Unit II

Demand
Supply
Equlibrium
Part - I
 THE MARKET FORCES OF
SUPPLY AND DEMAND
•• Supply
Supply and
and Demand
Demand are
are the
the two
two
words
words that
that economists
economists use
use most
most
often.
often.
•• Supply
Supply and
and Demand
Demand are
are the
the forces
forces
that
that make
make market
market economies
economies work!
work!
•• Modern
Modern microeconomics
microeconomics is is about
about
supply,
supply, demand,
demand, and
and market
market
equilibrium.
equilibrium.
 MARKETS AND COMPETITION
•• The
The terms
terms supply
supply and and demand
demand refer
refer to
to
the
the behaviour
behaviour of of people
people asas they
they
interact
interact with
with one
one another
another inin markets.
markets.
•• AA market
market is
is aa group
group ofof buyers
buyers and
and sellers
sellers
of
of aa particular
particular good
good or
or service.
service.
––Buyers
Buyers determine
determine demand...
demand...
––Sellers
Sellers determine
determine supply…..
supply…..
AA Competitive
Competitive Market
Market is
is aa market
market with
with many
many
buyers
buyers and
and sellers
sellers so
so that
that each
each has
has aa
negligible
negligible impact
impact on
on the
the market
market price.
price.
 DEMAND

•• Quantity
Quantity Demanded
Demanded refers
refers to
to the
the
amount
amount (quantity)
(quantity) of
of aa good
good that
that
buyers
buyers are
are willing
willing to
to purchase
purchase at at
alternative
alternative prices
prices for
for aa given
given period.
period.
 Determinants of Demand

•• What
What factors
factors determine
determine how
how much
much ice
ice
cream
cream youyou will
will buy?
buy?
•• What
What factors
factors determine
determine how
how much
much you
you
will
will really
really purchase?
purchase?
1)
1) Product’s
Product’sOwnOwnPrice
Price
2)
2) Consumer
ConsumerIncome
Income
3)
3) Prices
PricesofofRelated
RelatedGoods
Goods
4)
4) Tastes
Tastes
5)
5) Expectations
Expectations
6)
6) Number
Numberof ofConsumers
Consumers
 What are the factors that determine
“demand”?

• “P.O.I.N.T.”

– P rice of other goods (substitute or complementary)

– O utlook (consumer expectation of the future)
– I ncome (normal goods versus inferior goods)
– N umber of potential customers (pop.of market)
– T aste (fads or trends)
1) Price

Law
Law of
of Demand
Demand
–– The
The law
law of
of demand
demand states
states that,
that,
other
other things
things equal,
equal, the
the quantity
quantity
demanded
demanded of of aa good
good falls
falls when
when
the
the price
price of
of the
the good
good rises.
rises.
Law of Demand
The Law of Demand is an inverse relationship between
price and quantity demanded.
The Law of Demand states that an increase in price causes
a decrease in the quantity demanded. Consumers will buy
more at lower prices and buy less at higher prices. A
decrease in price causes an increase in demand.
2) Income

•• As
As income
income increases
increases thethe
demand
demand for
for aa normal
normal good
good will
will
increase.
increase.
•• As
As income
income increases
increases thethe
demand
demand for
for an
an inferior
inferior good
good will
will
decrease.
decrease.
The Income Effect
The amount of money, or income, that people have
available to spend on goods and services is called their
Purchasing Power

An increase in a consumer’s purchasing power caused by a

change in PRICE is called the Income Effect.

The Income Effect says that when the price of a product

goes down, people can afford to buy more of it. When the
price goes up, people can’t buy as much.
3) Prices of Related Goods

Prices
Prices of
of Related
Related Goods
Goods
–– When
When aa fall
fall in
in the
the price
price of
of one
one
good
good reduces
reduces the the demand
demand forfor
another
another good,
good, the the two
two goods
goods are
are
called
called substitutes.
substitutes.
–– When
When aa fall
fall in
in the
the price
price of
of one
one
good
good increases
increases the the demand
demand forfor
another
another good,
good, the the two
two goods
goods are
are
called
called complements.
complements.
4) Others

•• Tastes
Tastes
•• Expectations
Expectations
 The Demand Schedule and the
Demand Curve
 The
The demand
demand schedule
schedule is is aa table
table that
that
shows
shows the
the relationship
relationship between
between the the
price
price of
of the
the good
good and
and the
the quantity
quantity
demanded.
demanded.
 The
The demand
demand curve
curve is
is aa graph
graph of of the
the
relationship
relationship between
between thethe price
price of
of aa
good
good and
and the
the quantity
quantity demanded.
demanded.
 Ceteris
Ceteris Paribus:
Paribus: “Other
“Other thing
thing being
being
equal”
equal”
Demand Schedules

A demand schedule lists the quantity of a good

consumers are willing and able to buy at a number
of prices.

