1. The Market Forces of Supply and Demand Chapter 4 Copyright © 2004 by South-Western,a division of Thomson Learning.

2. In this chapter you will Learn what a competitive market is Examine what determines the demand for a good in a competitive market Examine what determines the supply of a good in a competitive market See how supply and demand together set the price of a good and the quantity sold

3. Consider the key role of prices in allocating scarce resources in the market economies

4. Key concept Market Competitive market Quantity demanded Law of demand Normal good Inferior good Substitutes

5. Complements demand schedule demand curve ceteris paribus( 其它条件相同）ceteris paribus quantity supplied law of supply supply schedule

6. Supply curve equilibrium equilibrium price equilibrium quantity excess supply excess demand law of supply and demand

7. The Market Forces of Supply and Demand uSupply and demand are the two words that economists use most often. uSupply and demand are the forces that make market economies work. uModern microeconomics is about supply, demand, and market equilibrium.

8. Markets uA market is a group of buyers and sellers of a particular good or service. uThe terms supply and demand refer to the behavior of people... as they interact with one another in markets.

9. Markets u Buyers determine demand. u Sellers determine supply.

10. 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.

11. Competition: Perfect and Otherwise uProducts are the same uNumerous buyers and sellers so that each has no influence over price uBuyers and Sellers are price takers Perfect Competition

12. Competition: Perfect and Otherwise uMonopoly u One seller, and seller controls price uOligopoly u Few sellers u Not always aggressive competition

13. Competition: Perfect and Otherwise uMonopolistic Competition u Many sellers u Slightly differentiated products u Each seller may set price for its own product

14. Quantity demanded The amount of a good that buyers are willing and able to purchase back

15. Law of Demand The law of demand states that there is an inverse relationship between price and quantity demanded. The claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises

16. Demand Schedule The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.

17. Demand Schedule

18. Demand Curve The demand curve is the downward- sloping line relating price to quantity demanded.

19. Demand Curve $3.00 2.50 2.00 1.50 1.00 0.50 213456789101211 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0

20. 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. ” The demand curve slopes downward because, ceteris paribus, lower prices imply a greater quantity demanded!

21. Market Demand uMarket demand refers to the sum of all individual demands for a particular good or service. uGraphically, individual demand curves are summed horizontally to obtain the market demand curve.

22. Change in Quantity Demanded versus Change in Demand Change in Quantity Demanded uMovement along the demand curve. uCaused by a change in the price of the product.

23. 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 20 2.00 $4.00 12

24. Change in Quantity Demanded versus Change in Demand Change in Demand uA shift in the demand curve, either to the left or right. uCaused by a change in a determinant other than the price.

25. Changes in Demand 0 D1D1 Price of Ice-Cream Cone Quantity of Ice-Cream Cones D3D3 D2D2 Increase in demand Decrease in demand

26. Determinants of Demand uMarket price uConsumer income uPrices of related goods uTastes uExpectations

27. Consumer Income uAs income increases the demand for a normal good will increase. uAs income increases the demand for an inferior good will decrease.

28. Normal good A good for which, other things being equal, an increase in income leads to a increase in quantity demanded

29. Inferior good A good for which, other things being equal, an increase in income leads to a decrease in quantity demanded

30. Consumer Income Normal Good $3.00 2.50 2.00 1.50 1.00 0.50 213456789101211 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in demand An increase in income... D1D1 D2D2

31. Consumer Income Inferior Good $3.00 2.50 2.00 1.50 1.00 0.50 213456789101211 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Decrease in demand An increase in income... D1D1 D2D2

32. Prices of Related Goods Substitutes & Complements uWhen a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. uWhen a fall in the price of one good increases the demand for another good, the two goods are called complements.

33. Substitutes Tow goods for which an increase in the price of one good lead to an increase in the demand for other good

34. Complements Tow goods for which an increase in the price of one good lead to an decrease in the demand for other good

35. Change in Quantity Demanded versus Change in Demand

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

37. Law of Supply The law of supply states that there is a direct (positive) relationship between price and quantity supplied. The claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises

38. Supply Schedule The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied.

39. Supply Schedule

40. Supply curve A group of the relationship between the price of a good and the quantity supplied The supply curve is the upward-sloping line relating price to quantity supplied.

