Chapter 2 Demand and Supply

ECON413/CE309/CE314
/CT214
19.10.2021 CHP 2
THE MARKET FORCES OF SUPPLY AND
DEMAND
FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

9781473725331 © CENGAGE EMEA 2017
DEMAND&SUPPLY
BUYERS SELLERS
CONSUMERS........... ...... MARKET...............PRODUCERS
DEMAND SUPPLY
Market Forces Of Supply And
Demand
Supply and demand are the forces that
make market economies work.
Supply and demand determine prices in a
market economy and how prices, in turn,
allocate the economy’s scarce resources.
The model of the market based on supply
and demand, like any other model, is based
on a series of assumptions.

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The Assumptions Of The Market Model
The terms supply and demand refer to the behaviour of people as
they interact with one another in markets.
A market is a group of buyers and sellers of a particular good or
service.

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Demand
Quantity demanded is the amount of a good that buyers are
willing and able to purchase.
Law of Demand is the claim that, other things equal, the quantity
demanded of a good falls when the price of the good rises.

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The Demand Curve: The Relationship between
Price and Quantity Demanded
Demand schedule is a table that shows the relationship between
the price of the good and the quantity demanded.

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The Demand Curve: The Relationship between
Price and Quantity Demanded
Price of milk per litre (€) Quantity of milk demanded
Rachel’s (litres per month)
Demand 0.00 20
0.10 18
Schedule
0.20 16
0.30 14
0.40 12
0.50 10
0.60 8
0.70 6
0.80 4
0.90 2

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Rachel’s Demand Schedule and Demand Curve
The demand curve

is a graph of the
relationship
between the price
of a good and the
quantity
demanded.
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Market Demand versus Individual 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.

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9781473725331 © CENGAGE EMEA 2017
Price Qd
0.00 30
0.50 25
3.50 7
7.00 3
10.00 1
15.00 0

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Shifts Versus Movements Along The Demand
Curve
 Ceteris paribus - other factors affecting demand are held
constant so that we can analyze the effect of a change in price
on demand.
◦ A shift in the demand curve is caused by a factor affecting
demand other than a change in price.
◦ Movement along the demand curve.
◦ Caused by a change in the price of the product.

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Changes In Quantity Demanded
Price of milk
A tax that raises the

price milk results in a
B movement along the
€1.20
demand curve.
A
€0.60
D
0 4 8 Quantity of milk
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Movement Along the Demand Curve
Assume the price of milk falls.
◦ More will be demanded because of the income and substitution
effects.
◦ The income effect. Assume that incomes remain constant then a fall in
the price of milk means that consumers can now afford to buy more
with their income.
◦ The substitution effect. Milk is lower in price compared to other similar
products so some consumers will choose to substitute the more
expensive drinks with the now cheaper milk.

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Shifts in the Demand Curve
A shift in the demand curve, to the left or right.
◦ Caused by any change that alters the quantity demanded at every
given price.
Shifts caused by factors other than price.
1) Prices of related goods (substitutes and complements)
o Substitutes: A substitute, or substitute good, in economics and
consumer theory is a product or service a consumer sees as the
same or similar to another product. Put simply, a substitute is a
good that can be used in place of another. Two goods for which
an increase in the price of one good leads to an increase in the
demand for the other.

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•Nike- Adidas
•Ford-Toyata
•McDonalds- Burger King
•Coca Cola-Pepsi
•Nestle- Cadbury
•Px increases Dy increases(+)

Complements: A complementary good or service is an item used
in conjunction with another good or service.
Two goods for which an increase in the price of one good leads to
a decrease in the demand for the other.
Complement goods:
Tea- Sugar
Kebap- Ayran
Hamburger- Coke
Car- Petrol
Car-Tyre
• Px increases Dy Decrease (-)
2.Income
1) A lower income means that you have less to spend
in total, so you would have to spend less on some –
and probably most – goods.

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Shifts caused by factors other than price (continued)
2) Income continued.
◦ If the demand for a good falls when income falls or rises as income rises,
the good is called a normal good.
◦ If the demand for a good rises when income falls, the good is called an
inferior good.

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◦ Fish-Rice
◦ Ex: Income: 2000 TL, 7 days Fish+ 23 days rice
◦ Income:3000 TL, 10 days Fish+ 20 days rice
◦ Income: 1500 TL, 5 days+ 25 days rice
◦ Taxi-Bus
◦ Income: 2000 TL 8 days Taxi + Bus 22 days
◦ 3000 TL 12 days taxi + Bus 18 days
◦ 1500 TL 5 days taxi + Bus 25 days

9781473725331 © CENGAGE EMEA 2017
3) Tastes/Preferences More people may like something
4) Number of buyers (population).