Demand schedules allow businesses to set their

price to achieve the largest revenue. Sometimes
they will charge more even though they sell less
because their revenue is higher.
Table 4-1: Catherine’s Demand Schedule

Price of Ice-cream Quantity of cones

Cone ($) Demanded
0.00 12
0.50 10
1.00 8
1.50 6
2.00 4
2.50 2
3.00 0
 Figure 4-1: Catherine’s Demand Curve
Price of Ice-
Cream
Cone

$3.00

2.50

2.00

1.50

1.00

0.50

0 2 4 6 8 10 12 Quantity of
Ice-Cream
Cones
 Market Demand Schedule

•• Market
Market demand
demand is is the
the sum
sum of
of all
all individual
individual
demands
demands atat each
each possible
possible price.
price.
•• Graphically,
Graphically, individual
individual demand
demand curves
curves are
are
summed
summed horizontally
horizontally to to obtain
obtain the
the market
market
demand
demand curve.
curve.
•• Assume
Assume the
the ice
ice cream
cream market
market has
has two
two
buyers
buyers as
as follows…
follows…
 Table 4-2: Market demand as the Sum of
Individual Demands
Price of Ice-cream
Catherine Nicholas Market
Cone ($)

0.00 12 + 7 = 19
0.50 10 6 16
1.00 8 5 13
1.50 6 4 10
2.00 4 3 7
2.50 2 2 4
3.00 0 1 1
 Figure 4-3: Shifts in the Demand Curve
Price of Ice-
Cream
Cone

Increase
in demand

Decrease
in demand

D2
D1

D3
Quantity of
Ice-Cream
Cones
Reason for Demand Shifts

Consumer
Consumer Tastes
Tastes and
and Income
Income
••Generally
Generallywhen
whenincome
Preferences
Preferences increases
income
increasesconsumers
consumershavehave
••As
Asaanew
newbrand
brandbecomes
becomes more
moremoney
moneyto tospend,
spend,or
ormore
more
popular
popularthe
thedemand
demandfor
forthat
that ability.
ability.
band
bandgrows.
grows. ••This
Thisleads
leadsto
toaagreater
greaterdemand
demand
••When
Whenthe
thebrand
brandgets
getspoor
poor for
forgoods
goods
reviews
reviewsthe
thedemand
demanddecreases
decreases
Reason for Demand Shifts
Market
Market Size
Size
••AAlarger
largermarket
marketmeans
meansmoremoredemand,
demand,butbutaasmaller
smallermarket
market
means
meanslesslessdemand.
demand.
••Markets
Marketsare
arethe
thepeople
peoplethatthatwill
willbe
bepurchasing.
purchasing.For
Forinstance,
instance,aa
pizza
pizzashop
shopwill
willdeliver
delivertotoaa55mile
mileradius.
radius.The
Thepeople
peoplein
inthat
thatarea
area
are
aretheir
theirmarket.
market.IfIfthey
theyincrease
increasedelivery
deliveryto
to10
10miles
milesthey
theyare
are
increasing
increasingtheir
theirmarket
marketsize.
size.
Reason for Demand Shifts
Price
Price of
of Related
Related Consumer
Consumer
Goods
Goods Expectations
Expectations
••Two
Twotypes:
types:substitute
substitutegoods
goods ••When
Whenaaconsumer
consumerexpects
expectsan an
or
orcomplementary
complementarygoods
goods increase
increasein
inpay
paythey
theytend
tendto
to
••Substitute spend
spendmore,
more,increasing
Substitutegood-
good-similar
similargoods
goods increasing
that demand.
thatreplace
replacehigher
higherpriced
priced demand.
goods
goods ••When
Whenexpecting
expectingaalower
lower
••Complimentary income
incomethey
theyspend
spendless,
Complimentarygood-
good-goods
goods less,
commonly decreasing
decreasingdemand.
commonlyusedusedwith
withother
other demand.
goods
goods(ex:
(ex:paint
paintand
and
paintbrushes)
paintbrushes)
 Demand Curve Shifters: income
•• Demand
Demand for for aa normal
normal good
good is is positively
positively
related
related toto income.
income.
–– An
An increase
increase in in income
income causes
causes increase
increase
in
in quantity
quantity demanded
demanded at at each
each price,
price,
shifting
shifting the
the DD curve
curve to
to the
the right.
right.
(Demand
(Demand for for an
an inferior
inferior good
good is
is negatively
negatively
related
related to
to income.
income. An An increase
increase inin income
income
shifts
shifts D
D curves
curves for
for inferior
inferior goods
goods to to the
the left.)
left.)
Demand Curve Shifters: prices of
related goods
•• Two
Two goods
goods are
are substitutes
substitutes ifif
an
an increase
increase in
in the
the price
price of
of one
one causes
causes
an
an increase
increase in
in demand
demand forfor the
the other.
other.
•• Example:
Example: pizza
pizza and
and hamburgers.
hamburgers.
An
An increase
increase in
in the
the price
price of
of pizza
pizza
increases
increases demand
demand for for hamburgers,
hamburgers,
shifting
shifting hamburger
hamburger demand
demand curve
curve to
to the
the right.
right.
•• Other
Other examples:
examples: Coke
Coke and
and Pepsi,
Pepsi,
laptops
laptops and
and desktop
desktop computers,
computers,
compact
compact discs
discs and
and music
music downloads
downloads
Demand Curve Shifters: prices of
related goods
•• Two
Two goods
goods are are complements
complements ifif
an
an increase
increase in in the
the price
price ofof one
one causes
causes
aa fall
fall in
in demand
demand forfor the
the other.
other.
•• Example:
Example: computers
computers and
and software.
software.
IfIf price
price of
of computers
computers rises,
rises, people
people buy
buy fewer
fewer
computers,
computers, and and therefore
therefore less
less software.
software.
Software
Software demand
demand curve
curve shifts
shifts left.
left.
•• Other
Other examples:
examples: college
college tuition
tuition and
and textbooks,
textbooks,

