3 Market - Forces

SUPPLY AND DEMAND I: HOW MARKETS WORK
The Market Forces of

Supply and Demand
Copyright © 2004 South-Western

• Supply and demand are the two words that
economists use most often.
• Supply and demand are the forces that make
market economies work.
• Modern microeconomics is about supply,
demand, and market equilibrium.

MARKETS AND COMPETITION
• A market is a group of buyers and sellers of a
particular good or service.
• The terms supply and demand refer to the

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

MARKETS AND COMPETITION
• Buyers determine demand.
• Sellers determine supply

Competitive Markets
• A competitive market is a market in which

there are many buyers and sellers so that each
has a negligible impact on the market price.

Competition: Perfect and Otherwise
• Perfect Competition
• Products are the same
• Numerous buyers and sellers so that each has no
influence over price
• Buyers and Sellers are price takers
• Monopoly
• One seller, and the seller controls price) price
maker)

DEMAND
• Quantity demanded is the amount of a good
that buyers are willing and able to purchase.
• Law of Demand
• The law of demand states that the quantity
demanded of a good falls when the price of the
good rises.

The Demand Curve: The Relationship
between Price and Quantity Demanded
• Demand Schedule
• The demand schedule is a table that shows the
relationship between the price of the good and the
quantity demanded.

Catherine’s Demand Schedule

The Demand Curve: The Relationship
between Price and Quantity Demanded
• Demand Curve
• The demand curve is a graph of the relationship
between the price of a good and the quantity
demanded.

Figure 1 Catherine’s Demand Schedule and Demand
Curve
Price of
Ice-Cream Cone
$3.00
2.50
1. A decrease
2.00
in price ...
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12
Ice-Cream Cones
2. ... increases quantity Quantity Demanded
of cones demanded.
Copyright © 2004
Copyright South-Western
© 2004 South-Western
Figure 1 Catherine’s Demand Schedule and Demand
Curve
Price of
Ice-Cream Cone
$3.00
2.50
1. A decrease
2.00
in price ...
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
Market Demand
• Market demand refers to the sum of all

individual demands for a particular good or
service.

• Change in Quantity Demanded
• Movement along the demand curve.
• Caused by a change in the price of the product.

Shifts in the Demand Curve
• Consumer income
• Prices of related goods
• Tastes

• Change in Demand
• A shift in the demand curve, either to the left or
right.
• Caused by any change that alters the quantity
demanded at every price.

• Normal or superior goods are defined as
goods whose demand increases as income
increases.
• Inferior goods are defined as goods whose

demand falls as income rises.

Figure 3 Shifts in the Demand Curve
Price of
Ice-Cream
Cone
Increase
in demand
Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0 Quantity of
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning
• Consumer Income
• As income increases the demand for a normal good
will increase.
• As income increases the demand for an inferior
good will decrease.

Consumer Income
Normal Good
Price of Ice-
Cream Cone
$3.0 An increase
0
2.5 in income...
0 Increase
2.0 in demand
0
1.5
0
1.0
0
0.5
0
D2
D1 Quantity
of Ice-
0 1 2 3 4 5 6 7 8 9 10 11 12 Cream
Cones
Consumer Income
Inferior Good
Price of Ice-
Cream Cone
$3.0
0
2.5 An increase
0
2.0
in income...
0 Decrease
1.5 in demand
0
1.0
0
0.5
0
D2 D1 Quantity of
Ice-Cream
0 1 2 3 4 5 6 7 8 9 10 11 12 Cones
• Prices of Related Goods

• When a fall in the price of one good reduces the
demand for another good, the two goods are called
substitutes.
• When a fall in the price of one good increases the
demand for another good, the two goods are called
complements.

Demand curve shifts to the Demand curve shifts to the
left right
---------------------------------- ----------------------------------
• Fall in income (normal goods) • Rise in income (normal goods)

• Rise in income (inferior • Fall in income (inferior goods)
goods) • Fall in price of complementary
• Rise in price of goods
complementary goods • Rise in price of substitutes
• Fall in price of substitutes • Rise in quality
• Fall in quality • Fashionable
• Unfashionable • More advertising
• Less advertising • Increased leisure time
• Less leisure time

SUPPLY
• Quantity supplied is the amount of a good that
sellers are willing and able to sell.
• Law of Supply
• The law of supply states that the quantity supplied
of a good rises when the price of the good rises.

