PrinEconArabWorld 4e Ch04 PowerPoint

Chapter 4
The Market Forces of Supply and Demand

In this chapter, 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?
For use with Principle of Economics Arab World Edition, 4e by N. Gregory Mankiw and Mohamed H. Rashwan (9781473774926) © 2022 Cengage Learning
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 and sellers so numerous that no one can affect market price—each is a
“price taker”
For use with Principle of Economics Arab World Edition, 4e by N. Gregory Mankiw and Mohamed H. Rashwan (9781473774926) © 2022 Cengage Learning 3
Demand
• Quantity demanded: The amount of a good that buyers are willing
and able to purchase.
• Law of demand: The claim that, other things equal, the quantity
demanded of a good falls when the price of the good rises.
• Demand schedule: A table that shows the relationship between the
price of a good and the quantity demanded.
• Demand curve: A graph of the relationship between the price of a
good and the quantity demanded
Demand schedule and curve: An example
Market demand versus individual demand
Shifts in the demand curve
• 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
• Income
• Demand for a normal good is positively related to income.
• 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.
• Prices of related goods

• Two goods are substitutes if an increase in the price of one causes an increase in demand
for the other.
• Two goods are complements if an increase in the price of one causes a fall in demand for
the other.
• 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.
• Expectations
• Expectations affect consumers’ buying decisions.
• The size and structure of the population
• A larger population will mean higher demand for all goods and services.
• A younger population will mean different patterns of demand
ACTIVE LEARNING 1
Demand Curve
• Draw a demand curve for software downloads.

• What happens to it in each of the following
scenarios?
A. The price of computers falls.
B. The price of software downloads falls.
C. The price of software CDs falls.
• Why?
ACTIVE LEARNING 1
A. Price of computer falls
Price of Software downloads and
software computers are complements.
down-loads A fall in price of computers
shifts the demand curve for
software downloads
to the right.
P1
D1 D2
Q1 Q2 Quantity of
software downloads
ACTIVE LEARNING 1
B. Price of music downloads falls
Price of
software The D curve
down-
loads
does not shift.
Move down along
P1 curve to a point with
lower P, higher Q.
P2
D1
Q1 Q2 Quantity of
software downloads
Active Learning 1
C. Price of software CDs falls
Price of
software
Software CDs and
down- software downloads
loads are substitutes.
A fall in price of CDs
P1 shifts demand for
downloads to the left.
D2 D1
Q2 Q1 Quantity of
software downloads
Supply
• Quantity supplied: The among of any good that sellers are willing and
able to sell.
• Law of supply: The claim that, other things equal, the quantity
supplied of a good rises when the price of the good rises.
• Supply schedule: A table that shows the relationship between the
price of a good and the quantity supplied.
• Supply curve: A graph of the relationship between the price of a good
and the quantity supplied.
Supply schedule and curve: An example
Market supply versus individual supply
Shifts in the supply curve
• 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.
• Input prices
• An increase in the number of sellers increases the quantity supplied at each price,
shifts S curve to the right.
• 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, shifting the S curve to the right.
• Expectations
• Sellers may adjust supply when their expectations of future prices change.
• Number of sellers
• A fall in input prices makes production more profitable at each output price,
so firms supply a larger quantity at each price, shifting the S curve to the right.
• Natural/social factors
• Natural or social factors can affect supply, e.g., the weather, natural disasters,
regional conflicts or social expectations
• These impact production decisions and may have an influence on the cost of
inputs into production
Active Learning 2
Supply Curve
Draw a supply curve for tax return preparation
software.
What happens to it in each of the following
scenarios?
A. Retailers cut the price of the software.
B. A technological advance allows the software to
be produced at lower cost.
C. Professional tax return preparers raise the price
of the services they provide.
Active Learning 2
A. Fall in price of tax return software
Price of
tax return S curve does
S1
software
not shift.
P1 Move down
along the curve
P2 to a lower P
and lower Q.
Q2 Q1 Quantity of tax
return software
To be used with Mankiw and Rashwan, Principles of Economics, Arab World Edition, 3rd edition, ISBN: 9781473749504 © Cengage Learning EMEA 2018.
Active Learning 2
B. Fall in cost of producing the software
Price of
tax return
S1
S curve shifts
software S2
to the right:
At each price,
P1
Q increases.
Q1 Q2 Quantity of tax
return software
Active Learning 2
C. Professional preparers raise their price
Price of
tax return
S1 This shifts the
software
demand curve for
tax preparation
software, not the
supply curve.
Quantity of tax
return software
Supply and demand together
• Equilibrium: A situation in which the market price has reached the
level at which quantity supplied equals quantity demanded.
• Equilibrium price: The price that balances quantity supplied and
quantity demanded.
• Equilibrium quantity: The quantity supplied and demanded at the
equilibrium price.
• Law of supply and demand: The claim that the price of any good
adjusts to bring the quantity supplied and the quantity demanded for
the good into balance
The equilibrium of supply and demand
Markets not in equilibrium
Prices as signals
• For buyers:
• The price signals what they have to give up to acquire the benefits – the utility (satisfaction)
– that having the good will give them.
• At a higher price, the sacrifice is greater, which may reduce willingness to buy.
• For sellers:
• The price signals the profitability of production.
• Producing more will incur additional cost, so a higher price is required to compensate and
make a profit (the reward from the risk they are taking in production).
• A higher price signals that there is a shortage and thus an incentive to expand production.
Three steps to analyzing changes in
equilibrium
To determine the effects of any event,
1. Decide whether event shifts S curve, the D curve or both.
2. Decide in which direction curve shifts.
3. Use the supply-and-demand diagram to see how the shift changes