bagels
bagels and
and cream
cream cheese,
cheese, eggs
eggs and
and bacon
bacon
 Demand Curve Shifters: tastes
•• Anything
Anything that
that causes
causes aa shift
shift in
in tastes
tastes toward
toward aa
good
good will
will increase
increase demand
demand for for that
that good
good
and
and shift
shift its
its DD curve
curve to
to the
the right.
right.
•• Example:
Example:
The
The Atkins
Atkins diet
diet became
became popular
popular in
in the
the ’90s,
’90s,
caused
caused an an increase
increase in
in demand
demand forfor eggs,
eggs,
shifted
shifted the
the egg
egg demand
demand curve
curve to
to the
the right.
right.
Demand Curve Shifters: expectations
•• Expectations
Expectations affect
affect consumers’
consumers’ buying
buying
decisions.
decisions.
•• Examples:
Examples:
–– IfIf people
people expect
expect their
their incomes
incomes to to rise,
rise,
their
their demand
demand for
for meals
meals at
at expensive
expensive
restaurants
restaurants may may increase
increase now.
now.
–– IfIf the
the economy
economy turns
turns bad
bad and
and people
people
worry
worry about
about their
their future
future job
job security,
security,
demand
demand for for new
new autos
autos may
may fall
fall now.
now.
 SUPPLY

•• Quantity
Quantity Supplied
Supplied refers
refers toto the
the amount
amount
(quantity)
(quantity) of of aa good
good that
that sellers
sellers areare
willing
willing to
to make
make available
available for
for sale
sale at
at
alternative
alternative prices
prices for
for aa given
given period.
period.
•• Supply
Supply is is the
the quantity
quantity of
of goods
goods and and
services
services that
that producers
producers areare willing
willing to
to
offer
offer at
at various
various possible
possible prices.
prices.
 Determinants of Supply

•• What
What factors
factors determine
determine how
how much
much
ice
ice cream
cream youyou are
are willing
willing to
to offer
offer or
or
produce?
produce?
1)
1)Product’s
Product’s Own
Own Price
Price
2)
2)Input
Input prices
prices
3)
3)Technology
Technology
4)
4)Expectations
Expectations
5)
5)Number
Number ofof sellers
sellers
What are the factors that determine
“supply”?

