ECO2201 – Microeconomics

Chapter 4 :The Market Forces

of Supply and Demand

Demand and Supply

Lesson 3.1
Road Map
1. Introduction
2. Market and Competition
3. Demand
– The Law of Demand
– Keywords
– The Demand Curve
– Individual and Market Demand
– Movement along the Demand Curve: ∆QD
– Change in Demand: : ∆D

2
Road Map

4. Supply
– The Law of Supply
– Keywords
– The Supply Curve
– Individual and Market Supply
– Movement along the Supply Curve: ∆QS
– Change in Supply: ∆S

3
1. Introduction
• Let’s think about what we normally do in our daily life when we want to
eat some fruits, say mangoes.
– We go to the (traditional or farmer) market
• Let’s assume that we do not go to the supermarket.
• What do we do at the (traditional or farmer) market?
– Meet many fruit sellers.
– Ask them the price of their fruits.
– Then, decide on how many mangoes to buy.
• We do the same things when we want other items.

4
1. Introduction
• Common elements in our purchasing activities:
1. The market
2. The goods (or services)
3. The buyers
4. The sellers
5. The price of the goods
• In this lesson, we will discuss how each element interacts with
one another in a market setting.

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2. Markets and Competition
• Market
– A group of buyers and sellers of a particular good or service
• Buyers as a group
– Determine the demand for the product
• Sellers as a group
– Determine the supply of the product
– Could be either face to face or faceless contact.
– Could be local, national, or international markets.

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2. Markets and Competition

• Typically, prices help match buyers and sellers in the market.

Market for Buyers Sellers Prices

Demanders, Suppliers,
Goods/services Prices
consumers producers, firms
Factors of Firms, Workers,
Wages
production producers households

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2. Markets and Competition

• To keep things simple, the market here is assumed to be

perfectly competitive,
– Perfectly competitive market
• All goods are exactly the same
• Buyers and sellers are so numerous that no one can affect the
market price, “price takers”
– We will relax these assumptions in later lessons.

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2. Markets and Competition

• Note that in some of the examples in this lesson, we choose to

use products or goods that may not fit the above assumptions
because we believe that students can better relate them to
their daily life.

• Students should be aware how to use the tools introduced in

this lesson, the market must have those characteristics in the
last slide.

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3. Demand

Overview
– How many iPhones or something similar that you currently own?
• Most of us will say one.
– Why don’t most of us own more than one iPhone?
• We will say that we either don’t want it or cannot afford to
pay for more iPhones.
• The new iPhone (off-contract) costs about 30,000 baht.

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3. Demand
Overview
– If the same phone was sold at 10,000 baht, what will happen?
• Some will buy more than one iPhone.
– What if the same phone was sold at 3,000 baht?
• People will buy even more iPhones.
• In fact, people will all line up in front of the Apple Store
waiting to purchase the phone.

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3. Demand

The Law of Demand

• Conditional on all else being equal, as the price of a good rises,
the quantity demanded of the good falls (or, as the price falls,
the quantity demanded rises)
– That is, there is an inverse relationship between the price of the
good (P) and the quantity that consumers are willing and able to
purchase, i.e. quantity demanded (QD).

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3. Demand
Keywords
• Quantity demanded (QD) – the quantities that consumers are willing
and able to purchase.
• Demand – a curve/schedule that shows the quantities that consumers
are willing and able to purchase at each alternative price, at a specific
period of time (other things constant).
• Law of demand – there exists an inverse relationship between price (P)
and quantity demanded (QD). Thus, if the P of a good falls, the QD of
the good rises and vice versa.

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3. Demand
Demand schedule: Quantity
Price
of Lattes
− A table shows the relationship of Lattes
Demanded
between the price of a good and $0.00 16
the quantity demanded 1.00 14

− Example: Sam’s demand for lattes 2.00 12

3.00 10
per week
4.00 8
− Notice that Sam’s preferences obey 5.00 6
the law of demand. 6.00 4

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 3. Demand
Demand schedule (and Demand Curve):
Price of Quantity
Lattes Price
of Lattes
of Lattes
$6.00 Demanded
$5.00 $0.00 16
$4.00 1.00 14

$3.00 2.00 12
3.00 10
$2.00
4.00 8
$1.00
5.00 6
$0.00
Quantity 6.00 4
0 5 10 15 of Lattes

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 3. Demand
Market Demand versus Individual Demand
• Market demand
– Sum of all individual demands for a good or service
– Market demand curve: sum the individual demand curves
horizontally
• To find the total quantity demanded, we add the individual
quantity demanded at each price level.

