The Market Forces of Supply and Demand

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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.

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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

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MARKETS AND COMPETITION
Buyers determine demand.
Sellers determine supply

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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.

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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 seller controls price

Competition: Perfect and Otherwise

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Oligopoly
Few sellers
Not always aggressive competition
Monopolistic Competition
Many sellers
Slightly differentiated products
Each seller may

set price for its own product

Competition: Perfect and Otherwise

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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, other things equal, the quantity demanded of a good falls when the price of the good rises.

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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.

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Catherine’s Demand Schedule

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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.

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Figure 1 Catherine’s Demand Schedule and Demand Curve
Copyright © 2004 South-Western
Price

Ice-Cream Cone

2.50

2.00

1.50

1.00

0.50

Quantity of

Ice-Cream Cones

$3.00

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Market Demand versus Individual 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.

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Shifts in the Demand Curve
Change in Quantity Demanded
Movement along the demand

curve.
Caused by a change in the price of the product.

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0
D
Price of Ice-Cream Cones
Quantity of Ice-Cream Cones
A tax that raises the

price of ice-cream cones results in a movement along the demand curve.

1.00

Changes in Quantity Demanded

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Shifts in the Demand Curve
Consumer income
Prices of related goods
Tastes
Expectations
Number of buyers

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Shifts in the Demand Curve
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.

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Figure 3 Shifts in the Demand Curve
Copyright©2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream

Cones

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Shifts in the Demand Curve
Consumer Income
As income increases the demand for

a normal good will increase.
As income increases the demand for an inferior good will decrease.

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$3.00
2.50
2.00
1.50
1.00
0.50
2
1
3
4
5
6
7
8
9
10
12
11
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
0
Increase
in demand
An increase in income...
D1
D2
Consumer

Income Normal Good

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$3.00
2.50
2.00
1.50
1.00
0.50
2
1
3
4
5
6
7
8
9
10
12
11
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
0
Decrease
in demand
An increase in income...
D1
D2
Consumer

Income Inferior Good

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Shifts in the Demand Curve
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.

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Table 1 Variables That Influence Buyers
Copyright©2004 South-Western

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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, other things equal, the quantity supplied of a good rises when the price of the good rises.

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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.

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Ben’s Supply Schedule

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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.

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Figure 5 Ben’s Supply Schedule and Supply Curve
Copyright©2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
0
2.50
2.00
1.50
1.00
1
2
3
4
5
6
7
8
9
10
11
Quantity

Ice-Cream Cones

$3.00

0.50

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Market Supply versus Individual 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.

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Shifts in the Supply Curve
Input prices
Technology
Expectations
Number of sellers

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Shifts in the Supply Curve
Change in Quantity Supplied
Movement along the supply

curve.
Caused by a change in anything that alters the quantity supplied at each price.

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1
5
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
0
S
1.00
A
C
A rise in

the price of ice cream cones results in a movement along the supply curve.

Change in Quantity Supplied

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Shifts in the Supply Curve
Change in Supply
A shift in the supply

curve, either to the left or right.
Caused by a change in a determinant other than price.

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Figure 7 Shifts in the Supply Curve
Copyright©2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream

Cones

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Table 2 Variables That Influence Sellers
Copyright©2004 South-Western

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SUPPLY AND DEMAND TOGETHER
Equilibrium refers to a situation in which the

price has reached the level where quantity supplied equals quantity demanded.

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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.

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At $2.00, the quantity demanded is equal to the quantity supplied!
SUPPLY

AND DEMAND TOGETHER

Demand Schedule

Supply Schedule

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of Ice-Cream Cones

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Ice-Cream

Cones

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Equilibrium
Surplus
When price > equilibrium price, then quantity supplied > quantity demanded.

There is excess supply or a surplus.
Suppliers will lower the price to increase sales, thereby moving toward equilibrium.

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Equilibrium
Shortage
When price < equilibrium price, then quantity demanded > the quantity

supplied.
There is excess demand or a shortage.
Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.

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Demand

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Equilibrium
Law of supply and demand
The claim that the price of any

good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.

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Three Steps to Analyzing Changes in Equilibrium
Decide whether the event shifts

the supply or demand curve (or both).
Decide whether the curve(s) shift(s) to the left or to the right.
Use the supply-and-demand diagram to see how the shift affects equilibrium price and quantity.

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Learning

Price of

Ice-Cream

Cone

Quantity of

Ice-Cream Cones

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Three Steps to Analyzing Changes in Equilibrium
Shifts in Curves versus

Movements along Curves
A shift in the supply curve is called a change in supply.
A movement along a fixed supply curve is called a change in quantity supplied.
A shift in the demand curve is called a change in demand.
A movement along a fixed demand curve is called a change in quantity demanded.

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Learning

Price of

Ice-Cream

Cone

Quantity of

Ice-Cream Cones

Initial equilibrium

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Table 4 What Happens to Price and Quantity When Supply or

Demand Shifts?

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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.

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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.

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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.
In addition to price, other determinants of how much producers want to sell include input prices, technology, expectations, and the number of sellers.
If one of these factors changes, the supply curve shifts.

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Summary
Market equilibrium is determined by the intersection of the supply and

demand curves.
At the equilibrium price, the quantity demanded equals the quantity supplied.
The behavior of buyers and sellers naturally drives markets toward their equilibrium.

The Market Forces of Supply and Demand

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