equilibrium P and Q.
Example: How an increase in demand affects
the equilibrium
Example: How a decrease in supply affects
the equilibrium
Example 1: A shift in supply and demand
Example 2: A shift in supply and demand
Three possible
outcomes:
• (a) Rise in P and Q
• (b) Fall in P, but
rise in Q
• (c) No change in
P, but rise in Q
Active Learning 3
Shifts in supply and demand
Use the three-step method to analyze the effects of each

event on the equilibrium price and quantity of software
downloads.
Event A: A fall in the price of software CDs.
Event B: Sellers of software downloads negotiate a
reduction in the royalties they must pay for
each copy they sell.
Event C: Events A and B both occur.
Active Learning 3
A. Fall in price of software CDs
The market for
STEPS
P software downloads
1. D curve shifts. S1
2. D shifts left.
P1
3. P and Q both fall.

P2
D2 D1
Q
Q2 Q1
Active Learning 3
B. Fall in cost of royalties
STEPS The market for
P software downloads
1. S curve shifts. S1 S2
2. S shifts right.
P1
3. P falls,
P2
Q rises.
(Royalties are part of

sellers’ costs) D1
Q
Q1 Q2
Active Learning 3
C. Fall in price of software CDs and fall in cost of royalties
STEPS
STEPS
1.
1. Both
Both curves
curves shift
shift (see
(see parts
parts AA && B).
B).
2.
2. DD shifts
shifts left,
left, SS shifts
shifts right.
right.
3.
3. PP unambiguously
unambiguously falls.
falls.
Effect
Effect on
on QQ isis ambiguous:
ambiguous:
The
The fall
fall in
in demand
demand reduces
reduces Q,
Q, the
the increase
increase in
in
supply
supply increases
increases Q.Q.
How prices allocate resources
• In market economies, prices adjust to balance supply and demand.
• These equilibrium prices are the signals that guide economic decisions
and thereby allocate scarce resources.
• Negative prices
• Mean that sellers are paying buyers to take the stock off their hand
• Example: Oil prices during the COVID-19 pandemic
Summary
• A competitive market has many buyers and sellers, each of whom has
little or no influence on the market price – they are price-takers
• Economists use the supply and demand model to analyze competitive
markets.
• The downward-sloping demand curve reflects the law of demand,
which states that the quantity buyers demand of a good depends
negatively on the good’s price.
Summary
• Besides price, demand depends on buyers’ incomes, prices of related
goods, tastes and the size and structure of the population. If one of
these factors changes, the D curve shifts.
• The upward-sloping supply curve reflects the law of supply, which
states that the quantity sellers supply depends positively on the good’s
price.
• Other determinants of supply include input prices, technology,
expectation, the number of sellers and natural or social factors.
Changes in these factors shift the S curve.
Summary
• The intersection of S and D curves determines the market equilibrium.
At the equilibrium price, quantity supplied equals quantity demanded.
• If the market price is above equilibrium, a surplus results, which
causes the price to fall.
• If the market price is below equilibrium, a shortage results, causing
the price to rise.
Summary
• We can use the supply-demand diagram to analyze the effects of any
event on a market.
• The three steps to analyze changes in equilibrium are: (1) Determine
whether the event shifts one or both curves. (2) Determine the
direction of the shifts. (3) Compare the new equilibrium to the initial
one.
• In market economies, prices are the signals that guide economic
decisions and allocate scarce resources.

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Chapter 4

The Market Forces of Supply and Demand

• Prices of related goods

• Draw a demand curve for software downloads.

1. Decide whether event shifts S curve, the D curve or both.

2. Decide in which direction curve shifts.

3. Use the supply-and-demand diagram to see how the shift changes

Use the three-step method to analyze the effects of each

3. P and Q both fall.

(Royalties are part of

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