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 3. Demand
Market Demand versus Individual Demand
Suppose Sam and Dean are the only two buyers in the market for lattes.
(QD = quantity demanded)
Price Sam’s QD Dean’s QD Market QD
$0.00 16 + 8 = 24
1.00 14 + 7 = 21
2.00 12 + 6 = 18
3.00 10 + 5 = 15
4.00 8 + 4 = 12
5.00 6 + 3 = 9
6.00 4 + 2 = 6

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 3. Demand
The Market Demand Curve for Lattes
P P QD (Market)
$6.00
$0.00 24
$5.00
1.00 21
$4.00
2.00 18
$3.00
3.00 15
$2.00
4.00 12
$1.00
5.00 9
$0.00
0 5 10 15 20 25 Q 6.00 6

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3. Demand
Demand Curve Shifters
• Recall, the demand curve shows how price affects quantity demanded (i.e. the
only factor that causes consumers to buy more or less is the price of the
good.); i.e., all other factors (such as income, price of related goods, tastes and
preferences) that may influence the amount bought are assumed to be
constant.
• These “other things” are non-price determinants of demand
– Things that determine buyers’ demand for a good, other than the good’s
price
➢ Changes in them shift the demand curve…

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 3. Demand
Change in Demand: ∆D
(Changes in the demand are shown as shifts of the demand curve)
P ($)
When demand When demand
falls, the demand rises, the demand
curve will shift to curve will shift to
the left (Demand D1 the right (Demand
decreases from D0 D0 increases from D0
to D2). D2
0 Q to D1).

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3. Demand
Determinants of Demand (Demand Shifters)
• Determinants of demand are the variables that their changing results in
a change in demand.
• There are 6 demand shifting factors.
i. Number of Buyers
ii. Consumer Tastes and Preferences
iii. Consumer Income
iv. Prices of Related Goods
v. Consumer Expectation
vi. Taxes and Subsidies to Consumers

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3. Demand
Determinants of Demand (Demand Shifters)
i. Number of buyers
• Increase in number of buyers
– Increases quantity demanded at each price → Shifts D curve to the right
• Decrease in number of buyers
– Decreases quantity demanded at each price → Shifts D curve to the left

ii. Tastes and Preferences

• Anything that causes a shift in tastes and preferences toward a good
will increase demand for that good and shift its D curve to the right

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3. Demand
Determinants of Demand (Demand Shifters)
iii. Income
• If good is a normal good
– An increase in income leads to an increase in
demand → Shifts D curve to the right

• If good is an inferior good

– An increase in income leads to a decrease in
demand: Shifts D curve to the left

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3. Demand
Determinants of Demand (Demand Shifters)
iv. Prices of related goods, substitutes
– Two goods are substitutes if an increase in the price of one
leads to an increase in the demand for the other
– Example: Coke and Pepsi
• An increase in the price of Coke increases demand for Pepsi,
shifting Pepsi demand curve to the right

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3. Demand
Determinants of Demand (Demand Shifters)
iv. Prices of related goods, complements
– Two goods are complements if an increase in the price of one leads to a
decrease in the demand for the other
– Example: computers and software
• If price of computers rises, people buy fewer computers, and
therefore less software; Software demand curve shifts to the left

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3. Demand
Determinants of Demand (Demand Shifters)
v. Expectations about the future
– Expect an increase in income, increase in current demand
– Expect higher prices, increase in current demand
– Example:
• If people expect their incomes to rise, their demand for meals at
expensive restaurants may increase now
• If people expect a sharp rise of cooking oil price, their demand
for cooking oil increases now.

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3. Demand
Determinants of Demand (Demand Shifters)
vi. Taxes and Subsidies to Consumers
– Taxes (-)
• Taxes increase ⇒ demand decreases
• Example: VAT or sales taxes add costs to consumer
– Subsidies (+) [It works in the opposite direction of taxes]
• Subsidies increase ⇒ demand increases
• reduce costs to consumer
– As the product becomes cheaper, consumers will buy more.
• Example: taxes rebate on first car purchase, subsidy on public schools

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 Example 1: Demand curve
• What happens to number of music
downloads in each of the following
scenarios? Why?
a) The price of iPods falls
b) The price of music downloads falls
c) The price of music CDs falls

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 Example 1: Demand curve
Price of
music a) The price of iPods falls
downloads
• Music downloads and iPods
are complements.
P1 • A fall in price of iPods shifts
the demand curve for music
downloads to the right.
D1 D2

Q1 Q2 Quantity of
music downloads

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 Example 1: Demand curve
Price of
music
b) The price of music downloads
downloads
falls
• The D curve does not shift.
P1
• Move down along the curve to
P2
a point with lower P, higher QD.

