THE MARKET FORCES OF

DEMAND AND SUPPLY

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 LEARNING OBJECTIVES
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Learn the nature of competitive market

Examine what determines the demand of a good in
competitive market
Examine what determines the supply of a good in
competitive market
See how demand and supply together set the price of
a good and the quantity sold.
Consider the key role of prices in allocating of scarce
resources in market economies
 MARKETS AND COMPETITION
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Market: Group of buyers and sellers of a particular

good or service
Buyers determine demand, while sellers determine
supply of the product
Organized markets: have specific place and time
with an auctioneer helping to set price and arrange
sales. (e.g Fruit Mundi)
Unorganized Markets: e.g group of ice cream buyers
and sellers. Price and quantity is determined as
buyers and sellers meet.
TYPES OF MARKETS ON BASIS OF COMPETITION
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1. Perfectly Competitive Market:

Is defined by two primary characteristics: (a) the
goods being offered for sale are all the same, and
(b) the buyers and sellers are so numerous that no
single buyer or seller can influence the market
price
Buyers and Sellers are price takers.
2. Imperfect Market:
Market which does not has the above mentioned
characteristics are known as imperfect markets.
They can be of following types:
 IMPERFECT MARKET; TYPES
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1. Monopoly: when there is single seller of a commodity

and he sets the price of its product
2. Duopoly: Two sellers of a commodity
3. Oligopoly: has a few sellers that do not always compete
aggressively. Airline routes are an example
4. Monopolistic Competition: It contains
many sellers, each offering a slightly different product.
Because the products are not exactly the same, each
seller has some ability to set the price for its own
product. An example is the soap/detergent industry
 DEMAND
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What do you think is demand?

Demand = Desire/Willingness + Purchasing Power
Quantity Demanded is the amount of a good that
buyers are willing and able to purchase
 WHAT DETERMINES THE QUANTITY AN
INDIVIDUAL DEMANDS?
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How much ice creams you demand in a month?

What factors affect the quantity that you demand?
 FACTORS AFFECTING DEMAND
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Price
Income
Prices of related goods (Substitutes, complements)
Tastes
Expectations

 Citrus Pribus, ) Relationship between and

 ceteris paribus a Latin phrase, translated as “other things
being equal,” used as a reminder that all variables other
than the ones being studied are assumed to be constant
 LAW OF DEMAND
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Citrus Paribus, if price of a commodity increases

then people buy less of a commodity and less of it
when its prices rises.
This inverse relationship between price and quantity
demanded is known as law of demand.
 THE DEMAND SCHEDULE
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Demand Schedule a table that shows the

relationship between the price of a good and the
quantity demanded
 THE DEMAND CURVE
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Demand
Curve
a graph of the
relationship
between
the price of a
good and the
quantity
demanded
 THE DEMAND CURVE
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The downward-sloping line relating price and

quantity demanded is called the demand curve.
Demand curve has negative slope due to following
REASONS;
1. Income Effect: Price decreases, real income
increases.
2. Substitution Effect: People substitute expensive
goods with cheaper goods.
3. New Buyers come into the market, so market
demand increases.
MARKET DEMAND VERSUS INDIVIDUAL DEMAND
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Sum of all individual demands of a commodity gives

market demand.
Consider the example:
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 CHANGES IN DEMAND
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Two types of changes in demand are

1. Extension and Contraction in Quantity Demanded
 Due to changes in Price
 Movement along the same demand curve
2. Rise and Fall in Demand
 Due to changes in other factors affecting demand
 Shift of demand curve
VARIABLES THAT CAUSE CHANGES IN DEMAND
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EXTENSION AND CONTRACTION IN QUANTITY DEMANDED
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RISE AND FALL IN DEMAND
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TURN TO
OTHER SIDE OF
MARKET
 SUPPLY
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Quantity Supplied is the amount of a good that sellers

are willing and able to sell at the prevailing price.
Supply vs Stock
 Stock is the amount of final goods that a producers has in
or near the market and can be brought for sale at short
notice. Stock is an inventory, fixed amount.
 Supply is flow of goods at prevailing price.

