e#iew

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Price ofIce-Cream

Cone

2.00

0 7 10 Quantity of

Ice-Cream Cones

%u!!+y

Initia+

eui+irium

D1

' i D d

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Price ofIce-Cream

Cone

2.00

0 7 10 Quantity of

Ice-Cream Cones

%u!!+y

Initia+

eui+irium

D1


' i D d

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Price ofIce-Cream

Cone

2.00

0 7 10 Quantity of

Ice-Cream Cones

%u!!+y

Initia+eui+irium

D1


'2

#e eui+irium$2.50

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ow an 'ncrease in Demand


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Price ofIce-Cream

Cone

2.00

0 7 10 Quantity of

Ice-Cream Cones

%u!!+y

Initia+eui+irium

D1


'2

#e eui+irium

2. ...resu+tin

in a *i*er!rice...

$2.50


ow an 'ncrease in Demand


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Price ofIce-Cream

Cone

2.00

0 7 10 Quantity of

Ice-Cream Cones

%u!!+y

Initia+eui+irium

D1


'2

#e eui+irium

2. ...resu+tin

in a *i*er!rice...

$2.50


ow a Decrease in Supply ,ffects

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Price ofIce-Cream

Cone

2.00

0 1 2 3 4 5 6 7 8 9 11 12 Quantity of

Ice-Cream Cone

13

'eman&

Initia+ eui+irium

S1

10


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Price ofIce-Cream

Cone

2.00

0 1 2 3 4 5 6 7 8 9 11 12 Quantity of

Ice-Cream Cone

13

'eman&

Initia+ eui+irium

S1

10



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Price ofIce-Cream

Cone

2.00

0 1 2 3 4 5 6 7 8 9 11 12 Quantity of

Ice-Cream Cone

13

'eman&

Initia+ eui+irium

S1

10



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Price ofIce-Cream

Cone

2.00

0 1 2 3 4 5 6 7 8 9 11 12 Quantity of

Ice-Cream Cone

13

'eman&

Initia+ eui+irium

S1

10


#eeui+irium$2.50


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Price ofIce-Cream

Cone

2.00

0 1 2 3 4 5 6 7 8 9 11 12 Quantity of

Ice-Cream Cone

13

'eman&

Initia+ eui+irium

S1

10


#eeui+irium$2.50

2. ...resu+tin

in a *i*er!rice...


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Price ofIce-Cream

Cone

2.00

0 1 2 3 4 7 8 9 11 12 Quantity of13

'eman&

Initia+ eui+irium

S1

10


#eeui+irium$2.50

2. ...resu+tin

in a *i*er!rice...

Chapter 0414

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