Chapter 4: Demand & Supply

Look for the answers to these questions:

 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?
1
 Markets and Competition
 A market is a group of buyers and sellers of a
particular product.
 A competitive market is one with many buyers
and sellers, each has a negligible effect on price.
 In a perfectly competitive market:
 All goods exactly the same
 Buyers & sellers so numerous that no one can
affect market price – each is a “price taker”
 Produce the product “lack uniqueness” any
supermarket you don’t care about the quality
for example if you want buy iphone
THE MARKET FORCES OF SUPPLY AND DEMAND
you first 2
 Demand
 The quantity demanded of any good is the
amount of the good that buyers are willing and
able to purchase.
 Law of demand: the claim that the quantity
demanded of a good falls when the price of the
good rises, other things equal

THE MARKET FORCES OF SUPPLY AND DEMAND 3

 The Demand Schedule
Price
 Demand schedule: of Quantity
a table that shows the lattes of lattes
relationship between the demanded
Dhs
price of a good and the
0.00 16
quantity demanded
4.00 14
 Example: 8.00 12
Huda’s demand for lattes. 12.00 10
16.00 8
 Notice that Huda’s
20.00 6
preferences obey the
Law of Demand. 24.00 4

THE MARKET FORCES OF SUPPLY AND DEMAND 4

 Huda’s Demand Schedule
& Curve Price
Price of Lattes, Dhs of Quantity
lattes of lattes
demanded
24 Dhs
20 0.00 16
16
4.00 14
8.00 12
12
12.00 10
8
16.00 8
4 20.00 6
0 24.00 4

Quantity
of Lattes
THE MARKET FORCES OF SUPPLY AND DEMAND 5
Market Demand versus Individual Demand
 The quantity demanded in the market is the sum of
the quantities demanded by all buyers at each price.
 Suppose Huda and Hessa are the only two buyers in
the Latte market. (Qd = quantity demanded)
Price Huda’s Qd Hessa’s Qd Market Qd
0.00 16 + 8 = 24
4.00 14 + 7 = 21
8.00 12 + 6 = 18
12.00 10 + 5 = 15
16.00 8 + 4 = 12
20.00 6 + 3 = 9
24.00 4 + 2 = 6 6
 The Market Demand Curve for Lattes
P Qd
P
Dhs (Market)
0.00 24
4.00 21
8.00 18
12.00 15
16.00 12
20.00 9
24.00 6
Q

THE MARKET FORCES OF SUPPLY AND DEMAND 7

 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 (i.e., things that determine buyers’
demand for a good, other than the good’s price).

 Changes in them shift the D curve…

THE MARKET FORCES OF SUPPLY AND DEMAND 8

 Demand Curve Shifters: Number of
Buyers

THE MARKET FORCES OF SUPPLY AND DEMAND 9

 Demand Curve Shifters: # of Buyers

P Suppose the number

of buyers increases.
Then, at each P,
Qd will increase
(by 5 in this example).

THE MARKET FORCES OF SUPPLY AND DEMAND 10

Demand Curve Shifters: Expectations

THE MARKET FORCES OF SUPPLY AND DEMAND 11

Demand Curve Shifters: Tastes and
Preferences
 Anything that causes a shift in tastes toward a
good will increase demand for that good
and shift its D curve to the right.
 Example:
Scientists have just discovered that a type of
honey that comes from New Zealand helps against
cancer.
 Something that becomes very fashionable: D shifts
right; or goes out of style: D shifts left

THE MARKET FORCES OF SUPPLY AND DEMAND 12

Demand Curve Shifters: Income

THE MARKET FORCES OF SUPPLY AND DEMAND 13

Demand Curve Shifters: Prices of
Related Goods
 Two goods are substitutes if
an increase in the price of one causes an increase
in 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 desktop computers,

THE MARKET FORCES OF SUPPLY AND DEMAND 14

 Demand Curve Shifters: Prices of
Related Goods
 Two goods are complements if an increase in the
price of one causes a fall in demand for the other.
 Example: computers and software.
If price of computers rises, people buy fewer
computers, and therefore less software.
Software demand curve shifts left.
 Other examples: ?

THE MARKET FORCES OF SUPPLY AND DEMAND 15

 Summary: Variables That Influence Buyers
Variable A change in this variable…
Price …movement along the D curve

# of buyers …shifts the D curve

Expectations …shifts the D curve

Tastes &
Preferences …shifts the D curve
Income …shifts the D curve
Price of Related Goods …shifts the D curve
THE MARKET FORCES OF SUPPLY AND DEMAND 16
 ACTIVE LEARNING 1
Demand Curve
Draw a demand curve for software downloads.
What happens to it in each of
the following scenarios? Why?

