Ch04 The Market Forces of Supply and Demand PDF

ECON-UA 2 INTRODUCTION TO MICROECONOMICS CHAPTER 04 HANDOUT
DR. ANDREW PAIZIS - NYU
N. GREGORY MANKIW NINTH EDITION
BRIEF PRINCIPLES OF
MICRO
ECONOMICS
CHAPTER
The Market Forces
4 of Supply and Demand
Interactive PowerPoint Slides by:
V. Andreea Chiritescu
Eastern Illinois University
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 1
IN THIS CHAPTER
• What factors affect buyers’ demand for
goods?
• What factors affect sellers’ supply of goods?
• How do supply and demand determine the
price of a good and the quantity sold?
• How do changes in the factors that affect
demand or supply affect the market price and
quantity of a good?
• How do markets allocate resources?
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
2
1
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
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a 3
Markets and Competition

• Competitive market
– Many buyers and many sellers, each has a
negligible impact on market price
• Perfectly competitive market

– All goods are exactly the same
– Price takers: so many buyers and sellers
that no one can affect the market price
– At the market price, buyers can buy all they
want, and sellers can sell all they want
2
Demand
• Quantity demanded
– Amount of a good that buyers are willing
and able to purchase
• Law of demand
– Other things equal
– When the price of a good rises, the
quantity demanded of the good falls
– When the price falls, the quantity
demanded rises
Demand Schedule and Demand Curve

• Demand schedule:
− A table that shows the relationship
between the price of a good and the
quantity demanded
• Demand curve
− A graph of the relationship between the
price of a good and the quantity
demanded
3
EXAMPLE 1A: Sofia’s demand for muffins
Sofia’s demand Price Quantity

of of muffins
schedule for muffins muffins demanded
$0.00 16
− Notice that Sofia’s 1.00 14
preferences obey the 2.00 12
law of demand. 3.00 10
4.00 8
5.00 6
6.00 4
7
EXAMPLE 1B: Sofia’s demand schedule and

Price of demand curve Price Quantity
Muffins
of of muffins
$6.00
muffins demanded
$5.00 $0.00 16
$4.00 1.00 14
A decrease
2.00 12
$3.00
in price… 3.00 10
$2.00 4.00 8
$1.00 5.00 6
6.00 4
$0.00
Quantity of
0 5 10 15 Muffins
… increases the quantity of muffins demanded.
8
4
Market 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 at any
price, we add the individual quantities
EXAMPLE 1C: Market vs. individual demand

Suppose Sofia and Diego are the only two buyers in
the market for muffins. (Qd = quantity demanded)
Price Sofia’s Qd Diego’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
10
5
EXAMPLE 1D: Market demand curve for muffins

P
Qd
$6.00 P
(Market)
$5.00 $0.00 24
A movement 1.00 21
$4.00 along the
An demand curve 2.00 18
$3.00 increase in
price… 3.00 15
$2.00
4.00 12
$1.00 5.00 9
$0.00 6.00 6
Q
0 5 10 15 20 25
… decreases the quantity of muffins demanded.
11
Demand Curve Shifters

• The demand curve
– Shows how price affects quantity
demanded, other things being equal
• 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 D curve

6
Demand Curve Shifters

• Shifts in the demand curve are caused by
changes in:
– Number of buyers
– Income
– Prices of related goods
– Tastes
– Expectations
Changes in Number of Buyers

• Increase in number of buyers
– Increases the quantity demanded at each
price
– Shifts the demand curve to the right
• Decrease in number of buyers

– Decreases the quantity demanded at each
price
– Shifts the demand curve to the left
7
EXAMPLE 1E: Demand curve shifts

P Suppose the number of
$6.00 buyers increases.
$5.00 • Then, at each P, Qd
will increase (by 5 in
$4.00
this example).
$3.00 • The demand curve
$2.00 shifts to the right
$1.00
$0.00
Q
0 5 10 15 20 25 30
15
Changes in Income
• Normal good, other things constant
– An increase in income leads to an
increase in demand
– Shifts the demand curve to the right
• Inferior good, other things constant

– An increase in income leads to a decrease
in demand
– Shifts the demand curve to the left
8
Changes in Prices of Related Goods

• Two goods are substitutes if
– An increase in the price of one leads to an
increase in the demand for the other
• Example: pizza and hamburgers
– An increase in the price of pizza increases
demand for hamburgers, shifting hamburger
demand curve to the right
• Other examples:
– Coke and Pepsi, laptops and tablets, movie
streaming and movie theater
Changes in Prices of Related Goods