Think of the factors that determine the quantity

supplied
 FACTORS AFFECTING SUPPLY
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Price
Input Prices
Technology
Expectations

 Citrus Pribus, ) Relationship between and

 LAW OF SUPPLY
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Citrus paribus, if prices increase then quantity

supplied in the market also increases and vice versa.
This positive relationship between price and
quantity supplied is known as Law of Supply.
It can be explained using supply schedule and supply
curve
 THE SUPPLY SCHEDULE
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Supply Schedule a table that shows the

relationship between the price of a good and the
quantity supplied
 THE SUPPLY CURVE
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Supply Curve a
graph of the
relationship
between the price
of a good and the
quantity
supplied
 MARKET SUPPLY VERSUS INDIVIDUAL SUPPLY
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The market supply is the sum of the all the

individual supplies.
Suppose we have two suppliers, then market supply
is sum of their individual supplies.
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 CHANGES IN SUPPLY
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Two types of changes in supply are

1. Extension and Contraction in Quantity
supplied
 Due to changes in Price
 Movement along the same supply curve
2. Rise and Fall in supply
 Due to changes in other factors affecting
supply
 Shift of supply curve
VARIABLES THAT CAUSE CHANGES IN SUPPLY
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SHIFTS IN SUPPLY CURVE
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 CHANGES IN SUPPLY; SUMMARY
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In summary, the supply curve shows what happens

to the quantity supplied of a good
when its price varies, holding constant all other
determinants of quantity supplied.
When one of these other determinants changes, the
supply curve shifts.
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SUPPLY AND
DEMAND
TOGETHER
 EQUILIBRIUM
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Equilibrium is a situation in which supply and

demand have been brought into balance
Equilibrium Price is the price that balances
supply and demand
Equilibrium Quantity is the quantity supplied
and the quantity demanded when the price has
adjusted to balance supply and demand.
EQUILIBRIUM OF DEMAND AND SUPPLY
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 DISEQUILIBRIUM
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What happens when the market

price is not equal to the equilibrium price?
Surplus is a situation in which quantity supplied is
greater than quantity demanded
 Price is too high, and price must fall
Shortage is a situation in which quantity
demanded is greater than quantity supplied
 Price is too low, and price must rise.
Law Of Supply And Demand is the claim that the
price of any good adjusts to bring the supply and
demand for that good into balance
SURPLUS
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SHORTAGE
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ANALYZING CHANGES IN EQUILIBRIUM
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The equilibrium price and quantity depend on the

position of the supply and demand curves.
When some event shifts one of these curves, the
equilibrium in the market changes.
The analysis of such a change is called
Comparative Statics because it involves
comparing two static situations—an old and a new
equilibrium.
 THREE STEPS
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When analyzing how some event affects a market, we

proceed in three steps.
 POINTS TO REMEMBER
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Always Remember,
A shift in the supply curve is called a “change in
supply,” and a shift in the demand curve is called a
“change in demand.”
A movement along a fixed supply curve is called a
“change in the quantity supplied,” and a movement
along a fixed demand curve is called a “change in the
quantity demanded.”
EXAMPLE: A CHANGE IN DEMAND
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EXAMPLE: A CHANGE IN SUPPLY
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EXAMPLE: A CHANGE IN BOTH SUPPLY AND DEMAND
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WHAT HAPPENS TO PRICE AND
QUANTITY WHEN
44 SUPPLY OR
DEMAND SHIFTS?
 CONCLUSION
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What prevents decentralized degenerating into

chaos?
What coordinates the actions of the millions of
people with their varying abilities and desires?
What ensures that what needs to get done does in
fact get done?
The answer, in a word, is prices. If market
economies are guided by an invisible hand, as
Adam Smith famously suggested, then the price
system is the baton that the invisible hand uses to
conduct the economic orchestra
Who Will Explain This?
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Thank You For

listening patiently