A. The price of iPhone

falls
B. The price of
apps/itunes falls

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 ACTIVE LEARNING 1
A. Price of iPhone falls
Apps/itunes
Apps/itunes and and iPhones
iPhones
Price of are
are complements.
complements.
apps/itunes A
A fall
fall in
in price
price of
of iPhones
iPhones
shifts
shifts thethe demand
demand curve
curve for
for
music
music downloads
downloads
to
to the
the right.
right.

P1

D1 D2

Q1 Q2 Quantity of
apps/itunes

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, 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 for classroom use.
 ACTIVE LEARNING 1
B. Price of music downloads falls
Price of
apps/itunes The D curve
does not shift.
Move down along
P1 curve to a point with
lower P, higher Q.
P2

D1

Q1 Q2 Quantity of
apps/itunes

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, 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 for classroom use.
 Supply

THE MARKET FORCES OF SUPPLY AND DEMAND 20

 The Supply Schedule
Price
 Supply schedule: of Quantity
A table that shows the lattes of lattes
relationship between the supplied
Dhs
price of a good and the
0.00 0
quantity supplied.
4.00 3
 Example: 8.00 6
Starbucks’ supply of lattes. 12.00 9

 Notice that Starbucks’ 16.00 12

supply schedule obeys the 20.00 15
Law of Supply. 24.00 18

THE MARKET FORCES OF SUPPLY AND DEMAND 21

 Starbucks’ Supply Schedule & Curve
Price Quantity
P of of lattes
lattes supplied
0.00 0
4.00 3
8.00 6
12.00 9
16.00 12
20.00 15
24.00 18
Q

THE MARKET FORCES OF SUPPLY AND DEMAND 22

 Market Supply versus Individual Supply
 The quantity supplied in the market is the sum of
the quantities supplied by all sellers at each price.
 Suppose Starbucks and Tim Horton are the only two
sellers in this market. (Qs = quantity supplied)
Price Starbucks Tim Horton Market Qs
0.00 0 + 0 = 0
4.00 3 + 2 = 5
8.00 6 + 4 = 10
12.00 9 + 6 = 15
16.00 12 + 8 = 20
20.00 15 + 10 = 25
24.00 18 + 12 = 30 23
 The Market Supply Curve
QS
P
P (Market)
0.00 0
4.00 5
8.00 10
12.00 15
16.00 20
20.00 25
24.00 30

0 5 10 15 20 25 30 35 Q

THE MARKET FORCES OF SUPPLY AND DEMAND 24

 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…
 The number of sellers: The more sellers, the
higher the supply.

THE MARKET FORCES OF SUPPLY AND DEMAND 25

 Supply Curve Shifters: Expectations
Example:
 Health authorities declare coffee to be important for health---this leads
to expectations of higher coffee bean prices.
 In response, owners of coffee bean farms reduce supply now, save
some inventory to sell later at the higher price.
 S curve shifts left.
In general, sellers may adjust supply when their expectations of future
prices change.
:‫مثال‬
‫ وهذا يؤدي إلى توقعات بارتفاع أسعار‬- ‫تعلن السلطات الصحية أن القهوة مهمة للصحة‬
.‫حبوب البن‬
‫ وحفظ بعض‬، ‫ يقوم أصحاب مزارع حبوب البن بتقليل العرض اآلن‬، ‫رداً على ذلك‬
.‫المخزون لبيعه الح ًقا بسعر أعلى‬
.‫ إلى اليسار‬S ‫يتحول منحنى‬
.‫ قد يقوم البائعون بتعديل العرض عندما تتغير توقعاتهم لألسعار المستقبلية‬، ‫بشكل عام‬

THE MARKET FORCES OF SUPPLY AND DEMAND 26

Supply Curve Shifters: Input Prices
 Examples of input prices: wages, prices of raw
materials.
 A fall in input prices makes production more
profitable at each output price, so firms supply a
larger quantity at each price, and the S curve
shifts to the right.
 Starbucks inputs: Coffee beans, milk, syrup,
water, employees’ paychecks, baked goods,
espresso machines, etc.

THE MARKET FORCES OF SUPPLY AND DEMAND 27

Supply Curve Shifters: Input Prices

P Suppose the
price of milk falls.