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Price of
milk
Increase
in demand
Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0 Quantity of milk
9781473725331 © CENGAGE EMEA 2017
Consumer Income Normal Good
Price of milk
€ 1.20 An increase
1.00 in income...
Increase
0.80 in demand
0.60
0.40
0.20
D2
D1 Quantity of
milk
0 1 2 3 4 5 6 7 8 9 10 11 12
9781473725331 © CENGAGE EMEA 2017
Consumer Income Inferior Good
Price inferior
good
€ 1.50
An increase
1.00
in income...
Decrease
in demand
0.50
D2 D1 Quantity of
inferior
0 1 2 3 4 5 6 7 8 9 10 11 12 good
9781473725331 © CENGAGE EMEA 2017
Supply
Quantity supplied is the amount of a good that sellers are willing
and able to sell.
Law of supply is the claim that, other things equal, the quantity
supplied of a good rises when the price of the good rises.

9781473725331 © CENGAGE EMEA 2017
The Supply Curve: The Relationship between
Price and Quantity Supplied
Supply Schedule
◦ The supply schedule is a table that shows the relationship between the
price of the good and the quantity supplied.

9781473725331 © CENGAGE EMEA 2017
Price of milk per litre (€) Quantity of milk supplied
(litres per month)
0.00 0
Richard’s 0.10 0
Supply 0.20 2
Schedule 0.30 4
0.40 6
0.50 8
0.60 10
0.70 12
0.80 14
0.90 16
1.00 18

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Supply Curve
◦ The supply curve is the graph of the relationship between the price of
a good and the quantity supplied.

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Richard’s Supply Schedule and Supply Curve

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Market Supply versus Individual
Supply
Market supply refers to the sum of all
individual supplies for all sellers of a
particular good or service.

9781473725331 © CENGAGE EMEA 2017
The Market Supply
Graphically, individual supply curves are
summed horizontally to obtain the market
supply curve.

9781473725331 © CENGAGE EMEA 2017
Supply schedule
Price of
milk S
C
€1.50
A rise in the price
milk results in a
movement along
the supply curve.
A
€0.60
Quantity of
milk
0 1 5
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Shifts in the Supply Curve
The supply curve shows how much producers offer
for sale at any given price, holding constant all
other factors that may influence producers’
decisions about how much to sell.
When any of these other factors change, the
supply curve will shift.
◦ These are shown on the next slide.

9781473725331 © CENGAGE EMEA 2017
① Profitability of other goods in production and prices
of goods in joint supply.
② Technology.
③ Natural/Social Factors such as the weather and
changing attitudes.
④ Input prices – the prices of the factors of
production.
⑤ Expectations of producers about the future state of
the market.
⑥ A change in the number of sellers in the market.
9781473725331 © CENGAGE EMEA 2017
Change in Supply
◦ A shift in the supply curve, either to the left or right.
◦ Caused by a change in a determinant other than price.

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Price of
milk Supply curve, S3
Supply
curve, S1
Supply
Decrease curve, S2
in supply
Increase
in supply
0 Quantity of milk
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Supply And Demand Together:
EQUILIBRIUM
What is EQUILIBRIUM? “state of rest” !
Equilibrium Price
◦ The price that balances quantity supplied and quantity
demanded.
Or, Equilibrium as a market clearing price: Price that equates the
quantity supplied to the quantity demanded.
◦ On a graph, it is the price at which the supply and demand curves
intersect.
Equilibrium Quantity
◦ The quantity supplied and the quantity demanded at the equilibrium
price.
◦ On a graph it is the quantity at which the supply and demand curves
intersect.
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The Equilibrium of Supply and Demand

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Markets Not in Equilibrium
(a) Excess Supply
Price
of milk Supply
Surplus
€ 0.70
0.60
Demand
0 4 7 10 Quantity of milk
Quantity Quantity
demanded supplied
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Equilibrium
Surplus
◦ When price > equilibrium price, then quantity supplied > quantity
demanded.
◦ There is excess supply or a surplus.
◦ Suppliers will lower the price to increase sales, thereby moving toward equilibrium.

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Equilibrium
Shortage
◦ When price < equilibrium price, then quantity demanded > the quantity
supplied.
◦ There is excess demand or a shortage.
◦ Suppliers will raise the price due to too many buyers chasing too few goods, thereby
moving toward equilibrium.

