Demand, Supply and Market

Equilibrium

How market works out?

10/21/2024
Rui Xu 24Fall AP Macroeconomics 10/21/2024 1
 Table of Contents

① Demand

② Supply

③ Market Equilibrium

Rui Xu 24Fall AP Macroeconomics 10/21/2024 2

 Demand

• Quantity demanded
– Amount of a good that buyers are
willing and able to purchase
• Law of demand
– Other things equal
– When the price of a good rises, the
quantity demanded of the good falls
– When the price falls, the quantity
demanded rises
Rui Xu 24Fall AP Macroeconomics 10/21/2024 3
 Demand

• Demand
– Relationship between the price of a
good and quantity demanded
– Demand schedule: a table
– Demand curve: a graph
• Price on the vertical axis
• Quantity on the horizontal axis
• Individual demand
– An individual’s demand for a product
Rui Xu 24Fall AP Macroeconomics 10/21/2024 4
 Figure 1
Catherine’s Demand Schedule and Demand Curve
Price of Ice-Cream Cones

1. A decrease
Price of Quantity of $3.00 in price . . .
Ice-Cream Cones
Cone Demanded 2.50
2. . . . increases quantity
$0.00 12 cones 2.00
of cones demanded.
0.50 10
1.00 8 1.50
1.50 6 Demand curve
2.00 4 1.00
2.50 2 0.50
3.00 0
0 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones
The demand schedule is a table that shows the quantity demanded at each price. The demand
curve, which graphs the demand schedule, illustrates how the quantity demanded of the good
changes as its price varies. Because a lower price increases the quantity demanded, the
demand curve slopes downward.
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 Demand

• Market demand
– Sum of all individual demands for a
good or service
• Market demand curve
– Sum the individual demand curves
horizontally
– Total quantity demanded of a good
varies
• As the price of the good varies
• Other things constant
Rui Xu 24Fall AP Macroeconomics 10/21/2024 6
 Figure 2
Market Demand as the Sum of Individual Demands

The quantity demanded in a market is the sum of the quantities demanded by all the
buyers at each price. Thus, the market demand curve is found by adding horizontally
the individual demand curves. At a price of $2.00, Catherine demands 4 ice-cream
cones, and Nicholas demands 3 ice-cream cones. The quantity demanded in the
market at this price is 7 cones.

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 Figure 2
Market Demand as the Sum of Individual Demands

Price of
Catherine’s demand
+ Nicholas’s demand
Price of
=
Price of
Market demand

Ice-Cream Ice-Cream Ice-Cream

Cones Cones Cones

$3.00 DCatherine $3.00 $3.00

DNicholas
2.50 2.50 2.50

2.00 2.00 2.00

1.50 1.50 1.50 DMarket

1.00 1.00 1.00

0.50 0.50 0.50

0 1 2 3 4 5 6 7 8 9 10 11 12 0 1 2 3 4 5 6 7 0 2 4 6 8 10 12 14 16 18

Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones

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 Demand

• Shifts in the demand curve

– Increase in demand
• Any change that increases the quantity
demanded at every price
• Demand curve shifts right
– Decrease in demand
• Any change that decreases the quantity
demanded at every price
• Demand curve shifts left

Rui Xu 24Fall AP Macroeconomics 10/21/2024 9

 Figure 3
Shifts in the Demand Curve
Price of
Ice-Cream Increase in
Cones Demand

Decrease in
Demand
Demand
Demand
Demand curve, D1
curve, D2
curve, D3
0
Quantity of Ice-Cream Cones
Any change that raises the quantity that buyers wish to purchase at any given price
shifts the demand curve to the right. Any change that lowers the quantity that buyers
wish to purchase at any given price shifts the demand curve to the left.
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 Demand

• Variables that can shift the demand

curve
– Income
– Prices of related goods
– Tastes
– Expectations
– Number of buyers

Rui Xu 24Fall AP Macroeconomics 10/21/2024 11

 Demand

• Income
– Normal good
• Other things constant
• An increase in income leads to an
increase in demand
– Inferior good
• Other things constant
• An increase in income leads to a
decrease in demand

Rui Xu 24Fall AP Macroeconomics 10/21/2024 12

 Demand

• Prices of related goods

– Substitutes, two goods
• An increase in the price of one
• Leads to an increase in the demand for
the other
– Complements, two goods
• An increase in the price of one
• Leads to a decrease in the demand for
the other