• “P.I.G. T.O.E.S”
– P roductivity (workers, machines, and/or assembly)
– I nputs (Change in the price of materials needed to make the
good)
– G overnment Actions (Subsidies, Taxes, and Regulations)

– T echnology (Improvements in machines and production)

– O utputs (Price changes in other products)
– E xpectations (outlook of the future)
– S ize of Industry (Number of companies in the industry)
1) Price

Law
Law of
of Supply
Supply
–– The
The law
law ofof supply
supply states
states that,
that,
other
other things
things equal,
equal, the
the quantity
quantity
supplied
supplied of of aa good
good rises
rises when
when the
the
price
price of
of the
the good
good rises.
rises.
Law of Supply
The
TheLaw
LawofofSupply
Supplyisisaadirect
directrelationship
relationshipbetween
betweenprice
priceand
andquantity
quantity
supplied.
supplied.

The
TheLaw
LawofofSupply
Supplystates
statesthat
thatproducers
producerswill
willoffer
offermore
moreof ofaaproduct
productat at
higher
higherprices
pricesand
andless
lessof
ofaaproduct
productat
atlower
lowerprices.
prices.Producers
Producerssupply
supply
more
moregoods
goodsandandservices
serviceswhen
whenthey
theycan
cansell
sellthem
thematathigher
higherprices.
prices.They
They
will
willsupply
supplyfewer
fewergoods
goodsandandservices
serviceswhen
whenthey
theymust
mustsell
sellthem
thematatlower
lower
prices.
prices.
 The Supply Schedule and the
Supply Curve
 The
The supply
supply schedule
schedule is is aa table
table that
that
shows
shows the
the relationship
relationship between
between the the
price
price of
of the
the good
good and
and thethe quantity
quantity
supplied.
supplied.
 The
The supply
supply curve
curve is
is aa graph
graph ofof the
the
relationship
relationship between
between the the price
price of
of aa
good
good and
and the
the quantity
quantity supplied.
supplied.
 Ceteris
Ceteris Paribus:
Paribus: “Other
“Other thing
thing being
being
equal”
equal”
Supply Schedule
A supply schedule shows the relationship between the price of a
good and the quantity producers are willing to supply.

The supply schedule lists each quantity of a product that

producers are willing to supply at various market prices.

Supply schedules and curves are a snapshot because they

represent a specific time period.

A supply curve plots the information from a Supply Schedule on a

graph. This allows us to easily and quickly make decisions on
supply.

Normal supply curves reflect a steady relationship between

quantity and price, like the graph on the right.
Table 4-4: Ben’s Supply Schedule

Price of Ice-cream Quantity of cones

Cone ($) Supplied
0.00 0
0.50 0
1.00 1
1.50 2
2.00 3
2.50 4
3.00 5
 Figure 4-5: Ben’s Supply Curve
Price of Ice-
Cream
Cone

$3.00

2.50

2.00

1.50

1.00

0.50

0 1 2 3 4 5 6 8 10 12 Quantity of
Ice-Cream
Cones
 Market Supply Schedule

•• Market
Market supply
supply isis the
the sum
sum ofof all
all individual
individual
supplies
supplies at
at each
each possible
possible price.
price.
•• Graphically,
Graphically, individual
individual supply
supply curves
curves are
are
summed
summed horizontally
horizontally to to obtain
obtain thethe market
market
demand
demand curve.
curve.
•• Assume
Assume the
the ice
ice cream
cream market
market has has two
two
suppliers
suppliers as
as follows…
follows…
 Table 4-5: Market supply as the Sum of
Individual Supplies
Price of Ice-cream
Ben Nicholas Market
Cone ($)

0.00 0 + 0 = 0
0.50 0 0 0
1.00 1 0 1
1.50 2 2 4
2.00 3 4 7
2.50 4 6 10
3.00 5 8 13
 Figure 4-7: Shifts in the Supply Curve
Price of Ice- S3
Cream
Cone
S1 S2

Decrease
in supply

Increase
in supply

Quantity of
Ice-Cream
Cones
Supply Shifts
Supply can change for a variety of reasons other than price
including:
●price of resources

● government tools

● technology

● competition

● prices of related goods

● producer expectations

Markets are constantly changing. The factors above are

able to shift the ENTIRE supply curve.

