The Market Forces of

Supply and Demand

 Markets

 A market is a group of buyers and sellers of

a particular good or service.
 The terms supply and demand refer to the
behavior of people . . . as they interact with
one another in markets.
 And Economics, especially Microeconomics
is about how supply and demand interact in
markets.
Market Types or Structures
 Competitive Markets
Products are the same,price takers
 Monopoly
 Monopolistic Competition
 Oligopoly
 Demand Curve
Price of
Ice-Cream
Cone
$3.00

2.50

2.00

1.50

1.00

0.50

Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
Why does the Demand
Curve Slope Downward?
 Law of Demand
Inverse relationship between price and
quantity.
 Law of Diminishing Marginal Utility.
Utility is the extra satisfaction that one
receives from consuming a product.
Marginal means extra.
Diminishing means decreasing.
 Market 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.
 Ceteris Paribus
Ceteris paribus is a Latin phrase that
means all variables other than the
ones being studied are assumed to be
constant. Literally, ceteris paribus
means “other things being equal.”

The demand curve slopes downward

because, ceteris paribus, lower prices
imply a greater quantity demanded!
Two Simple Rules for
Movements vs. Shifts
 Rule One
When an independent variable changes and that
variable does not appear on the graph, the curve on
the graph will shift.
 Rule Two
When an independent variable does appear on the
graph, the curve on the graph will not shift, instead
a movement along the existing curve will occur.
 Let’s apply these rules to the following cases of
supply and demand!
Change in Quantity Demanded
versus Change in Demand

Change in Quantity Demanded

 Movement along the demand curve.
 Caused by a change in the price of
the product.
 Changes in Quantity
Price of
Cigarettes
Demanded
per Pack
A tax that raises the
price of cigarettes
C results in a movement
$4.00
along the demand
curve.

2.00 A

D1
0 12 20 Number of Cigarettes
Smoked per Day
Change in Quantity Demanded
versus Change in Demand

Change in Demand
 A shift in the demand curve, either
to the left or right.
 Caused by a change in a
determinant other than the price.
 Determinants of Demand

 Market price
 Consumer income
 Prices of related goods
 Tastes
 Expectations
 What are some examples?
 Consumer Income
Price of
Normal Good
Ice-Cream
Cone
$3.00 An increase
2.50 in income...
Increase
2.00 in demand

1.50

1.00

0.50
D2
D1 Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Consumer Income
Price of
Inferior Good
Ice-Cream
Cone
$3.00

2.50 An increase
2.00
in income...
Decrease
1.50 in demand
1.00

0.50

D2 D1 Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Prices of Related Goods
Substitutes & Complements
 When a fall in the price of one good
reduces the demand for another good,
the two goods are called substitutes.
 When a fall in the price of one good
increases the demand for another
good, the two goods are called
complements.
Change in Quantity Demanded
versus Change in Demand
Variables that A Change in
Affect Quantity
Demanded This Variable . . .
Price Represents a movement
along the demand curve
Income Shifts the demand curve
Prices of related Shifts the demand curve
goods
Tastes Shifts the demand curve
Expectations Shifts the demand curve
Number of Shifts the demand curve
buyers
Price of Supply Curve
Ice-Cream
Cone
$3.00

2.50

2.00

1.50

1.00

0.50

Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Law of Supply

The law of supply states that there is a

direct (positive) relationship between
price and quantity supplied.
 Supply

Quantity supplied is the amount of a

good that sellers are willing and able
to sell.
 Change in Quantity Supplied
Price of
Ice-Cream
Cone
S
C
$3.00 A rise in the price
of ice cream cones
results in a
movement along
the supply curve.
A
1.00

Quantity of
0 1 5 Ice-Cream
Cones
 Market Supply
 Market supply refers to the sum of
all individual supplies for all sellers
of a particular good or service.
 Graphically, individual supply
curves are summed horizontally to
obtain the market supply curve.
 Determinants of Supply

 Market price
 Input prices
 Technology
 Expectations
 Number of producers
 What are some examples?
 Change in Supply
Price of S3
Ice-Cream
Cone
S1 S2
Decrease in
Supply

Increase in
Supply

Quantity of
0 Ice-Cream
Cones
 Change in Quantity Supplied
versus Change in Supply
Variables that
Affect Quantity Supplied A Change in This Variable . . .
Price Represents a movement along
the 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
 Equilibrium of
Price of Supply and Demand
Ice-Cream
Cone
Supply
$3.00

2.50 Equilibrium

2.00

1.50

1.00

0.50 Demand
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Excess Supply
Price of
Ice-Cream
Cone
Supply
$3.00 Surplus

2.50

2.00

1.50

1.00

0.50 Demand
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Excess Demand
Price of
Ice-Cream
Cone
Supply

$2.00

$1.50

Shortage Demand

0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of
Ice-Cream Cones
 Three Steps To Analyzing
Changes in Equilibrium
 Decide whether the event shifts the
supply or demand curve (or both).
 Decide whether the curve(s) shift(s) to the
left or to the right.
 Examine how the shift affects
equilibrium price and quantity.
 Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

How an Increase in Demand

Affects the Equilibrium
Price of 1. Hot weather increases
Ice-Cream the demand for ice cream...
Cone

Supply

$2.50 New equilibrium

2.00
2. ...resulting Initial
in a higher equilibrium
price... D2

D1
0 7 10 Quantity of
3. ...and a higher Ice-Cream Cones
quantity sold.
 How a Decrease in Supply Affects
the Equilibrium
Price of
Ice-Cream 1. An earthquake reduces
Cone S2 the supply of ice cream...

S1

New
$2.50 equilibrium
2.00 Initial equilibrium

2. ...resulting
in a higher
price...
Demand

0 1 2 3 4 7 8 9 10 11 12 13 Quantity of
3. ...and a lower Ice-Cream Cones
quantity sold.