• Two goods are complements if
– An increase in the price of one leads to a
decrease in the demand for the other
• Example: smartphones and apps
– If price of smartphones rises, people buy
fewer smartphones, and therefore fewer
apps; App demand curve shifts to the left
• Other examples:
– College tuition and textbooks, bagels and
cream cheese, milk and cookies
9
Changes in Tastes
• Tastes
– Anything that causes a shift in tastes
toward a good will increase demand for
that good and shift its demand curve to
the right
– Example:
• Advertising convinces consumers that
drinking 3 glasses of orange juice a day will
help lower cholesterol: demand for orange
juice increases
Expectations about the Future

• People expect an increase in income
– The current demand increases
• People expect higher prices
– The current demand increases
• Example:
– If people expect their incomes to rise
(because they got a promotion at work), their
demand for meals at expensive restaurants
may increase now
10
Shift vs. Movement Along Curve

• Change in demand:
– A shift in the demand curve
– Occurs when a non-price determinant of
demand changes (like income or number
of buyers)
• Change in the quantity demanded:

– A movement along a fixed demand curve
– Occurs when the price changes
Summary: variables that influence buyers
22
11
Supply
• Quantity supplied
– Amount of a good
– Sellers are willing and able to sell
• Law of supply
– Other things equal
– When the price of a good rises, the
quantity supplied of the good rises
– When the price falls, the quantity supplied
falls
Supply Schedule and Supply Curve

• Supply schedule:
− A table that shows the relationship
between the price of a good and the
quantity supplied
• Supply curve
− A graph of the relationship between the
price of a good and the quantity supplied
12
EXAMPLE 2A: Starbucks’ supply of muffins

Price Quantity
Starbucks’ supply of of muffins
schedule of muffins muffins supplied
$0.00 0
− Notice that Starbucks’ 1.00 3

2.00 6
supply schedule obeys
3.00 9
the law of supply
4.00 12
5.00 15
6.00 18
25
EXAMPLE 2B: Starbucks’ supply schedule and

supply curve
P Price Quantity
of of muffins
$6.00
muffins supplied
$5.00 $0.00 0
$4.00 1.00 3
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
26
13
Market Supply vs. Individual Supply

• Market supply
– Sum of the supplies of all sellers of a good
or service
– Market supply curve: sum of individual

supply curves horizontally
• To find the total quantity supplied at any
price, we add the individual quantities
EXAMPLE 2C: Market vs. individual supply

Suppose Starbucks and Peet’s Coffee are the only
two sellers in this market. (Qs = quantity supplied)
Qs Qs
Price Starbucks 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
28
14
EXAMPLE 2D: Market supply curve of muffins

P QS
P
$6.00 (Market)
$5.00 $0.00 0
An
$4.00 1.00 5
increase in A movement
price… along the 2.00 10
$3.00 supply curve
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
… increases the quantity of muffins supplied.
29
Supply Curve Shifters

• The supply curve
– Shows how price affects quantity supplied,
other things being equal
• These “other things”

– Are non-price determinants of supply
• Changes in them shift the S curve…
15
Supply Curve Shifters

• Shifts in the supply curve are caused by
changes in:
– Input prices
– Technology
– Number of sellers
– Expectations about the future
Changes in Input Prices

• Examples of input prices
– Wages, prices of raw materials
• A fall in input prices
– Makes production more profitable at each
output price
– Firms supply a larger quantity at each
price: the supply curve shifts to the right
– Supply is negatively related to prices of
inputs
16
EXAMPLE 2E: Changes in input prices

P Suppose the price
$6.00 of oranges falls.
• At each price,
$5.00
the quantity of
$4.00 orange juice
supplied will
$3.00
increase (by 5 in
$2.00 this example).
$1.00
$0.00
0 5 10 15 20 25 30 35
Q shifts to the right
33
Changes in Technology
• Technology
– Determines how much inputs are required
to produce a unit of output
• A cost-saving technological improvement

– Has the same effect as a fall in input
prices
– Shifts the supply curve to the right
17
Changes in Number of Sellers

• An increase in the number of sellers
– Increases the quantity supplied at each
price
– Shifts the supply curve to the right
• A decrease in the number of sellers

– Decreases the quantity supplied at each
price
– Shifts the supply curve to the left
Expectations about Future

• Example: Events in the Middle East lead
to expectations of higher oil prices
– Owners of Texas oil fields reduce supply
now, save some inventory to sell later at
the higher price
– The supply curve shifts left
• Sellers may adjust supply* when their

expectations of future prices change
(*If good not perishable)
18
Shift vs. Movement Along the Supply

• Change in supply:
– A shift in the supply curve
– Occurs when a non-price determinant of
supply changes (like technology or costs)
• Change in the quantity supplied:

– A movement along a fixed supply curve
– Occurs when the price changes
Summary: variables that influence sellers
38
19
Active Learning 2: The supply curve

Draw a supply curve for apple juice, S1, and a
point A (P1, Q1) on the supply curve. What
happens to it in each of the following
scenarios? Why?
A. Grocery stores cut the price of apple juice.