Rui Xu 24Fall AP Macroeconomics 10/21/2024 13

 Demand

• Tastes
– Change in tastes: changes the demand
• Expectations about the future
– Expect an increase in income
• Increase in current demand
– Expect higher prices
• Increase in current demand
• Number of buyers, increases
– Market demand increases

Rui Xu 24Fall AP Macroeconomics 10/21/2024 14

 Table 1
Variables That Influence Buyers

This table lists the variables that affect how much consumers choose to buy of any
good. Notice the special role that the price of the good plays: A change in the good’s
price represents a movement along the demand curve, whereas a change in one of
the other variables shifts the demand curve.

15
 Figure 4
Shifts in the Demand Curve versus Movements along the Demand Curve
(a) A Shift in the Demand Curve (b) A Movement along the Demand Curve
Price of Cigarettes, per Pack Price of Cigarettes, per Pack
A policy to discourage A tax that raises the
smoking shifts the price of cigarettes
demand curve to the left results in a movement
along the demand curve
$4.00
C

B A
$2.00 2.00
A

D1
D2 D1

0 10 20 0 12 20
Number of Cigarettes Smoked per Day Number of Cigarettes Smoked per Day
If warnings on cigarette packages convince smokers to smoke less, the demand curve for cigarettes shifts to
the left. In panel (a), the demand curve shifts from D 1 to D2. At a price of $2.00 per pack, the quantity demanded
falls from 20 to 10 cigarettes per day, as reflected by the shift from point A to point B. By contrast, if a tax raises
the price of cigarettes, the demand curve does not shift. Instead, we observe a movement to a different point on
the demand curve. In panel (b), when the price rises from $2.00 to $4.00, the quantity demanded falls from 20
to 12 cigarettes per day, as reflected by the movement from point A to point C.
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 Supply
• Quantity supplied
– Amount of a good
– Sellers are willing and able to sell
• Law of supply
– Other things equal
– When the price of a good rises, the
quantity supplied of the good also rises
– When the price falls, the quantity supplied
falls as well

Rui Xu 24Fall AP Macroeconomics 10/21/2024 17

 Supply
• Quantity supplied
– Amount of a good
– Sellers are willing and able to sell
• Law of supply
– Other things equal
– When the price of a good rises, the
quantity supplied of the good also rises
– When the price falls, the quantity supplied
falls as well

Rui Xu 24Fall AP Macroeconomics 10/21/2024 18

 Supply
• Quantity supplied
– Amount of a good
– Sellers are willing and able to sell
• Law of supply
– Other things equal
– When the price of a good rises, the
quantity supplied of the good also rises
– When the price falls, the quantity supplied
falls as well

Rui Xu 24Fall AP Macroeconomics 10/21/2024 19

 Supply
• Supply
– Relationship between the price of a good
and the quantity supplied
– Supply schedule: a table
– Supply curve: a graph
• Price on the vertical axis
• Quantity on the horizontal axis
• Individual supply
– A seller’s individual supply

Rui Xu 24Fall AP Macroeconomics 10/21/2024 20

 Figure 5
Ben’s Supply Schedule and Supply Curve
Price of Ice-Cream Cones

Supply curve
Price of Quantity
Ice-cream Of Cones $3.00
1. An increase
Cone Supplied 2.50 in price . . .
$0.00 0 cones
0.50 0 2.00
1.00 1 1.50 2. . . . increases
1.50 2
2.00 3 quantity of cones
1.00
2.50 4 supplied.
3.00 5 0.50

0 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones
The supply schedule is a table that shows the quantity supplied at each price. This supply curve,
which graphs the supply schedule, illustrates how the quantity supplied of the good changes as
its price varies. Because a higher price increases the quantity supplied, the supply curve slopes
upward.
21
 Supply
• Market supply
– Sum of the supplies of all sellers for a
good or service
• Market supply curve
– Sum of individual supply curves
horizontally
– Total quantity supplied of a good varies
• As the price of the good varies
• All other factors that affect how much
suppliers want to sell are hold constant
Rui Xu 24Fall AP Macroeconomics 10/21/2024 22
 Figure 6
Market Supply as the Sum of Individual Supplies