A right shift means an increase in Supply

A left shift means a decrease in Supply

Reason for Supply Shifts

Prices
Prices of
of Resources
Resources Technology
Technology
••Any
Anyprice
priceincrease
increaseorordecrease
decrease ••New
Newtechnology
technologycan
canreduce
reduce
in
inresources
resourceswill
willeffect
effecttheir
their the
thecosts
costsof
ofproduction,
production,
costs
costs leading
leadingto
toan
anincrease
increasein
in
••Resources supply
Resourcesinclude
includeraw
raw supply
materials,
materials,electricity
electricityand
and
workers’
workers’wages.
wages.
 Reason for Supply Shifts

Government
Government tools
tools
••Tools
Toolsinclude
includetaxes,
taxes,subsidies
subsidiesand
andregulation,
regulation,which
whichcan
can
change
changehowhowmuch
muchaacompany
companyis iswilling
willingto
toproduce
produce
••Taxes:
Taxes:payment
paymenttotofund
fundgovernment
governmentservices.
services.Taxes
Taxesadd
addtotocost
cost
of
ofproduction
production
••Subsidies:
Subsidies:payments
paymentsto toprivate
privatebusinesses
businessesto toensure
ensureanan
affordable
affordablesupply
supplyof
ofsome
someessential
essentialgoods
goodslike
likedairy,
dairy,wheat,
wheat,etc.
etc.
–– Example-
Example-Corn-vs-Wheat
Corn-vs-Wheat
••Regulations:
Regulations:rules
ruleson
onhow
howaabusiness
businesscan
canoperate
operatewhich
whichare
are
meant
meanttotoprotect
protectthe
theconsumer
consumer
–– Example-
Example-Coca-Cola
Coca-Cola
Reason for Supply Shifts
Competition
Competition
••Competition
Competitionincreases
increasessupply
supplybecause
becausethere
thereare
aremore
more
companies
companiesproducing
producingsimilar
similargoods
goods
–– Example:
Example:AsAsnew
newvideo
videogame
gameconsoles
consolescome
comeout,
out,the
the
demand
demandfor
fornew
newgames
gamesincreases.
increases.As
Assuch,
such,more
more
suppliers
supplierscome
cometo
tothe
themarket,
market,creating
creatingplenty
plentyof
ofsupply.
supply.
Supply Shifts
Prices
Pricesof
ofRelated
RelatedGoods
Goods Producer
Producer Expectations
Expectations
••Suppliers
Suppliersmay
maychoose
choosetoto ••IfIfthe
theproducers
producersthinkthinkthe
the
produce
producedifferent
differentgoods
goodswhich
which demand
demandfor foror
orthe
theprice
priceofoftheir
their
are
areselling
sellingfor
foraahigher
higherprofit
profit products
productswill willincrease
increasethey
theywill
will
••Example:
Example:farmer
farmergrowing
growing increase
increasetheirtheirsupply
supply
wheat
wheatwill
willwant
wantto toswitch
switchto
to
growing
growingcorn
cornififthe
theprice
priceof
of
corn
corngoes
goesup up
 Supply Curve Shifters: input prices

P Suppose the
$6.00 price of milk falls.

$5.00
At each price,
$4.00 the quantity of
$3.00 Lattes supplied
will increase
$2.00 (by 5 in this
$1.00 example).

$0.00 Q
0 5 10 15 20 25 30 35
Supply Curve Shifters: technology

•• Technology
Technology determines
determines how how much much inputs
inputs
are
are required
required toto produce
produce aa unit unit of
of output.
output.
•• A
A cost-saving
cost-saving technological
technological improvement
improvement
has
has same
same effect
effect as
as aa fall
fall in
in input
input prices,
prices,
shifts
shifts the
the SS curve
curve to
to the
the right.
right.
Supply Curve Shifters: no. of sellers

•• An
An increase
increase in in the
the number
number of of sellers
sellers
increases
increases thethe quantity
quantity supplied
supplied at at each
each
price,
price,
shifts
shifts the
the SS curve
curve toto the
the right.
right.
Supply Curve Shifters: expectations

•• Suppose
Suppose aa firm firm expects
expects the the price
price of
of the
the good
good
itit sells
sells to
to rise
rise in
in the
the future.
future.
•• The
The firm
firm may
may reduce
reduce supply
supply now,
now, toto save
save
some
some of of its
its inventory
inventory to to sell
sell later
later at
at the
the
higher
higher price.
price.
•• This
This would
would shiftshift the
the SS curve
curve leftward.
leftward.
Supply
Supply and
and Demand
Demand
 SUPPLY AND DEMAND
TOGETHER