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P: price (TL/unit)
Q: quantity (unit/day)
Unit= “dürüm”
Find the equilibrium price and

quantity.
Markets Not in Equilibrium
(b) Excess Demand

Price of
Ice-Cream Supply
Cones
€ 2.00
1.50
Shortage
Demand
0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
supplied demanded Cones
9781473725331 © CENGAGE EMEA 2017
Equilibrium
Law of supply and demand
◦ The claim that the price of any good adjusts to bring the quantity
supplied and the quantity demanded for that good into balance.

9781473725331 © CENGAGE EMEA 2017
Prices as signals
The main function of price in a free market is
to act as a signal to both buyers and sellers.
• For buyers, price tells them something about what they have to give up (usually an
amount of money) to acquire the benefits
• For sellers price acts as a signal in relation to the profitability of production.

9781473725331 © CENGAGE EMEA 2017
Three Steps to Analyzing Changes in
Equilibrium
① Decide whether the event shifts the
supply or demand curve (or both).
② Decide whether the curve(s) shift(s) to
the left or to the right.
③ Use the supply and demand diagram to
see how the shift affects equilibrium price
and quantity.

9781473725331 © CENGAGE EMEA 2017
How an Increase in Demand Affects the
Equilibrium
Price
of milk 1. Hot weather increases
the demand for milk. . .
Supply
€ 0.80 New equilibrium
0.60
2. . . . resulting Initial
in a higher
equilibrium
price . . .
D
0 7 10 Quantity of
3. . . . and a higher milk
quantity sold.
Three Steps to Analyzing Changes in
Equilibrium
Shifts in Curves versus Movements along Curves
◦ A shift in the supply curve is called a change in supply.
◦ A movement along a fixed supply curve is called a change in quantity
supplied.
◦ A shift in the demand curve is called a change in demand.
◦ A movement along a fixed demand curve is called a change in quantity
demanded.

9781473725331 © CENGAGE EMEA 2017
How a Decrease in Supply Affects the Equilibrium
Price of
milk 1. An increase in the
animal feed reduces
the supply of milk. .
S2
S1
New
€ 0.80 equilibrium
0.60 Initial equilibrium
2. . . . resulting
in a higher
price of milk
Demand
0 4 7 Quantity of milk
3. . . . and a lower
quantity sold.
Table: What Happens to Price and Quantity When
Supply or Demand Shifts?

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Effects of Dual Shifts!
It Depends …
Supply and demand

curves shift over time as
market conditions
change.
In this example,
rightward shifts of the
supply and demand
curves lead to a slightly
higher price and a much
larger quantity.
In general, changes in
price and quantity
depend on the amount
by which each curve
shifts and the shape of
each curve.
9781473725331 © CENGAGE EMEA 2017
Summary
① Economists use the model of supply and
demand to analyse competitive markets.
② In a competitive market, there are many
buyers and sellers, each of whom has
little or no influence on the market price.

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Summary
③ The demand curve shows how the
quantity of a good depends upon the
price.
◦ According to the law of demand, as the price of a good falls, the
quantity demanded rises. Therefore, the demand curve slopes
downward.
◦ In addition to price, other determinants of how much consumers want
to buy include income, the prices of complements and substitutes,
tastes, expectations, and the number of buyers.
◦ If one of these factors changes, the demand curve shifts.

9781473725331 © CENGAGE EMEA 2017
Summary
④ The supply curve shows how the quantity
of a good supplied depends upon the
price.
◦ According to the law of supply, as the price of a good rises, the
quantity supplied rises. Therefore, the supply curve slopes upward.
◦ In addition to price, other determinants of how much producers want to
sell include input prices, technology, expectations, and the number of
sellers.
◦ If one of these factors changes, the supply curve shifts.

9781473725331 © CENGAGE EMEA 2017
Summary
⑤ Market equilibrium is determined by the intersection of the
supply and demand curves.
⑥ At the equilibrium price, the quantity demanded equals the
quantity supplied.
⑦ The behaviour of buyers and sellers naturally drives markets
toward their equilibrium.

9781473725331 © CENGAGE EMEA 2017
Summary
⑧ To analyse how any event influences a market, we use the
supply and demand diagram to examine how the even affects
the equilibrium price and quantity.
⑨ In market economies, prices are the signals that guide
economic decisions and thereby allocate resources.

9781473725331 © CENGAGE EMEA 2017

Chapter 2 Demand and Supply

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ECON413/CE309/CE314

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

The demand curve

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

A tax that raises the

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

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•Px increases Dy increases(+)

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

Find the equilibrium price and

(b) Excess Demand

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€ 0.80 New equilibrium

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0.60 Initial equilibrium

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Supply and demand

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FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

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