The Market Forces of Supply and

Demand

PRINCIPLES OF

MICROECONOMICS
FOURTH EDITION

N. G R E G O R Y M A N K I W

PowerPoint® Slides
by Ron Cronovich

© 2007 Thomson South-Western, all rights reserved

Demand
 Demand comes from the behavior of buyers.
 The quantity demanded of any good is the amount of the

good that buyers are willing and able to purchase.

 Law of demand: other things equal the quantity demanded of

a good falls when the price of the good rises,

THE MARKET FORCES OF SUPPLY AND DEMAND

The Demand Schedule
Quantity
Price
 Demand schedule: of lattes
of lattes
A table that shows the demanded
relationship between the P0.00 16
price of a good and the 50.00 14
quantity demanded. 100.00 12
150.00 10
 Example:
Helen’s demand for lattes. 200.00 8
250.00 6
300.00 4
 Notice that Helen’s
preferences obey the
Law of Demand.
THE MARKET FORCES OF SUPPLY AND DEMAND
 Helen’s Demand Schedule & Curve
Price of Quantity
Price
Lattes of lattes
of lattes
demanded
P300.00

P250.00 P0.00 16
50.00 14
P200.00
100.00 12
P150.00
150.00 10
P100.00 200.00 8
P 50.00
250.00 6
300.00 4
P0.00
Quantity
0 5 10 15 of Lattes
THE MARKET FORCES OF SUPPLY AND DEMAND
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 Helen and Ken are the only two buyers in
the Latte market. (Qd = quantity demanded)

Price Helen’s Qd Ken’s Qd Market Qd

P0.00 16 + 8 = 24
50.00 14 + 7 = 21
100.00 12 + 6 = 18
150.00 10 + 5 = 15
200.00 8 + 4 = 12
250.00 6 + 3 = 9
300.00 4 + 2 = 6
 The Market Demand Curve for Lattes
Price of
LattesP Qd
P
(Market)
P300.00
P0.00 24
P250.00
50.00 21
P200.00 100.00 18
P150.00 150.00 15
200.00 12
P100.00
250.00 9
P 50.00
300.00 6
Q
0 5 10 15 20 25

THE MARKET FORCES OF SUPPLY AND DEMAND

Market 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

 Demand Curve Shifters: # of buyers
Price of
LattesP Suppose the
P300.00 number of buyers
increases.
P250.00
Then, at each price,
P200.00 quantity demanded
P150.00
will increase
(by 5 in this
P100.00 example).
P 50.00

Q
0 5 10 15 20 25 30
THE MARKET FORCES OF SUPPLY AND DEMAND
Demand Curve Shifters: income
 Demand for a normal good is positively
related to income.
◦ An increase in income causes increase
in quantity demanded at each price,
shifting the D curve to the right.
(Demand for an inferior good is negatively
related to income. An increase in income
shifts D curves for inferior goods to the left.)

THE MARKET FORCES OF SUPPLY AND DEMAND

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: Butter and margarine,
laptops and desktop computers,
compact discs and music downloads

THE MARKET FORCES OF SUPPLY AND DEMAND

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: college tuition and
textbooks,
bagels and cream cheese, eggs and bacon

THE MARKET FORCES OF SUPPLY AND DEMAND

Demand Curve Shifters: tastes

 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:
The Atkins diet became popular in the ’90s,
caused an increase in demand for eggs,
shifted the egg demand curve to the right.

THE MARKET FORCES OF SUPPLY AND DEMAND

Demand Curve Shifters: expectations

 Expectations affect consumers’ buying

decisions.
 Examples:
◦ If people expect their incomes to rise,
their demand for meals at expensive
restaurants may increase now.
◦ If the economy turns bad and people worry
about their future job security, demand for
new autos may fall now.

THE MARKET FORCES OF SUPPLY AND DEMAND

Demand Curve Shifters: Number of buyers
 An increase in the number of buyers causes
an increase in quantity demanded at each
price, which shifts the demand curve to the
right.

