Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Market Forces of Supply and Demand u Supply and demand are the two words that economists use most often. u Supply and demand are the forces that make market economies work.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Market Forces of Supply and Demand u Modern microeconomics is about supply, demand, and market equilibrium. äHow prices harmonize the behaviors of buyers and sellers

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Competition: Perfect and Otherwise u Products are the same u Numerous buyers and sellers so that each has no influence over price u Buyers and Sellers are price takers Perfect Competition

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Competition: Perfect and Otherwise u Monopoly u One seller, and seller controls price u Oligopoly u Few sellers u Not always aggressive competition

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Markets u Buyers determine demand. u Sellers determine supply.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Demand n Demand for a good is the relationship between PRICE and QUANTITY DEMANDED, other things equal.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Quantity Demanded Quantity demanded is the amount of a good that buyers are willing and able to purchase at a particular price.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Law of Demand People buy more at a low price than at a high price, ceteris paribus. Quantity demanded is greater at low price.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Determinants of Demand u Consumer income u Prices of related goods u Tastes u Expectations u Also … u Number of consumers in the market

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Demand Schedule

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Demand Curve $ Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Market Demand u Market demand refers to the sum of all individual demands for a particular good or service. u Graphically, individual demand curves are summed horizontally to obtain the market demand curve.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Change in Quantity Demanded u Movement along the demand curve. u Caused by a change in the price of the product.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Changes in Quantity Demanded 0 D1D1 Price of Cigarettes per Pack Number of Cigarettes Smoked per Day A tax that raises the price of cigarettes results in a movement along the demand curve. A C $

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Change in Demand u A shift in the demand curve, either to the left or right. u Caused by a change in a determinant of demand other than the price. uA change in consumer income will cause demand to change … the demand curve will shift.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Changes in Demand 0 D1D1 Price of Ice-Cream Cone Quantity of Ice-Cream Cones D3D3 D2D2 Increase in demand Decrease in demand

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Consumer Income u As income increases the demand for a normal good will increase. u As income increases the demand for an inferior good will decrease.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Consumer Income Normal Good $ Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in demand An increase in income... D1D1 D2D2

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Consumer Income Inferior Good $ Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Decrease in demand An increase in income... D1D1 D2D2

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Prices of Related Goods Substitutes & Complements u When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. u When a fall in the price of one good increases the demand for another good, the two goods are called complements.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Changes in Demand 0 D1D1 Price of Ice-Cream Cone Quantity of Ice-Cream Cones D3D3 D2D2 Increase in demand when price of a substitute rises Decrease in demand when price of a complement rises

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Markets u Buyers determine demand. u Sellers determine supply.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Supply Supply is the relationship between a product’s PRICE and QUANTITY SUPPLIED, other things equal. Quantity supplied is the amount of a good that sellers are willing and able to sell at a particular price.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Law of Supply Firms offer to sell more at a high price than at a low price, ceteris paribus. Quantity supplied is greater at a high price.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Determinants of Supply: COSTS u Input prices u Technology u Expectations u Also … u Number of producers

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Supply Schedule

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Supply Curve $ Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Market Supply u Market supply is the sum of all individual supplies for all sellers of a product. u Graphically, individual supply curves are summed horizontally to obtain the market supply curve.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Determinants of Supply u Input prices u Technology u Expectations u Number of producers

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Change in Quantity Supplied 1 5 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 S 1.00 A C $3.00 A rise in the price of ice cream cones results in a movement along the supply curve.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Change in Supply Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 S1S1 S2S2 S3S3 Increase in Supply when technology improves Decrease in Supply when wages rise

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Change in Quantity Supplied versus Change in Supply

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Supply and Demand Together Demand ScheduleSupply Schedule At $2.00, the quantity demanded is equal to the quantity supplied!

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Supply Demand Price of Ice-Cream Cone Quantity of Ice-Cream Cones Equilibrium of Supply and Demand $ Equilibrium

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Price of Ice-Cream Cone Quantity of Ice-Cream Cones $ Supply Demand Surplus Excess Supply

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Excess Demand Quantity of Ice-Cream Cones Price of Ice-Cream Cone $ Supply Demand $1.50 Shortage

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Three Steps To Analyzing Changes in Equilibrium u Decide whether the event shifts the supply or demand curve (or both). u Decide whether the curve(s) shift(s) to the left or to the right. u Examine how the shift affects equilibrium price and quantity.

How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1 1. Hot weather increases the demand for ice cream... D2D resulting in a higher price... $ and a higher quantity sold. New equilibrium Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

S2S2 How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S An earthquake reduces the supply of ice cream... New equilibrium 2....resulting in a higher price... $ and a lower quantity sold.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. What Happens to Price and Quantity When Supply or Demand Shifts?

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u Economists use the model of supply and demand to analyze competitive markets. u The demand curve shows how the quantity of a good depends upon the price.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u According to the law of demand, as the price of a good rises, the quantity demanded falls. u In addition to price, other determinants of quantity demanded include income, tastes, expectations, and the prices of complements and substitutes.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u The supply curve shows how the quantity of a good supplied depends upon the price. u According to the law of supply, as the price of a good rises, the quantity supplied rises.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u In addition to price, other determinants of quantity supplied include input prices, technology, and expectations. u Market equilibrium is determined by the intersection of the supply and demand curves.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u Supply and demand together determine the prices of the economy’s goods and services. u In market economies, prices are the signals that guide the allocation of resources.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Graphical Review

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1 1. Hot weather increases the demand for ice cream...

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1 1. Hot weather increases the demand for ice cream... D2D2 New equilibrium $2.50

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1 1. Hot weather increases the demand for ice cream... D2D2 New equilibrium 2....resulting in a higher price... $2.50

How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1 1. Hot weather increases the demand for ice cream... D2D2 New equilibrium 2....resulting in a higher price... $ and a higher quantity sold. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1 1. Hot weather increases the demand for ice cream... D2D2 New equilibrium 2....resulting in a higher price... $ and a higher quantity sold. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S1 10

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S An earthquake reduces the supply of ice cream...

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S An earthquake reduces the supply of ice cream...

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S An earthquake reduces the supply of ice cream... New equilibrium $2.50

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S An earthquake reduces the supply of ice cream... New equilibrium $ resulting in a higher price...

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S An earthquake reduces the supply of ice cream... New equilibrium $ resulting in a higher price and a lower quantity sold.