B. A technological advance allows apple juice
to be produced at lower cost.
C. Grocery stores cut the price of orange
juice.
39
Active Learning 2A. Decrease in price of apple juice
Price of • Move down along the

apple supply curve to a
S1
juice lower P and lower Q.
P1 A
• S curve does not shift.
P2 B
Q2 Q1 Quantity of
apple juice
40
20
Active Learning 2B. Technological advance

Price of • Better technology
apple
S1 reduces production
juice S2
costs
A
P1
• At each price, QS
increases.
shifts to the right
Q1 Q2 Quantity of
apple juice
41
Supply and demand together

Equilibrium:
P
• Price has D
$6.00
S
reached the
$5.00
level where
quantity $4.00
supplied $3.00
equals quantity $2.00
demanded $1.00
$0.00
Q
0 5 10 15 20 25 30 35
42
21
Supply and demand together

Equilibrium price: price where QS = QD = equilibrium
Q
P D
S
$6.00 P QD QS
$5.00 $0 24 0
$4.00 1 21 5
2 18 10
$3.00
3 15 15
$2.00
4 12 20
$1.00 5 9 25
$0.00 6 6 30
Q
0 5 10 15 20 25 30 35
© 2021 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
®
43
Markets not in equilibrium: surplus

Surplus (excess supply):
P
D
quantity supplied is
S
$6.00 Surplus greater than quantity
demanded
$5.00
$4.00 If P = $5,
$3.00 – then QD = 9 muffins
$2.00 – and QS = 25 muffins,
– Resulting in a
$1.00
surplus of 16 muffins
$0.00
Q
0 5 10 15 20 25 30 35
44
22
Markets not in equilibrium: surplus

Facing a surplus, sellers
P try to increase sales by
D S cutting the price:
$6.00 Surplus
– This causes QD to rise
$5.00
– and QS to fall…
$4.00 – …which reduces the
$3.00 surplus.
$2.00 – And so on… until
market reaches
$1.00
equilibrium.
$0.00
Q
0 5 10 15 20 25 30 35
45
Markets not in equilibrium: shortage

Shortage (excess
P demand): quantity
D S demanded is greater than
$6.00
quantity supplied
$5.00
$4.00 If P = $1,
- then QD = 21 muffins
$3.00
- and QS = 5 muffins
$2.00
- Resulting in a
$1.00 shortage of 16 muffins
$0.00 Shortage
Q
0 5 10 15 20 25 30 35
46
23
Markets not in equilibrium: shortage

Facing a shortage,
P sellers raise the price,
D S
$6.00 - Causing QD to fall
$5.00 - and QS to rise,
$4.00
- …which reduces the
shortage.
$3.00
– And so on… until
$2.00 market reaches
$1.00 equilibrium
Shortage
$0.00
Q
0 5 10 15 20 25 30 35
47
Supply and Demand Together

Three steps to analyzing changes in equilibrium:
1. Decide whether the event shifts the supply
curve, the demand curve, or, in some cases,
both curves
2. Decide whether the curve(s) shifts to the right
or to the left
3. Use the supply-and-demand diagram
• Compare the initial and the new
equilibrium
• Effects on equilibrium price and quantity
24
EXAMPLE 3: The market for muffins

P
price of
S1
muffins
Market
P1 equilibrium
D1
Q
Q1
quantity of
muffins
49
EXAMPLE 3A: A shift in demand

EVENT A: Increase in the price of doughnuts.
STEP 1: D curve shifts
P
• muffins and doughnuts S1
are substitutes.
P2
STEP 2: D shifts right
• Consumers will buy P1
fewer expensive doughnuts
and switch to muffins.
STEP 3: Increase in price D1 D2
and quantity of muffins. Q

Q1 Q2
50
25
EXAMPLE 3B: A shift in supply

EVENT B: New technology of producing muffins.
P
STEP 1: S curve shifts S1 S2
• because new technology
reduces production costs
STEP 2: S shifts right P1
• because lower P2
production cost makes
D1
production more profitable
Q
at any given price. Q1 Q2
STEP 3: Decrease in price and increase in quantity
51
EXAMPLE 3C: A shift in both S and D