THE MARKET FORCES OF SUPPLY AND DEMAND

Summary: Variables That Affect Demand

VariableA change in this variable…

Price …causes a movement

along the D curve
No. of buyers …shifts the D curve
Income …shifts the D curve
Price of
related goods …shifts the D curve
Tastes …shifts the D curve
Expectations …shifts the D curve

THE MARKET FORCES OF SUPPLY AND DEMAND

Supply
 Supply comes from the behavior of sellers.
 The quantity supplied of any good is the amount that sellers

are willing and able to sell.

 Law of supply: the claim that the quantity supplied of a good

rises when the price of the good rises, other things equal

THE MARKET FORCES OF SUPPLY AND DEMAND

The Supply Schedule
Quantity
 Supply schedule: Price
A table that shows the of lattes of lattes
relationship between the supplied
price of a good and the P0.00 0
quantity supplied. 50.00 3
 Example: 100.00 6
Starbucks’ supply of lattes. 150.00 9
200.00 12
 Notice that Starbucks’ 250.00 15
supply schedule obeys the 300.00 18
Law of Supply.
THE MARKET FORCES OF SUPPLY AND DEMAND
Starbucks’ Supply Schedule & Curve
Price of Quantity
LattesP Price
P300.00 of lattes of lattes
supplied
P250.00
P0.00 0
P200.00 50.00 3
P150.00
100.00 6
150.00 9
P100.00
200.00 12
P 50.00 250.00 15
300.00 18
Q
0 5 10 15

THE MARKET FORCES OF SUPPLY AND DEMAND

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 J.Co are the only two
sellers in this market. (Qs = quantity supplied)

Price Starbucks J.Co Market Qs

P0.00 0 + 0 = 0
50.00 3 + 2 = 5
100.00 6 + 4 = 10
150.00 9 + 6 = 15
200.00 12 + 8 = 20
250.00 15 + 10 = 25
300.00 18 + 12 = 30
 The Market Supply Curve
Qs
P
P (Market)
P300.00
P0.00 0
P250.00 50.00 5
P200.00 100.00 10
150.00 15
P150.00
200.00 20
P100.00
250.00 25
P 50.00 300.00 30
Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND
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 MARKET FORCES OF SUPPLY AND DEMAND

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.

THE MARKET FORCES OF SUPPLY AND DEMAND

 Supply Curve Shifters: input prices

P Suppose the
P300.00 price of milk
falls.
P250.00
At each price,
P200.00 the quantity of
P150.00 Lattes supplied

P100.00
will increase
P 50.00 (by 5 in this
example).
P 0.00 Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND
Supply Curve Shifters: technology

 Technology determines how much inputs are required to

produce a unit of output.
 A cost-saving technological improvement has same effect as a

fall in input prices,

shifts the S curve to the right.

THE MARKET FORCES OF SUPPLY AND DEMAND

Supply Curve Shifters: expectations

 Suppose a firm expects the price of the good

it sells to rise in the future.
 The firm may reduce supply now, to save

some of its inventory to sell later at the

higher price.
 This would shift the S curve leftward.

THE MARKET FORCES OF SUPPLY AND DEMAND

Supply Curve Shifters: Number of sellers

 An increase in the number of sellers

increases the quantity supplied at each
price,
shifts the S curve to the right.

THE MARKET FORCES OF SUPPLY AND DEMAND

Summary: Variables That Affect Supply

VariableA change in this variable…

Price …causes a movement
along the S curve
Input prices …shifts the S curve
Technology …shifts the S curve
No. of sellers …shifts the S curve
Expectations …shifts the S curve

THE MARKET FORCES OF SUPPLY AND DEMAND

 Supply and Demand Together

P
P300.00 D S Equilibrium:
P has reached
P250.00
the level where
P200.00 quantity supplied
P150.00 equals
quantity demanded
P100.00

