The

Market
Forces of
Supply and
Demand
 A market is a group of
buyers and sellers of a
particular good or service.

The terms supply and

Markets demand refer to the

behavior of people . . . as
they interact with one
another in markets.

And Economics, especially

Microeconomics is about
how supply and demand
interact in markets.
Market Types or Structures

• Competitive Markets
– Products are the same, price takers
• Monopoly
• Monopolistic Competition
• Oligopoly
DEMAND

Quantity demanded is the amount of a good or service consumers

are willing and able to purchase during a given period of time (week,
month, etc.)

Generalized Demand Function:

Demand function is a table, a graph, or an

equation that shows how quantity demanded is
related to product price, holding constant the
five other variables that influence demand.
It is the relation between quantity demanded
and the six factors that affect quantity
demanded:
Qd = f (P, M, PR, T, PE, N)
 Determinants of Demand
Market price (P)
Consumer income (M)
Prices of related goods (PR)
Tastes (T)
Expectations (PE)
Size of the market (N)
Demand
Curve
Why does the Demand
Curve Slope Downward?

• Law of Demand
• Inverse relationship between price
and quantity.
• Law of Diminishing Marginal Utility.
• Marginal utility is the extra
satisfaction that one receives from
consuming a product.
• Marginal means extra.
• Diminishing means decreasing.
 Market Demand

Market demand refers to the sum of

all individual demands for a particular
good or service.
Graphically, individual demand curves
are summed horizontally to obtain the
market demand curve.
LAW OF DEMAND

The law of demand states that quantity demanded increases when price falls, and
quantity demanded decreases when price rises, other things held constant

Given Demand Function: 𝑄𝑑 = 1,800 − 20𝑃 + 0.6𝑀 − 50𝑃𝑅

[2] Qd = 1,300 – 20P [3] Qd = 1,600 – 20P [4] Qd = 1,000 – 20P

[1] Price
{M=BDT20,000} {M=BDT20,500} {M=BDT19,500}

10

15

20

25
Movements vs. Shifts
• Rule One
• When an independent variable changes and that
variable does not appear on the graph, the curve on
the graph will shift.
• Rule Two
• When an independent variable does appear on the
graph, the curve on the graph will not shift, instead a
movement along the existing curve will occur.
• Let’s apply these rules to the following cases of
supply and demand!
Change in Quantity Demanded versus
Change in Demand

Change in Quantity Demanded

Movement along the demand curve.
Caused by a change in the price of the product.
 Changes in Quantity Demanded
Price of
Ice-cream

A tax that raises the

price of Ice-cream
C results in a movement
$4.00
along the demand curve.

2.00 A

D1

0 12 20 Number of Ice-cream
Sold
Change in Quantity Demanded versus
Change in Demand

Change in Demand
A shift in the demand curve, either to the left or
right.
Caused by a change in a determinant other than
the price.
 Consumer Income
Normal Good
Price of
Ice-Cream
Cone
$3.00 An increase
2.50 in income...
Increase
2.00 in demand

1.50

1.00

0.50 D2
D1
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Consumer Income
Inferior Good
Price of
Ice-Cream
Cone
$3.00

2.50 An increase
2.00
in income...
Decrease
1.50 in demand
1.00

0.50
D2 D1
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
Change in Quantity Demanded
versus Change in Demand
SUPPLY

Quantity supplied is the amount of a good or service offered for sale

during a given period of time (week, month, etc.)

Generalized Supply Function:

Supply function is a table, a graph, or an equation that shows how quantity supplied
is related to product price, holding constant the five other variables that influence
demand.
It is the relation between quantity supplied and the six factors that jointly affect
quantity demanded:
Qs = g(P, Pi, PR, T, PE, F)
Price of
Supply Curve
Ice-Cream
Cone
$3.00

2.50

2.00

1.50

1.00

0.50

Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Law of Supply

The law of supply states that there is a

direct (positive) relationship between
price and quantity supplied.
 Determinants of Supply

Market price
Input prices
Technology
Expectations
Number of producers
Price of related goods
Government policy
SUPPLY FUNCTION
Given Supply Function: 𝑄𝑠 = 50 + 10𝑃 − 8𝑃𝑖 + 5F

[2] Qs = 100 + 10P [3] Qs = 250 + 10P [4] Qs = 100 + 10P

[1] Price
{Pi = 50 & F = 90} {Pi = 31.25& F = 90} {Pi = 50 & F = 30}

65

50

30

10
 Change in Quantity Supplied
Price of
Ice-Cream S
Cone

C
$3.00 A rise in the price
of ice cream cones
results in a
movement along
the supply curve.
A
1.00

Quantity of
0 1 5 Ice-Cream
Cones
 Market Supply

Market supply refers to the sum of all

individual supplies for all sellers of a
particular good or service.
Graphically, individual supply curves
are summed horizontally to obtain the
market supply curve.
 Change in Supply
S3
Price of
Ice-Cream S1
S2
Cone

Decrease in
Supply

Increase in
Supply

Quantity of
0 Ice-Cream
Cones
 Change in Quantity Supplied versus
Change in Supply
Variables that
Affect Quantity Supplied A Change in This Variable . . .
Price Represents a movement along
the supply curve
Input prices Shifts the supply curve
Technology Shifts the supply curve
Expectations Shifts the supply curve
Number of sellers Shifts the supply curve
MARKET EQUILIBRIUM
• A situation in which, at the prevailing
price, consumers can buy all of a good
Equilibrium
they wish and producers can sell all of the
good they wish (Qd = Qs).

• Excess supply (surplus) exists when

quantity supplied exceeds quantity
Surplus/
demanded and Excess demand (shortage)
Shortage
exists when quantity demanded exceeds
quantity supplied

• The price of a good at which buyers can

Market
purchase all they want and sellers can sell
Clearing Price
all they want at that price
 Equilibrium of
Supply and Demand
Price of
Ice-Cream
Cone
Supply
$3.00

2.50 Equilibrium

2.00

1.50

1.00

0.50 Demand
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Excess Supply
Price of
Ice-Cream
Cone
Supply
$3.00 Surplus

2.50

2.00

1.50

1.00

0.50 Demand
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 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 12 13 Quantity of
Ice-Cream Cones
 Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

How an Increase in Demand Affects the

Equilibrium
Price of 1. Hot weather increases
Ice-Cream the demand for ice cream...
Cone

Supply

$2.50 New equilibrium

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

D1
0 7 10 Quantity of
3. ...and a higher Ice-Cream Cones
quantity sold.
 How a Decrease in Supply Affects the
Equilibrium
Price of
Ice-Cream 1. An earthquake reduces
Cone the supply of ice cream...
S2
S1

New
$2.50 equilibrium

2.00 Initial equilibrium

2. ...resulting
in a higher
price...
Demand

0 1 2 3 4 7 8 9 10 11 12 13 Quantity of
3. ...and a lower Ice-Cream Cones
quantity sold.
MARKET EQUILIBRIUM

[1] Price [2] Qs = 100 + 10P [3] Qd = 1,300 – 20P [4] Surplus / Shortage = Qs - Qd

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50

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30
Thank You