The Market Forces
of Supply and
Demand
Chapter 4
Market
• A group of buyers and sellers of a particular good or
service
• Buyers as a group
• Determines the demand for the product
• Sellers as a group
• Determines the supply of the product
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Market & Competition
• Highly organized
• Markets for many agricultural commodities
• Less organized
• Markets for ice cream in a small town
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Competitive Market
• Market in which there are many buyers and many
sellers
• Each has a negligible impact on market price
• Price and quantity are determined by all buyers and
sellers
• As they interact with the marketplace
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Perfectly Competitive Market
• Goods offered for sale are all exactly the same
• Buyers and sellers are so numerous
• No single buyer or seller has any influence over the market
price
• Price takers
• At the market price
• Buyers can buy all they wany
• Sellers can sell all they want
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Types of Markets
• Monopoly
• Only one seller in the marker
• Sets the price
• Other markets
• Between perfect competition and monopoly
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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
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Demand
• Demand
• Relationship between the price of a good and quantity demanded
• Demand schedule
• Table
• Demand curve:
• Graph
• Price on the vertical axis
• Quantity on the horizontal axis
• Individual demand
• An individual’s demand for a product
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Demand Curve
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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
• All else constant
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Shifts in Demand Curve
• Increase in demand
• Any change that increases 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
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Variables that can Shift the Demand
Curve
• Income
• Prices of related goods
• Tastes
• Expectations
• Number of buyers
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Price of Related Goods
• Normal good
• An increase in income leads to an increase in demand
• Ex: clothing, food, name brand goods
• Inferior good
• An increase in income decreases the demand
• Ex: generic products, ramen
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Price of Related Goods
• Substitutes
• An increase in the price of one good leads to an increase in
the demand for the other
• Ex. Hamburgers and hot dogs; Coke and Pepsi
• Complements
• An increase in the price of one good leads to a decrease in
the demand for the other
• Ex. Peanut butter and jelly; hot dog and hot dog bun
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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
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Supply
• Supply
• Relationship between the price of a good and the quantity supplied
• Supply schedule
• Table
• Supply curve:
• Graph
• Price on the vertical axis
• Quantity on the horizontal axis
• Individual supply
• A seller’s individual supply
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Supply Curve
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Supply
• Market supply
• Sum of all the supplies of all sellers for a good or service
• Market supply curve
• Sum the individual supply curves horizontally
• Total quantity supplied of a good varies
• As the price of the good varies
• All other factors are held constant
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Shifts in Supply Curve
• Increase in supply
• Any change that increases quantity supplied at every price
• Supply curve shifts right
• Decrease in supply
• Any change that decreases the quantity supplied at every
price
• Supply curve shifts left
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Variables that can Shift the Demand
Curve
• Input prices
• Technology
• Expectations about future
• Number of sellers
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Supply & Demand Together
• Equilibrium
• Various forces are in balance
• A situation in which market price has reached the level
where:
Quantity supplied = Quantity demanded
• Supply and demand curves intersect
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Supply & Demand Together
• Equilibrium price
• Balances quantity supplied and quantity demanded
• Market-clearing price
• Equilibrium quantity
• Quantity supplied and quantity demanded at the
equilibrium price
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Surplus
• Quantity supplied > quantity demanded
• Excess supply
• Downward pressure on price
• Movement along the demand and supply curves
• Increase in quantity demanded
• Decrease in quantity supplied
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Shortage
• Quantity supplied < quantity demanded
• Excess demand
• Upward pressure on price
• Movement along the demand and supply curves
• Decrease in quantity demanded
• Increase in quantity supplied
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Supply & Demand Together
• Law of supply and demand
• The price of any good adjusts
• To bring the quantity supplied and the quantity demanded for that
good into balance
• In most markets
• Surpluses and shortages are temporary
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Shifts vs. Movements
• Shift in the supply curve
• Change in supply
• Movement along a fixed supply curve
• Change in quantity supplied
• Shift in the demand curve
• Change in demand
• Movement along a fixed demand curve
• Change in quantity demanded
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