D1

Q1 Q2 Quantity of
music downloads

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 Example 1: Demand curve
Price of
c) The price of music CDs falls
music
downloads • Music CDs and music
downloads are substitutes.

P1 • A fall in the price of music CDs

shifts demand for music
downloads to the left.

D2 D1

Q2 Q1 Quantity of
music downloads

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Summary: Variables That Influence Buyers

Variable A Change in This Variable

Price of the good itself Represents a movement along
the demand curve
Number of buyers Shifts the demand curve
Tastes and Preferences Shifts the demand curve
Income Shifts the demand curve
Price of related goods Shifts the demand curve
Expectation Shifts the demand curve
Taxes and Subsidies Shifts the demand curve

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 Summary: Variables That Influence Buyers

∆ Demand vs. ∆ Quantity Demanded

P ($) P

P1

D1
P2
D0 D
D2 Q
0 Q Q1 Q2
• Due to changes in factors other than • Due to changes in the product price.
the product price.
• When price decreases, quantity
• That is, consumers change quantity demanded increases.
demanded at each price.

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4. Supply
Overview
• Would any of you like to become a rice farmer after graduating?
– Probably very few of you (if not none at all) will say yes.
– You will say to me that you will probably get paid more in other jobs than
growing rice given the current price of rice in the market.
– Now farmers can sell rice at 12,000 baht per ton.
• What if you can sell the rice at 1,200,000 baht per ton? Will you change
your mind?
– Most people will probably say YES and there will be more people will sell rice.

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 4. Supply

The Law of Supply

• Conditional on all else being equal, as the price of a good rises,

the quantity supplied of the good rises (or, as the price falls, the

quantity supplied falls)

– That is, there is a direct relationship between the price of the good

(P) and the quantity that producers are willing and able to offer

(sell), i.e. quantity supplied (QS).

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4. Supply
Keywords
• Quantity supplied (QS) – the quantities that producers are willing and
able to offer (sell).
• Supply– a curve/schedule that shows the quantities that producers
are willing and able to offer at each alternative price, at a specific
period of time (other things constant).
• Law of supply– there exists a direct relationship between price (P) and
quantity supplied (QS). Thus, if the P of a good rises, the QS of the good
rises and vice versa.

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4. Supply

Supply schedule: Quantity

Price
of Lattes
− A table shows the relationship of Lattes
Supplied
between the price of a good and the $0.00 0
quantity supplied. 1.00 3
− Example: Starbucks’ supply of lattes in 2.00 6
3.00 9
a day
4.00 12
− Notice that Starbucks’ supply schedule
5.00 15
obeys the law of supply 6.00 18

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4. Supply
Supply Curve and Supply Schedule Quantity
Price
P of Lattes
of Lattes
$6.00
Supplied
$0.00 0
$5.00
1.00 3
$4.00
2.00 6
$3.00
3.00 9
$2.00
4.00 12
$1.00
5.00 15
$0.00 6.00 18
Q
0 5 10 15

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4. Supply

Market Supply vs. Individual Supply

• Market supply
– Sum of the individual supply of a good or service
– Market supply curve: sum of the individual supply curves
horizontally
• To find the total quantity supplied, we add the individual
quantity supplied at each price level.

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4. Supply
Market Supply vs. Individual Supply
• Suppose Starbucks and Peet’s are the only two sellers in this market.
(QS = quantity supplied)
Price QS Starbucks QS Peet’s Market QS
$0.00 0 + 0 = 0
1.00 3 + 2 = 5
2.00 6 + 4 = 10
3.00 9 + 6 = 15
4.00 12 + 8 = 20
5.00 15 + 10 = 25
6.00 18 + 12 = 30

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 4. Supply
The Market Supply Curve
P P QS (Market)
$6.00
$0.00 0
$5.00
1.00 5
$4.00
2.00 10
$3.00
3.00 15
$2.00
4.00 20
$1.00
5.00 25
$0.00 6.00 30
0 5 10 15 20 25 30 35
Q

