1

Chapter 4: Market Forces of Supply and Demand

1. Markets: group of buyers and sellers

- 4 types of markets are:
1) Perfect Competition: equal number of buyers and sellers (Rare in real life)
2) Monopoly: one seller and many buyers.
o Sellers base prices on demand
o Monopolies are typically regulated by the government
3) Oligopoly: two sellers and many more buyers
o Commodities are typically the same (ex. Oil companies)
4) Monopolistic Competition: many sellers, each producing different varieties of the
same commodity

2. Demand
Quantity Demanded: amount of good buyers are willing and able to buy
This is influenced by:
1) Price: As Price increases, quantity demanded goes down
As Price decreases, quantity demanded goes up
2) Income: Income increases, people increase quantity demanded for normal goods and
decrease quantity demanded for inferior goods (and vice versa)
3) Price of related goods
o Substitutes: ex. = Coke vs. Pepsi; Playstation 3 vs. Xbox 360
o Compliments: ex. = TV + VCR; Steak + BBQ Sauce
4) Tastes
5) Expectations: future prices or future income
o Example: Tennis gear is typically cheaper in the winter when it is not being
played
Law of Demand: other things being equal (ceteris paribus), the quantity demanded of a good
falls as the price of the good rises

Demand Schedule
Example
P Q

.05 1000

.10 800

.15 600
 2

Demand Curve
Example

Market Demand = sum of individual demands

- Shifts in the demand curve are caused by a change in anything other than price
- Movement along the demand curve (change in quantity demanded) is caused by a change
in price
o If price decreases, curve shifts out
o If price increases, curve shifts in

3. Supply
Quantity Supplied: amount of a good that a supplier is able and willing to sell
This is influenced by:
1) Price
2) Input prices
3) Technology
4) Expectations

Law of Supply: other things equal (ceteris paribus), the quantity supplied of a good rises as the
price of a good rises
 3

Market Supply: sum of individual supply curves

- Shifts in supply caused by a change in anything but price
o If Supply Increase = Curve shifts out
o If Supply Decreases = Curve shifts in
- Movement along a supply curve is caused by a change in price

4. Equilibrium
Equilibrium Price: price for which Qs = Qd
Equilibrium Quantity: quantity that corresponds to the equilibrium price

If Qs > Qd there is a surplus (excess supply)

If Qd > Qs there is a shortage (excess demand)
*In both cases, prices are adjusted so we get an equilibrium price*

Three Steps to Analyzing Equilibrium

1) Whether the event shifts supply or demand curve (or both, but highly unlikely)
2) Decide shift direction
3) Use diagram to see how shift alters equilibrium price and quantity