The quantity supplied in a market is the sum of the quantities supplied by all the
sellers at each price. Thus, the market supply curve is found by adding horizontally
the individual supply curves. At a price of $2.00, Ben supplies 3 ice-cream cones, and
Jerry supplies 4 ice-cream cones. The quantity supplied in the market at this price is
7 cones.
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 Figure 6
Market Supply as the Sum of Individual Supplies
Ben’s supply
+ Jerry’s supply
= Market supply

Price of Price of Price of

Ice-Cream Ice-Cream Ice-Cream
Cones Cones Cones
SBen
SMarket
$3.00 $3.00 SJerry $3.00

2.50 2.50 2.50

2.00 2.00 2.00

1.50 1.50 1.50

1.00 1.00 1.00

0.50 0.50 0.50

0 1 2 3 4 5 6 7 0 1 2 3 4 5 6 7 0 2 4 6 8 1012141618
Quantity of Quantity of Quantity of
Ice-Cream Cones Ice-Cream Cones Ice-Cream Cones
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 Figure 7
Shifts in the Supply Curve
Price of Supply Supply Supply
Ice-Cream curve, S3 curve, S1 curve, S2
Cones
Decrease
In supply

Increase in
Supply

0
Quantity of Ice-Cream Cones
Any change that raises the quantity that sellers wish to produce at any given price
shifts the supply curve to the right. Any change that lowers the quantity that sellers
wish to produce at any given price shifts the supply curve to the left.
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 Supply
• Variables that can shift the supply curve
– Input prices
• Supply is negatively related to prices of inputs
• Higher input prices: decrease in supply
– Technology
• Advance in technology: increase in supply

Rui Xu 24Fall AP Macroeconomics 10/21/2024 26

 Supply
• Variables that can shift the supply curve
– Expectations about future
• Affect current supply
• Expected higher prices
– Decrease in current supply
– Number of sellers, increases
• Market supply increases

Rui Xu 24Fall AP Macroeconomics 10/21/2024 27

 Table 2
Variables That Influence Sellers

This table lists the variables that affect how much producers choose to sell of any
good. Notice the special role that the price of the good plays: A change in the good’s
price represents a movement along the supply curve, whereas a change in one of the
other variables shifts the supply curve.

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 Figure 8
The Equilibrium of Supply and Demand
Price of
Ice-Cream
Cones Equilibrium Supply
$3.00

2.50
Equilibrium
price 2.00 Equilibrium
quantity
1.50
1.00
Demand
0.50

0 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones
The equilibrium is found where the supply and demand curves intersect. At the
equilibrium price, the quantity supplied equals the quantity demanded. Here the
equilibrium price is $2.00: At this price, 7 ice-cream cones are supplied, and 7 ice-
cream cones are demanded.
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 Supply
• Equilibrium
– A situation in which market price has
reached the level where
• Quantity supplied = quantity demanded
– Supply and demand curves intersect
• Equilibrium price / Market-clearing price
– Balances quantity supplied and quantity
demanded
• Equilibrium quantity
– Quantity supplied and quantity demanded at
the equilibrium price
Rui Xu 24Fall AP Macroeconomics 10/21/2024 30
 Figure 9
Markets Not in Equilibrium
Price of (a) Excess Supply Price of (b) Excess demand
Ice-Cream Ice-Cream
Cones Surplus Supply Cones Supply

$2.50

2.00 $2.00

1.50
Demand Demand

Shortage
Quantity Quantity Quantity Quantity
demanded supplied supplied demanded

0 4 7 10 0 4 7 10
Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones
In panel (a), there is a surplus. Because the market price of $2.50 is above the equilibrium price, the
quantity supplied (10 cones) exceeds the quantity demanded (4 cones). Suppliers try to increase sales by
cutting the price of a cone, and this moves the price toward its equilibrium level. In panel (b), there is a
shortage. Because the market price of $1.50 is below the equilibrium price, the quantity demanded (10
cones) exceeds the quantity supplied (4 cones). With too many buyers chasing too few goods, suppliers
can take advantage of the shortage by raising the price. Hence, in both cases, the price adjustment moves
the market toward the equilibrium of supply and demand
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 Supply
• Surplus
– Quantity supplied > quantity demanded
– Excess supply
– Downward pressure on price
• Movements along the demand and supply
curves
• Increase in quantity demanded
• Decrease in quantity supplied