•• Equilibrium
Equilibrium refers
refers to
to aa situation
situation in
in which
which
the
the price
price has
has reached
reached the
the level
level where
where
quantity
quantity supplied
supplied equals
equals quantity
quantity
demanded.
demanded.
Equilibrium
The goal of supply and demand is to reach equilibrium
between the two. By reaching the equilibrium there are
exactly enough goods to be sold, at a price the producers are
willing to supply at. All items will be sold, and there will be
nothing left over, nor anyone still demanding the product.
 Equilibrium
•• Equilibrium
Equilibrium Price
Price
–– The
Theprice
pricethat
thatbalances
balances quantity
quantitysupplied
suppliedand
and
quantity
quantitydemanded.
demanded.
–– On
On aagraph,
graph, ititis
isthe
theprice
priceatat which
whichthethesupply
supply
and
and demand
demandcurves
curvesintersect.
intersect.
•• Equilibrium
Equilibrium Quantity
Quantity
–– The
Thequantity
quantitysupplied
suppliedand and the
thequantity
quantity
demanded
demanded at at the
theequilibrium
equilibriumprice.
price.
–– On
On aagraph
graphititisis the
thequantity
quantity at
at which
which the
the
supply
supplyand
anddemand
demandcurves curvesintersect.
intersect.
 Equilibrium

Demand Schedule Supply Schedule

At $2.00, the quantity demanded

is equal to the quantity supplied!
 Figure 4-8: The Equilibrium of Supply and
Demand
Price of
Ice-Cream
Cone

Supply

Equilibrium price Equilibrium

$2.00

Demand

Equilibrium quantity

0 1 2 3 4 5 6 7 8 9 10 11 Quantity of Ice-
Cream Cones
 Equilibrium
•• Surplus
Surplus
–– When
Whenprice
price>>equilibrium
equilibriumprice,
price,then
thenquantity
quantity
supplied
supplied>>quantity
quantitydemanded.
demanded.
•• There
Thereis
isexcess
excesssupply
supplyor
oraasurplus.
surplus.
•• Suppliers
Supplierswill
willlower
lowerthe
theprice
priceto
toincrease
increasesales,
sales,
thereby
therebymoving
movingtoward
towardequilibrium.
equilibrium.
•• Shortage
Shortage
–– When
Whenprice
price<<equilibrium
equilibriumprice,
price,then
thenquantity
quantity
demanded
demanded>>the
thequantity
quantitysupplied.
supplied.
•• There
Thereisisexcess
excessdemand
demandor oraashortage.
shortage.
•• Suppliers
Supplierswill
willraise
raisethe
theprice
pricedue
duetototoo
toomany
manybuyers
buyers
chasing
chasingtoo
toofew
fewgoods,
goods,thereby
therebymoving
movingtoward
toward
equilibrium.
equilibrium.
Shortages
Sometimes shortages can occur, or a difference in the
amount demanded and the amount supplied (quantity
demanded is more than quantity supplied)

Shortages occur in competitive markets when prices are too

low or when supply is too low.

When prices are too low, more people buy

the goods, and when supply is too low
there are not enough to be purchased.
This causes suppliers to raise their prices until
they reach a new equilibrium.
Surplus
Sometimes a surplus can occur, or a difference in the
amount demanded and the amount supplied (quantity
demanded is less than quantity supply)

Surplus occurs in competitive markets when prices are too

high or when supply is too high.

When prices are too high more people

refuse to buy the goods, and when supply
is too high there are too many goods
to be purchased. This causes suppliers to
lower their prices until they reach a new
equilibrium.
 Figure 4-9 a): Excess Supply
Price of
Ice-Cream
Cone
Surplus
Supply
$2.50

$2.00

Demand

0 1 2 3 4 5 6 7 8 9 10 11 Quantity of Ice-
Cream Cones
Quantity Quantity
Demanded Supplied
 Figure 4-9 b): 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 Quantity of Ice-
Cream Cone
Quantity Quantity
Supplied Demanded
 Figure 4-10: How an Increase Demand
Affects the Equilibrium
Price of
Ice-Cream
Cone 1. Hot weather increases the
demand for ice cream…
Supply
$2.50 New equilibrium