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4. Supply
Supply Curve Shifters
• Recall, the supply curve describes this relationship between price and quantity
supplied by assuming that
– The only factor that causes sellers to sell more or less is the price of the
good.
– All other factors (such as technology and price of inputs) that may
influence the amount sold are held constant.
• These “other things”
– Are non-price determinants of supply → Supply shifters
➢ Changes in them shift the supply (S) curve…

42
4. Supply (Supply Curve Shifters)

Change in Supply: ∆S
(Changes in the supply are shown as shifts of the supply curve)
S2
P
S0
When supply falls, S1 When supply rises,
the supply curve will the supply curve will
shift to the left. shift to the right.
(supply decreases (supply increases from
from S0 to S2.) S0 to S1.)
0 Q

43
4. Supply
Determinants of Supply (Supply Shifters)
• Determinants of supply are the variables that their changing
results in a change in supply.
• They are 6 supply shifting factors
i. Number of sellers
ii. Cost of production
iii. Change in technology
iv. Price of other produced goods
v. Producer expectation
vi. Taxes and subsidies on producers

44
4. Supply

Determinants of Supply (Supply Shifters)

i. Number of sellers
• Recall, a market supply is a collection of all individual supplies.
• An increase in the number of sellers → Increases the quantity
supplied at each price
– This is because individual supply ≥ 0 (never be negative).
• Shifts the supply (S) curve to the right

45
4. Supply
Determinants of Supply (Supply Shifters)
ii. Cost of production:
• When production becomes more expensive, sellers will ask for a
higher price (at each level of production).
• For example, resource (or input) price is higher.
– An increase in input prices makes production less profitable at each
output price ⇒ Firms supply a smaller quantity at each price
• Production costs increases (decreases) ⇒ supply decreases
(increases) ⇒The supply (S) curve shifts to the left (right)

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 4. Supply
Supply Curve Shifters: Input Prices
P
$6.00 • Suppose the price of
$5.00 milk falls.
$4.00 • At each price, the
$3.00 quantity of lattes
$2.00
supplied will increase.
$1.00

$0.00
0 5 10 15 20 25 30 35 Q

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4. Supply
Determinants of Supply (Supply Shifters)
iii. Change in technology
• Technology determines how much inputs are required to produce a
unit of output
– improvement in technology ⇒ lower production costs ⇒ supply increases
⇒ shifts the supply (S) curve to the right
– In contrast, if producers adopt (or use) less efficient technology, supply
decreases. ⇒ shifts the supply (S) curve to the left
(Note: a cost-saving technological improvement has the same effect as a fall in
input prices)

48
4. Supply
Determinants of Supply (Supply Shifters)
iv. Price of Other Produced Goods, Production Complements
– Goods that are by-product of the other.
– E.g. beef and leather (by-product of each other in beef cattle farm)
– If the price of one good increases, the supply of its complement increases
– PBeef increases ⇒ supply for its leather increases

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 4. Supply
Determinants of Supply (Supply Shifters)
iv. Price of Other Produced Goods, Production Substitute
– Can produce either product but not both.
– E.g. milk or pork (a piece of land for daily farm or pig farming)
– If the price of one good increases, the supply of its substitute decreases.
– PMilk increases ⇒ supply of pork decreases

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4. Supply

Determinants of Supply (Supply Shifters)

v. Producer Expectation (about future)
• Expectations Future Costs
– What will Apple do if it expects that future cost of production for iPads
will increase by 200% three months from now?
• Increase production today to get sales revenue now than later.
– Supply increases today as future costs are expected to be higher ⇒The
supply (S) curve shifts to the right

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4. Supply
Determinants of Supply (Supply Shifters)
v. Producer Expectation (about future)

• Future Prices
– Sellers may adjust supply* when their expectations of future prices change

– Example: What will Apple do when it expects to be able to raise the price of

iPads by 50% next month?

• Hold back (cut) its production today to get a higher profit later.

– Supply decreases today as future price is expected to be higher ⇒ the

supply (S) curve shifts to the left

(* if good is not perishable)

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4. Supply
Determinants of Supply (Supply Shifters)
vi. Taxes and Subsidies on Producers
• Taxes (-)
– Add costs to producers
– Taxes increase ⇒ supply decreases
– E.g. import duties on imported machines or inputs add costs to producers
• Subsidies (+)
– Reduce costs to producers (i.e. work in the opposite direction of taxes)
– Subsidies increase ⇒ supply increases
– E.g. taxes rebate given to car manufacturers

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Example 2: Supply Curve
Draw a supply curve for mangoes. What
happens to it in each of the following
scenarios?
a) The cost of fertilizers and seeds has tripled.
b) There is a new technology to help facilitate
the production of mangoes.
c) The market price of other fruits in the
market has declined.