P 50.00

P 0.00
Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND
DEMAND
 Equilibrium price:
The price that equates quantity
supplied with quantity demanded
P
P300.00 D S P QD QS
P250.00 P 24 0
P200.00 50 21 5
P150.00 100 18 10
150 15 15
P100.00
200 12 20
P 50.00
250 9 25
P 0.00
Q 300 6 30
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND
 Equilibrium quantity:
The quantity supplied and quantity
demanded at the equilibrium price
P
P300.00 D S P QD QS
P250.00 P 24 0
P200.00 50 21 5
P150.00 100 18 10
150 15 15
P100.00
200 12 20
P 50.00
250 9 25
P 0.00
Q 300 6 30
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND
 Surplus:
when quantity supplied is greater
than quantity demanded
P
P300.00 D Surplus S Example:
If P = P250
P250.00
then
P200.00 QD = 9 lattes
P150.00
and
P100.00 QS = 25 lattes
P 50.00
resulting in a
surplus of 16 lattes
P 0.00
Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND
 Surplus:
when quantity supplied is greater
than quantity demanded
P
P300.00 D Surplus S Facing a surplus,
sellers try to increase
P250.00 sales by cutting the
P200.00 price.
This causes
P150.00
QD to rise and QS to
P100.00 fall…
…which reduces
P 50.00
the surplus.
P 0.00
Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND
 Surplus:
when quantity supplied is greater
than quantity demanded
P
P300.00 D Surplus S Facing a surplus,
sellers try to increase
P250.00 sales by cutting the
P200.00 price.
Falling prices cause
P150.00
QD to rise and QS to fall.
P100.00 Prices continue to fall
until market reaches
P 50.00
equilibrium.
P 0.00
Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND
 Shortage:
when quantity demanded is greater
than quantity supplied
P
P300.00 D S Example:
If P = P50,
P250.00
then
P200.00 QD = 21
P150.00 lattes
QS = 5 lattes
P100.00
resulting in a
P 50.00 shortage of 16
P 0.00 Shortage lattes
Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND
 Shortage:
when quantity demanded is greater
than quantity supplied
P
P300.00 D S Facing a shortage,
sellers raise the price,
P250.00
causing QD to fall
P200.00 and QS to rise,
P150.00 …which reduces
P100.00
the shortage.

P 50.00
Shortage
P 0.00
Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND
 Shortage:
when quantity demanded is greater
than quantity supplied
P
P300.00 D S Facing a shortage,
sellers raise the
P250.00 price,
causing QD to fall
P200.00 and QS to rise.
P150.00 Prices continue to
P100.00 rise until market
reaches equilibrium.
P 50.00
Shortage
P 0.00
Q
0 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND
Three Steps to Analyzing Changes in Eq’m

To determine the effects of any event,

1. Decide whether event shifts S curve,
D curve, or both.
2. Decide in which direction curve shifts.
3. Use supply-demand diagram to see
how the shift changes eq’m P and Q.

THE MARKET FORCES OF SUPPLY AND DEMAND

EXAMPLE: The Market for Hybrid Cars

P
price of
S1
hybrid
cars

P1

D1
Q
Q1
quantity of
hybrid cars
THE MARKET FORCES OF SUPPLY AND DEMAND
EXAMPLE 1: A Change in Demand
EVENT TO BE
ANALYZED: P
Increase in price of gas. S1
STEP 1: P2
D curve shifts
because
STEP 2:
price of P1
gas affects demand
D shifts right
for hybrids.
because
STEP 3: high gas
S curve
price does not
makes D1 D2
The shift
shift, causes
because price
hybrids more Q
an gas
of increase
does in
not Q1 Q2
attractive relative
price cost of
affect
to other cars.
and quantity
producing of
hybrids.
hybrid cars. THE MARKET FORCES OF SUPPLY AND DEMAND
 EXAMPLE 1: A Change in Demand
Notice: P
When P rises,
S1
producers supply
a larger quantity P2
of hybrids, even
though the S P1
curve has not
shifted.
Always be careful to
D1 D2
distinguish b/w a shift in
a curve and a movement Q
Q1 Q2
along the curve.

THE MARKET FORCES OF SUPPLY AND DEMAND

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
EXAMPLE 2: A Change in Supply
EVENT: New technology
reduces cost of P
producing hybrid cars. S1 S2
STEP 1:
S curve shifts
because
STEP 2:
event P1
affects cost of
S shifts right P2
production.
because event
D curve
STEP 3: does
reduces cost, not D1
shift,
The because
shift causes Q
makes production
production
price Q1 Q2
moreto fall
profitable at
technology
and
any quantity istonot
given price.
one of the factors
rise.
that affect demand. THE MARKET FORCES OF SUPPLY AND DEMAND
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.
 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”
 In this chapter, we assume markets are perfectly
competitive.

THE MARKET FORCES OF SUPPLY AND DEMAND