1. The Market Forces of Supply and Demand
Chapter 4
The Market Forces of Supply and Demand 1

2. The Market Forces of Supply and Demand
Supply and Demand are the two words that economists use most often.
Supply and Demand are the forces that make market economies work! 2

3. Market: any institution, mechanism, or arrangement which facilitates exchange.
A market is the interaction of buyers and sellers.
Buyers determine demand...
Sellers determine supply... 4

4. Market Type: A Competitive Market
A Competitive Market is a market:
with many buyers and sellers
that is not controlled by any one person
in which a narrow “range of prices” are established that buyers and sellers act upon 5

5. Market Type: Perfect & Otherwise
Perfect Competitive:
Homogeneous Products
Buyers and Sellers are Price Takers
Monopoly:
One Seller, controls price
Oligopoly:
Few Sellers, not aggressive competition
Monopolistic Competition:
Many Sellers, differentiated products 6

6. Determinant of Demand: Market Price
Law of Demand:
There exists an inverse relationship between Price and Quantity Demanded. P Q 12

7. Demand Schedule and Demand Curve
A table that shows the relationship between the price of the good and the quantity demanded. (Table 4-1)
Demand Curve:
The downward-sloping line relating price and quantity demanded. (Figure 4-1) 17

8. Example: Demand For Ice Cream
Price of Ice Cream
Quantity of Ice Cream 9

9. Change in Quantity Demanded verses Change in Demand
Movement along the demand curve. Caused by a change in the market price of the product. (Table 4-3)
Change in Demand
A shift in the demand curve, either to the left or right. (Figure 4-3) 19

10. The Concept of Demand. . .
Quantity Demanded refers to the amount (quantity) of a good that buyers are willing and able to purchase at each price for a given point in time. P Q 8

11. Ceteris Paribus . . .
...implies that all the relevant variables (e.g. determinants of demand) are held constant, except the one(s) being studied at the time. 18

12. Changes in Quantity Demanded
Price
$2.00
Quantity 7 20

13. Changes in Quantity Demanded
Price
$2.00
$1.00
Quantity 7 13 21

14. Change in Demand
Price
$2.00
Quantity 7 22

15. Change in Demand
Price
$2.00
Quantity 7 10 23

16. Determinants of Demand
What factors determine how much ice cream you will buy?
What factors determine how much will you really purchase? 10

17. Determinants of Demand
1. Consumer Income
2. Prices of Related Goods
3. Tastes
4. Expectations
5. Number of Consumers 11

18. Determinant of Demand: IncomeP
As income increases the demand for a normal good will increase. Q 13

19. Determinant of Demand: IncomeP
As income increases the demand for a normal good will increase.
As income increases the demand for a inferior good decrease. Q 14

20. Determinant of Demand: Prices of Related Goods
When the fall in price of one good reduces the demand for another good, the two goods are substitutes. 15

21. Determinant of Demand: Prices of Related Goods
When the fall in price of one good increases the demand for another good, the two goods are complements. 16

22. Tastes and Preferences
If tastes change in favor of a service or product, the demand will increase (shift to the right).

23. Tastes and Preferences
If tastes change against a product or service, the demand for that product or service will fall (shift to the left).

24. Expectations about future prices
If you expect the price of a product to rise in the future, the demand for the product will go up (shift to the right).
If you expect the price of a product to fall in the future, the demand for the product will go down (shift to the left).

25. Number of Consumers
If the number of consumers increase, the demand curve will shift to the right (increase). If the number decreases, the demand will fall.

26. Determinant of Supply: Market Price
Law of Supply
There exists an direct (positive) relationship between Price and Quantity Supplied. P Q 28

27. Supply: Schedule and Curve
A table that shows the relationship between the price of the good and the quantity supplied. (Table 4-4)
Supply Curve
The upward-sloping line relating price and quantity supplied. (Figure 4-4) 29

28. Supply of Ice Cream
Price
Quantity 26

29. Change in Quantity Supplied verses Change in Supply
Movement along the supply curve. Caused by a change in the market price of the product. (Table 4-6)
Change in Supply
A shift in the supply curve, either to the left or right. (Figure 4-7) 30

30. The Concept of Supply. . .
Quantity Supplied refers to the amount (quantity) of a good that sellers are willing and able to make available for sale at each possible price for a given point in time. P Q 25

31. Changes in Quantity Supplied
Price
$2.00
Quantity 7 31

32. Changes in Quantity Supplied
Price
$2.00
$1.00
Quantity 1 7 32

33. Determinants of Supply
1. Input Prices
2. Technology
3. Expectations
4. Number of Producers 27

34. Change in Supply
Price
$2.00
Quantity 7 33

35. Change in Supply
Price
$2.00
Quantity 7 11 34

36. Supply and Demand Together
Equilibrium Price
The price at which the supply and demand curve intersect. Quantity Supplied and Quantity Demanded are equal.
Equilibrium Quantity
The quantity at which the supply and demand curve intersect. 36

37. Forces of Demand. . .
Price
Quantity 37

38. Forces of Demand and Supply. . .
Price
Quantity 38

39. Forces of Demand and Supply At Rest Market Equilibrium
Price
$2.00
Quantity 7 39

40. Actions of buyers and sellers that move toward equilibrium.
Excess Supply
Price is above equilibrium price, therefore producers are unable to sell all they want at the going price.
Excess Demand
Price is below equilibrium price, therefore consumers are unable to buy all they want at the going price. 40

41. Actions of buyers and sellers that move toward equilibrium.
Price
Quantity 41

42. Actions of buyers and sellers that move toward equilibrium.
Price
Excess Supply
Quantity 42

43. Actions of buyers and sellers that move toward equilibrium.
Price
Quantity 43

44. Actions of buyers and sellers that move toward equilibrium.
Price
Excess
Demand
Quantity 44

45. Comparative Statics: Analyzing Changes in Equilibrium
Determine if event shifts supply curve, the demand curve, or both.
Determine if curve(s) shift to left or right.
Determine how shift affects equilibrium price and quantity.
Example: Demand for ice cream given hot weather. 45

46. Change in demand due to hot weather
Price Pe
Equilibrium
Quantity Qe 46

47. Change in demand due to hot weather
Price Pe
Quantity Qe 47

48. Change in demand due to hot weather
Price
New
Equilibrium Pe Pe
Quantity Qe Qe 49