The Supply Curve: The Relationship between
Price and Quantity Supplied
• Supply Schedule
• The supply schedule is a table that
shows the relationship between the price
of the good and the quantity supplied.

Ben’s Supply Schedule
Price Quantity supplied

$0.00 0
0.50 0
1.00 1
1.50 2
2.00 3
2.50 4
3.00 5

The Supply Curve: The Relationship between
Price and Quantity Supplied
• Supply Curve
• The supply curve is the graph of
the relationship between the
price of a good and the quantity
supplied.

Figure 5 Ben’s Supply Schedule and Supply Curve
Price of
Ice-Cream Price Quantity supplied
$0.00 0
Cone
0.50 0
$3.00
1.00 1
1.50 2
2.50 2.00 3
1. An
2.50 4
increase
2.00 3.00 5
in price ...
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity sold of
Ice-Cream Cones
2. ... increases quantity of cones supplied.
Market Supply versus Individual Supply
• Market supply refers to the sum

of all individual supplies for all
sellers of a particular good or
service.

SUPPLY AND DEMAND
TOGETHER
• Equilibrium Price
• The price that balances quantity supplied and
quantity demanded.
• On a graph, it is the price at which the supply and
demand curves intersect.
• Equilibrium Quantity
• The quantity supplied and the quantity demanded at
the equilibrium price.
• On a graph it is the quantity at which the supply and
demand curves intersect.
Figure 8 The Equilibrium of Supply and Demand
Price of
Ice-Cream
Cone Supply
Equilibrium price Equilibrium

$2.00
Equilibrium Demand
quantity
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of Ice-Cream Cones
Summary
• Economists use the model of supply and
demand to analyze competitive markets.
• In a competitive market, there are many buyers
and sellers, each of whom has little or no
influence on the market price.

Summary
• The demand curve shows how the quantity of a
good depends upon the price.
• According to the law of demand, as the price of a
good falls, the quantity demanded rises. Therefore,
the demand curve slopes downward.
• In addition to price, other determinants of how
much consumers want to buy include income, the
prices of complements and substitutes, tastes,
expectations, and the number of buyers.
• If one of these factors changes, the demand curve
shifts.
Summary
• The supply curve shows how the quantity of a
good supplied depends upon the price.
• According to the law of supply, as the price of a
good rises, the quantity supplied rises. Therefore,
the supply curve slopes upward.

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SUPPLY AND DEMAND I: HOW MARKETS WORK

The Market Forces of

Copyright © 2004 South-Western

Copyright © 2004 South-Western

• The terms supply and demand refer to the

Copyright © 2004 South-Western

• Sellers determine supply

Copyright © 2004 South-Western

• A competitive market is a market in which

Copyright © 2004 South-Western

Copyright © 2004 South-Western

Copyright © 2004 South-Western

Copyright © 2004 South-Western

Copyright © 2004 South-Western

Copyright © 2004 South-Western

• Market demand refers to the sum of all

Copyright © 2004 South-Western

Copyright © 2004 South-Western

Copyright © 2004 South-Western

Copyright © 2004 South-Western

• Inferior goods are defined as goods whose

Copyright © 2004 South-Western

Copyright © 2004 South-Western

• Prices of Related Goods

Copyright © 2004 South-Western

• Fall in income (normal goods) • Rise in income (normal goods)

Copyright © 2004 South-Western

Copyright © 2004 South-Western

Copyright © 2004 South-Western

Price Quantity supplied

Copyright © 2004 South-Western

Copyright © 2004 South-Western

• Market supply refers to the sum

Copyright © 2004 South-Western

Equilibrium price Equilibrium

Copyright © 2004 South-Western

Copyright © 2004 South-Western

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