Rui Xu 24Fall AP Macroeconomics 10/21/2024 32

 Supply
• Shortage
– Quantity demanded > quantity supplied
– Excess demand
– Upward pressure on price
• Movements along the demand and supply
curves
• Decrease in quantity demanded
• Increase in quantity supplied

Rui Xu 24Fall AP Macroeconomics 10/21/2024 33

Supply and Demand Together

• A change in market equilibrium due to

a shift in demand
– One summer, very hot weather
– Effect on the market for ice cream?
1. Hot weather: shifts the demand curve
(tastes )
2. Demand curve shifts to the right
3. Higher equilibrium price; higher
equilibrium quantity
Rui Xu 24Fall AP Macroeconomics 10/21/2024 34
 Figure 10
How an increase in demand affects the equilibrium
Price of 1. Hot weather increases the
Ice-Cream demand for ice cream . . .
Cones Supply
2. …resulting in
a higher price . . .
New equilibrium
$2.50
Initial equilibrium
2.00

3. …and a higher
D1 D2
quantity sold.
0 7 10 Quantity of Ice-Cream Cones

An event that raises quantity demanded at any given price shifts the demand curve to the right.
The equilibrium price and the equilibrium quantity both rise. Here an abnormally hot summer
causes buyers to demand more ice cream. The demand curve shifts from D 1 to D2, which causes
the equilibrium price to rise from $2.00 to $2.50 and the equilibrium quantity to rise from 7 to 10
cones.
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Supply and Demand Together

• A change in market equilibrium due to a

shift in supply
– One summer, a hurricane destroys part
of the sugarcane crop: higher price of
sugar
– Effect on the market for ice cream?
1. Change in price of sugar: supply curve
2. Supply curve: shifts to the left
3. Higher equilibrium price; lower
equilibrium quantity
Rui Xu 24Fall AP Macroeconomics 10/21/2024 36
 Figure 11
How a Decrease in Supply Affects the Equilibrium
Price of 1. An increase in the price of sugar reduces
Ice-Cream the supply of ice cream . . .
Cones
New equilibrium S2
2. …resulting in
a higher price . . .
S1
$2.50

2.00
Initial equilibrium
3. …and a lower
quantity sold.
Demand

0 4 7 Quantity of Ice-Cream Cones

An event that reduces quantity supplied at any given price shifts the supply curve to the left. The
equilibrium price rises, and the equilibrium quantity falls. Here an increase in the price of sugar
(an input) causes sellers to supply less ice cream. The supply curve shifts from S 1 to S2, which
causes the equilibrium price of ice cream to rise from $2.00 to $2.50 and the equilibrium
quantity to fall from 7 to 4 cones.
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Supply and Demand Together

• Shifts in both supply and demand

– One summer: hurricane and heat wave
1. Heat wave shifts the demand curve;
hurricane shifts the supply curve
2. Demand curve shifts to the right; Supply
curve shifts to the left
3. Equilibrium price raises
– If demand increases substantially while supply
falls just a little: equilibrium quantity rises
– If supply falls substantially while demand rises
just a little: equilibrium quantity falls

Rui Xu 24Fall AP Macroeconomics 10/21/2024 38

 Figure 12
A Shift in Both Supply and Demand
(a) Price Rises, Quantity Rises (b) Price Rises, Quantity Falls
Price of Price of
Ice-Cream New Ice-Cream Large decrease
New
equilibrium in supply
Cones Large increase Cones equilibrium
in demand S2 D2
S2
S1 D1 S1
P2 P2

P1 D2 P1
Initial equilibrium

Small
decrease Initial Small increase
in supply D1 equilibrium in demand

0 Q1 Q2 0 Q2 Q1
Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones
Here we observe a simultaneous increase in demand and decrease in supply. Two outcomes
are possible. In panel (a), the equilibrium price rises from P 1 to P2, and the equilibrium quantity
rises from Q1 to Q2. In panel (b), the equilibrium price again rises from P 1 to P2, but the
equilibrium quantity falls from Q1 to Q2.
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 Table3
What Happens to Price and Quantity When Supply
or Demand Shifts?

As a quick quiz, make sure you can explain at least a few of the entries in this table
using a supply-and-demand diagram.
40