# The Market Forces of Supply and Demand

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The Market Forces of Supply and Demand

Markets 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. And Economics, especially Microeconomics is about how supply and demand interact in markets. 4

Market Types or Structures
Competitive Markets Products are the same,price takers Monopoly Monopolistic Competition Oligopoly

Demand Curve Price of Ice-Cream Cone \$3.00 2.50 2.00 1.50 Use the cookie or snack example to illustrate individual and market demand. 1.00 0.50 Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 8 9 10 11 12 17

Why does the Demand Curve Slope Downward?
Law of Demand Inverse relationship between price and quantity. Law of Diminishing Marginal Utility. Utility is the extra satisfaction that one receives from consuming a product. Marginal means extra. Diminishing means decreasing.

Market 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. Use the market example on pages Use Famous Amos cookies.

Ceteris Paribus Ceteris paribus is a Latin phrase that means all variables other than the ones being studied are assumed to be constant. Literally, ceteris paribus means “other things being equal.” Need to emphasize the point of holding all other factors constant. The demand curve slopes downward because, ceteris paribus, lower prices imply a greater quantity demanded! 18

Two Simple Rules for Movements vs. Shifts
Rule One When an independent variable changes and that variable does not appear on the graph, the curve on the graph will shift. Rule Two When an independent variable does appear on the graph, the curve on the graph will not shift, instead a movement along the existing curve will occur. Let’s apply these rules to the following cases of supply and demand!

Change in Quantity Demanded versus Change in Demand
Movement along the demand curve. Caused by a change in the price of the product. 19

Changes in Quantity Demanded
Price of Cigarettes per Pack A tax that raises the price of cigarettes results in a movement along the demand curve. C \$4.00 A 2.00 D1 12 20 Number of Cigarettes Smoked per Day

Change in Quantity Demanded versus Change in Demand
A shift in the demand curve, either to the left or right. Caused by a change in a determinant other than the price. Need to emphasize that this difference is because of ceteris paribus. Very important distinction. 19

Determinants of Demand
Market price Consumer income Prices of related goods Tastes Expectations What are some examples? 11

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

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

Prices of Related Goods Substitutes & Complements
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. Use the Cold Soda example from page in the Instructors Manual. Shows very nicely the two different demand curves. 15

Change in Quantity Demanded versus Change in Demand
Variables that Affect Quantity Demanded A Change in This Variable . . . Price Represents a movement along the demand curve Income Shifts the demand curve Prices of related goods Tastes Expectations Number of buyers 19

Supply Curve Price of Ice-Cream Cone \$3.00 2.50 2.00 1.50 1.00 0.50 Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 8 9 10 11 12 29

Law of Supply The law of supply states that there is a direct (positive) relationship between price and quantity supplied. 28

Supply Quantity supplied is the amount of a good that sellers are willing and able to sell. 25

Change in Quantity Supplied
Price of Ice-Cream Cone S C \$3.00 A rise in the price of ice cream cones results in a movement along the supply curve. A 1.00 Quantity of Ice-Cream Cones 1 5 30

Market 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.

Determinants of Supply
Market price Input prices Technology Expectations Number of producers What are some examples? 27

Change in Supply S3 S1 S2 Decrease in Supply Increase in Supply
Price of Ice-Cream Cone S1 S2 Decrease in Supply Increase in Supply Quantity of Ice-Cream Cones 30

Change in Quantity Supplied versus Change in Supply
30

Equilibrium of Supply and Demand
Price of Ice-Cream Cone Supply \$3.00 Demand Equilibrium 2.50 2.00 1.50 1.00 0.50 Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 8 9 10 11 12 30

Excess Supply Surplus Supply \$3.00 2.50 2.00 1.50 1.00 0.50 Demand 1 2
Price of Ice-Cream Cone Supply Surplus \$3.00 2.50 2.00 1.50 1.00 0.50 Demand Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 8 9 10 11 12 30

Excess Demand Shortage Supply Demand Price of Ice-Cream Cone \$2.00
\$1.50 Campus Parking situation page 63 in the Instructors Manual. Shortage Demand 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of Ice-Cream Cones 37

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. Examine how the shift affects equilibrium price and quantity. 45

How an Increase in Demand Affects the Equilibrium
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 1. Hot weather increases the demand for ice cream... D2 Supply \$2.50 New equilibrium 2. ...resulting in a higher price... 2.00 Initial equilibrium D1 7 10 Quantity of Ice-Cream Cones 3. ...and a higher quantity sold. 46

How a Decrease in Supply Affects the Equilibrium
Price of Ice-Cream Cone 1. An earthquake reduces the supply of ice cream... S2 S1 New equilibrium \$2.50 2. ...resulting in a higher price... 2.00 Initial equilibrium Arrange students in groups and give them hypothetical scenarios that force them to shift either supply or demand and then have them write their answers on the board. Focus on the three steps to analyze equilibrium. Demand 1 2 3 4 7 8 9 10 11 12 13 Quantity of Ice-Cream Cones 3. ...and a lower quantity sold. 46