At each price,
the quantity of
Lattes supplied
will increase
(by 5 in this
example).
Q

THE MARKET FORCES OF SUPPLY AND DEMAND 28

Supply Curve Shifters: 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 S curve to the right.
 Technology can mean machinery and new
manufacturing processes.

THE MARKET FORCES OF SUPPLY AND DEMAND 29

 Supply Curve Shifters:
Natural/Social Factors
Weather, Natural Disasters,
War, Disease, Changing Attitudes and Social Expectations

THE MARKET FORCES OF SUPPLY AND DEMAND 30

Summary: Variables that Influence Sellers

Variable A change in this variable…

Price …causes a movement
along the S curve
# of Sellers ….shifts the S curve
Sellers’ Expectations …shifts the S curve
Input Prices …shifts the S curve
Technology …shifts the S curve
Natural/Social Factors …shifts the S curve

THE MARKET FORCES OF SUPPLY AND DEMAND 31

 Supply and Demand Together

P
D S Equilibrium:
P has reached
the level where
quantity supplied
equals
quantity demanded

Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND 32
 Equilibrium price and equilibrium quantity:
the price that equates quantity supplied
with quantity demanded
P
D S
P QD QS
0 24 0
4 21 5
8 18 10
12 15 15
16 12 20
20 9 25
Q 24 6 30

THE MARKET FORCES OF SUPPLY AND DEMAND 33

 Surplus (a.k.a. excess supply):
when quantity supplied is greater than
quantity demanded
P Example:
D Surplus S
If P = 20 Dhs,
then
QD = 9 lattes
and
QS = 25 lattes
resulting in a
surplus of 16 lattes
Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND 34
 Surplus (a.k.a. excess supply):
when quantity supplied is greater than
quantity demanded
P
D Surplus S Facing a surplus,
sellers try to increase
sales by cutting price.
This causes QD to
rise and QS to fall…
…which reduces the
surplus.

Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND 35
 Surplus (a.k.a. excess supply):
when quantity supplied is greater than
quantity demanded
P Facing a surplus,
D Surplus S
sellers try to increase
sales by cutting price.
This causes
QD to rise and QS to fall.
Prices continue to fall
until market reaches
equilibrium.
Q

THE MARKET FORCES OF SUPPLY AND DEMAND 36

 Surplus (a.k.a. excess supply):
when quantity supplied is greater than
quantity demanded
P
D Surplus S Facing a surplus,
sellers try to increase
sales by cutting price.
This causes QD to
rise and QS to fall…
…which reduces the
surplus.

Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND 37
 Shortage (a.k.a. excess demand):
when quantity demanded is greater than
quantity supplied
P
D S Example:
If P = 4 Dhs,
then
QD = 21 lattes
and
QS = 5 lattes
resulting in a
shortage of 16 lattes
Shortage Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND 38
 Shortage (a.k.a. excess demand):
when quantity demanded is greater than
quantity supplied
P Facing a shortage,
D S
sellers raise the price,
causing QD to fall
and QS to rise,
…which reduces the
shortage.

Shortage
Q

THE MARKET FORCES OF SUPPLY AND DEMAND 39

 Shortage (a.k.a. excess demand):
when quantity demanded is greater than
quantity supplied
P Facing a shortage,
D S
sellers raise the price,
causing QD to fall
and QS to rise,
…which reduces the
shortage. Prices
continue to rise until
the market reaches
Shortage
the equilibrium
Q

THE MARKET FORCES OF SUPPLY AND DEMAND 40

Three Steps to Analyzing Changes in Eq’m

To
Todetermine
determinethe
theeffects
effects of
ofany
anyevent,
event,

1. Decide
1. Decidewhether
whetherevent
event shifts
shifts SScurve,
curve,
DDcurve,
curve,or
or both.
both.

2. Decide
2. Decidein
inwhich
whichdirection
directioncurve
curveshifts.
shifts.

3. Use
3. Usesupply-demand
supply-demanddiagram
diagramto
tosee
see
how
howthe
theshift
shift changes
changes eq’m
eq’m PPand
and Q.
Q.

THE MARKET FORCES OF SUPPLY AND DEMAND 41

Terms for Shift vs. Movement Along Curve
 Change in supply: a shift in the S curve
occurs when a non-price determinant of supply
changes (like technology or costs)
 Change in the quantity supplied:
a movement along a fixed S curve
occurs when P changes
 Change in demand: a shift in the D curve
occurs when a non-price determinant of demand
changes (like income or # of buyers)
 Change in the quantity demanded:
a movement along a fixed D curve
occurs when P changes
42