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Example 2: Supply Curve

a) The cost of fertilizers and seeds has tripled

Price S2
S1 • The supply (S) curve shifts leftward.
– At each price, QS decreases.
P1

Q1 Q2 Quantity

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Example 2: Supply Curve

b) There is a new technology to help

Price facilitate the production of mangoes.
S1 S2
• The supply (S) curve shifts rightward
P1 • At each price, QS increases.

Q1 Q2 Quantity

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Example 2: Supply Curve
c) The market price of other fruits in the
Price market has declined.
S1 S2
• The supply (S) curve shifts rightward
P1 – At each price, QS increases.

Q1 Q2 Quantity

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 Summary: Variables That Influence sellers

Variable A Change in This Variable

Price of the good itself Represents a movement along the
supply curve
Number of sellers Shifts the supply curve
Cost of production Shifts the supply curve
Technology Shifts the supply curve
Price of related goods Shifts the supply curve
Expectation Shifts the supply curve
Taxes and Subsidies Shifts the supply curve

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 Summary: Variables That Influence sellers
S1
P ($) P
S0 S
S2 P2

P1

Q Q
0 Q1 Q2
• Due to changes in factors other • Due to changes in the product
than the product price. price.
• That is, producers change quantity • When price decreases, quantity
supplied at each price. supplied decreases.

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Review & Exercise
Demand and Supply Curves
P
• Conventionally, we put P on the vertical
P1
axis and Q on the horizontal axis.
P2 – The demand curve is typically downward
D
Q sloping.
Q1 Q2
– The supply curve is typically upward
P S sloping.
P2

P1
Q
Q1 Q2

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Demand Shifting Factors

1. Number of buyers (+)

2. Consumer tastes and preferences (+)

3. Consumer income (??)

4. Price of related goods (??)

5. Taxes and subsidies on consumers (- and +)

6. Consumer expectation (??)

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Supply Shifting Factors

1. Number of sellers (+)

2. Cost of production (-)
3. Change in technology (+)

4. Price of other produced goods (??)

5. Taxes and subsidies on producers (- and +)

6. Producer expectation (??)

63
Shift vs. Movement along the Curve

• Changes in demand/supply
• Shifting to a new demand/supply curve is due to changes in
factors other than the product price.
• Changes in quantity demanded/supplied
• Movement along demand/supply curve is due to changes in
the product price.
• When price increases, quantity demanded(supplied)
decreases(increases).

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Glossary
• Changes in Demand/Supply
An Increase in Demand/Supply A Decrease in Demand/Supply
Demand/Supply increases. Demand/Supply decreases
Demand/Supply rises. Demand/Supply falls
Demand/Supply curve shifts to the Demand/Supply curve shifts to the
right. left.
Demand/Supply curve shifts rightward. Demand/Supply curve shifts leftward.

• Changes in Quantity Demanded/Supplied

An Increase in QD/QS A Decrease in QD/QS

QD/QS increases. QD/QS decreases
QD/QS rises. QD/QS falls

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 Exercise 1: Demand and Supply
• State what will happen to the demand and/or supply of
wine (i.e. increases or decreases) when the following
events occur.
a) It was found that drinking a glass of wine a day will lower the risk
of heart disease.
• Wine will become more popular. (tastes and preferences)
• Demand for wine will increase.
b) Beer becomes cheaper.
• Beer and wine are substitute products. (although imperfect)
• Demand for wine will decrease.

66
 Exercise 1: Demand and Supply
• State what will happen to the demand and/or supply of wine (i.e.
increases or decreases) when the following events occur.
c) The government will increase duties (import taxes on importers)
on all alcoholic drinks by 100%.
• Taxes on importers increase the cost to importers and domestic wine
retailers.
• Supply of wine will decrease.
d) The cost of wine grapes are expected to rise next year.
• Cost of production is expected to rise in the future.
• Supply of wine will increase now.

67
 Next Week Schedule
• Lecture session covers
– 3.3 Changes in Market Equilibrium
– 3.4 Government Intervention Policies
• Discussion session covers
– 3.5* Discussion and Exercise of Topics 3.1 and 3.2