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

D1

0 1 2 3 4 5 6 7 10 11 Quantity of Ice-
Cream Cone
3. … and a higher quantity
sold.
 Figure 4-11: How a Decrease Supply Affects
the Equilibrium
Price of S2
Ice-Cream
Cone
1. An earthquake reduces the
supply of ice cream…
S1
$2.50 New equilibrium

$2.00 Initial equilibrium

2. …
resulting in
a higher
price …

Demand

0 1 2 3 4 7 10 11 Quantity of Ice-
Cream Cones
3. … and a lower quantity
sold.
 Figure 4-12 a): A Shift in Both Supply and
Demand
Price of
Large increase
Ice-Cream in demand
Cone
New
S2
equilibrium S1
P2
Small
decrease in
supply

P1 Initial equilibrium D2

D1

0 Q1 Q2 Quantity of Ice-
Cream Cone
 Figure 4-12 b): A Shift in Both Supply and
Demand
Price of Small increase
Ice-Cream in demand
Cone New S2
equilibrium
S1
P2

Large
decrease in
supply

P1 Initial equilibrium

D2

D1

0 Q2 Q1 Quantity of Ice-
Cream Cone
Concluding Remarks…

•• Market
Market economies
economies harness
harness thethe
forces
forces of
of supply
supply andand demand.
demand. .. ..
•• Supply
Supply and
and Demand
Demand together
together
determine
determine the the prices
prices ofof the
the
economy’s
economy’s different
different goods
goods andand
services.
services. .. ..
•• Prices
Prices in
in turn
turn are
are the
the signals
signals that
that
guide
guide the
the allocation
allocation ofof resources.
resources.
Summary

•• Economists
Economists use use the
the model
model ofof supply
supply and
and
demand
demand to to analyze
analyze competitive
competitive markets.
markets.
•• In
In aa competitive
competitive market,
market, there
there are
are many
many
buyers
buyers andand sellers,
sellers, each
each of
of whom
whom hashas little
little
or
or no
no influence
influence on
on the
the market
market price.
price.
Summary
•• The
The demand
demand curve
curve shows
shows how
how the
the
quantity
quantity of
of aa good
good depends
depends upon
upon the
the
price.
price.
–– According
According to to the
thelaw
law of
ofdemand,
demand,as asthe
theprice
price
of
of aagood
goodfalls,
falls, the
thequantity
quantitydemanded
demandedrises.
rises.
Therefore,
Therefore, the thedemand
demandcurvecurveslopes
slopes
downward.
downward.
–– In
In addition
additionto toprice,
price,other
other determinants
determinantsof of how
how
much
muchconsumers
consumerswant wanttotobuy
buyinclude
includeincome,
income,
the
theprices
pricesof of complements
complementsand andsubstitutes,
substitutes,
tastes,
tastes, expectations,
expectations, and and the
thenumber
number of of
buyers.
buyers.
–– IfIf one
oneofof these
thesefactors
factorschanges,
changes, the
thedemand
demand
curve
curveshifts.
shifts.
Summary
•• The
Thesupplysupplycurve
curveshows
showshowhow the
thequantity
quantity of
of aa
good
good supplied
supplieddepends
depends uponuponthe
the price.
price.
–– According
According to to the
thelaw
law of
ofsupply,
supply,as asthe
theprice
priceofof
aagood
good rises,
rises, the
thequantity
quantitysupplied
supplied rises.
rises.
Therefore,
Therefore, thethesupply
supplycurve
curveslopes
slopesupward.
upward.
–– In
In addition
additiontotoprice,
price,other
other determinants
determinantsof of how
how
much
muchproducers
producerswant want to
tosell
sell include
includeinput
input
prices,
prices,technology,
technology,expectations,
expectations,and andthe
the
number
number of of sellers.
sellers.
–– IfIf one
oneof
of these
thesefactors
factorschanges,
changes, thethesupply
supply
curve
curveshifts.
shifts.
Summary
•• Market
Market equilibrium
equilibrium is is determined
determined by by the
the
intersection
intersection ofof the
the supply
supply and
and demand
demand
curves.
curves.
•• At
At the
the equilibrium
equilibrium price,
price, the
the quantity
quantity
demanded
demanded equals
equals thethe quantity
quantity supplied.
supplied.
•• The
The behavior
behavior of
of buyers
buyers and
and sellers
sellers
naturally
naturally drives
drives markets
markets toward
toward their
their
equilibrium.
equilibrium.
The End