EVENTS: Price of doughnuts rises AND new
technology reduces production costs.
STEP 1: Both curves shift. P

STEP 2: Both shift S1 S2
to the right.
P2
STEP 3: P1
Q rises but the effect
on P is ambiguous:
D1 D2
If demand increases more
Q
than supply, P rises. Q1 Q2
52
26
EXAMPLE 3C: A Shift in Both S and D

EVENTS: Price of doughnuts rises AND new
technology reduces production costs
P S1 S2
STEP 3:
P1
Q rises, but the effect
P2
on P is ambiguous:
D1 D2
If supply increases more Q
than demand, P falls. Q1 Q2
53
How Prices Allocate Resources

• “Markets are usually a good way to
organize economic activity”
• In market economies
– Prices adjust to balance supply and
demand
• These equilibrium prices
– Are the signals that guide economic
decisions and thereby allocate scarce
resources
27
Active Learning 3: Shifts in supply and demand

Use the three-step method to analyze the
effects of each event on the equilibrium price
and quantity of orange juice.
Event A: A fall in the price of apple juice
Event B: The price of oranges declines
because of an abundant orange
crop.
Event C: Events A and B both occur
simultaneously.
55
Active Learning 3A. A fall in price of apple juice

STEPS: The market for orange juice
P
1. D curve shifts S1
2. D curve shifts left P1
P2
3. P and Q both fall
D2 D1
Q
Q2 Q1
56
28
Active Learning 3B. Fall in the price of oranges

P
1. S curve shifts S1 S2
P1
2. S curve shifts right
P2
3. P falls, Q rises
D1
Q
Q1 Q2
57
Active Learning 3C. Events A and B together

1. Both curves shift
P
(see parts A & B)
S1 S3
2. D shifts left, S shifts S2
right P1
3. P falls.
Effect on Q is P3
ambiguous:
- the fall in demand P2
reduces Q, D2 D1
Q
- the increase in supply Q3 Q1 Q2
increases Q.
58
29

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ECON-UA 2 INTRODUCTION TO MICROECONOMICS CHAPTER 04 HANDOUT

DR. ANDREW PAIZIS - NYU

N. GREGORY MANKIW NINTH EDITION

Markets and Competition

Markets and Competition

• Perfectly competitive market

Demand Schedule and Demand Curve

EXAMPLE 1A: Sofia’s demand for muffins

Sofia’s demand Price Quantity

EXAMPLE 1B: Sofia’s demand schedule and

– Market demand curve: sum the individual

EXAMPLE 1C: Market vs. individual demand

Price Sofia’s Qd Diego’s Qd Market Qd

EXAMPLE 1D: Market demand curve for muffins

Demand Curve Shifters

• These “other things” are non-price

• Changes in them shift the D curve

Demand Curve Shifters

– Prices of related goods

Changes in Number of Buyers

• Decrease in number of buyers

EXAMPLE 1E: Demand curve shifts

• Inferior good, other things constant

Changes in Prices of Related Goods

Changes in Prices of Related Goods

Expectations about the Future

Shift vs. Movement Along Curve

• Change in the quantity demanded:

Summary: variables that influence buyers

Supply Schedule and Supply Curve

EXAMPLE 2A: Starbucks’ supply of muffins

− Notice that Starbucks’ 1.00 3

EXAMPLE 2B: Starbucks’ supply schedule and

Market Supply vs. Individual Supply

– Market supply curve: sum of individual

EXAMPLE 2C: Market vs. individual supply

EXAMPLE 2D: Market supply curve of muffins

Supply Curve Shifters

• These “other things”

• Changes in them shift the S curve…

Supply Curve Shifters

– Expectations about the future

Changes in Input Prices

EXAMPLE 2E: Changes in input prices

• A cost-saving technological improvement

Changes in Number of Sellers

• A decrease in the number of sellers

Expectations about Future

• Sellers may adjust supply* when their

Shift vs. Movement Along the Supply

• Change in the quantity supplied:

Summary: variables that influence sellers

Active Learning 2: The supply curve

A. Grocery stores cut the price of apple juice.

Active Learning 2A. Decrease in price of apple juice

Price of • Move down along the

Active Learning 2B. Technological advance

Supply and demand together

Supply and demand together

Markets not in equilibrium: surplus

Markets not in equilibrium: surplus

Markets not in equilibrium: shortage

Markets not in equilibrium: shortage