41. Supply Curve $3.00 2.50 2.00 1.50 1.00 0.50 213456789101211 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0

42. Market Supply uMarket supply refers to the sum of all individual supplies for all sellers of a particular good or service. uGraphically, individual supply curves are summed horizontally to obtain the market supply curve.

43. Change in Quantity Supplied versus Change in Supply Change in Quantity Supplied uMovement along the supply curve. uCaused by a change in the market price of the product.

44. 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.

45. Change in Quantity Supplied versus Change in Supply Change in Supply uA shift in the supply curve, either to the left or right. uCaused by a change in a determinant other than price.

46. Change in Supply Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 S1S1 S2S2 S3S3 Increase in Supply Decrease in Supply

47. Determinants of Supply uMarket price uInput prices uTechnology uExpectations uNumber of producers

48. Change in Quantity Supplied versus Change in Supply

49. Law of supply and demand The claim that the price of any good adjusts to bring the supply and demand for the good into balance back

50. Equilibrium A situation in which supply and demand have been brought into balance back

51. Supply and Demand Together Equilibrium Price uThe price that balances supply and demand. On a graph, it is the price at which the supply and demand curves intersect. Equilibrium Quantity  The quantity that balances supply and demand. On a graph it is the quantity at which the supply and demand curves intersect.

52. Supply and Demand Together Demand ScheduleSupply Schedule At $2.00, the quantity demanded is equal to the quantity supplied!

53. Supply Demand Price of Ice-Cream Cone Quantity of Ice-Cream Cones Equilibrium of Supply and Demand 2134567891012110 $3.00 2.50 2.00 1.50 1.00 0.50 Equilibrium

54. Price of Ice-Cream Cone Quantity of Ice-Cream Cones 2134567891012110 $3.00 2.50 2.00 1.50 1.00 0.50 Supply Demand Surplus Excess Supply

55. Surplus When the price is above the equilibrium price, the quantity supplied exceeds the quantity demanded. There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby moving toward equilibrium.

56. Excess Demand Quantity of Ice-Cream Cones Price of Ice-Cream Cone $2.00 0123 4 5678910111213 Supply Demand $1.50 Shortage

57. When the price is below the equilibrium price, the quantity demanded exceeds 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.

58. Three Steps To Analyzing Changes in Equilibrium uDecide whether the event shifts the supply or demand curve (or both). uDecide whether the curve(s) shift(s) to the left or to the right. uExamine how the shift affects equilibrium price and quantity.

59. How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 2.00 0 7 Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1 1. Hot weather increases the demand for ice cream... D2D2 2....resulting in a higher price... $2.50 10 3....and a higher quantity sold. New equilibrium Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

60. S2S2 How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 2.00 012347891112 Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S1 10 1. An earthquake reduces the supply of ice cream... New equilibrium 2....resulting in a higher price... $2.50 3....and a lower quantity sold.

61. What Happens to Price and Quantity When Supply or Demand Shifts?

62. Shifts in Curves versus Movements along Curves uA shift in the supply curve is called a change in supply. uA movement along a fixed supply curve is called a change in quantity supplied. uA shift in the demand curve is called a change in demand. uA movement along a fixed demand curve is called a change in quantity demanded.

63. Summary uEconomists use the model of supply and demand to analyze competitive markets. uThe demand curve shows how the quantity of a good depends upon the price.

64. Summary uAccording to the law of demand, as the price of a good rises, the quantity demanded falls. uIn addition to price, other determinants of quantity demanded include income, tastes, expectations, and the prices of complements and substitutes.

65. Summary uThe supply curve shows how the quantity of a good supplied depends upon the price. uAccording to the law of supply, as the price of a good rises, the quantity supplied rises.

66. 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.

67. Summary  Supply and demand together determine the prices of the economy ’ s goods and services. uIn market economies, prices are the signals that guide the allocation of resources.

68. Graphical Review

69. How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 2.00 0 710 Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1

70. How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 2.00 0 710 Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1 1. Hot weather increases the demand for ice cream...

71. How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 2.00 0 710 Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1 1. Hot weather increases the demand for ice cream... D2D2 New equilibrium $2.50

72. How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 2.00 0 710 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

73. How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 2.00 0 710 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 3....and a higher quantity sold. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

74. How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 2.00 01234567891112 Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S1 10

75. How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 2.00 01234567891112 Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S1 10 1. An earthquake reduces the supply of ice cream...

76. How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 2.00 01234567891112 Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S1 10 1. An earthquake reduces the supply of ice cream...

77. How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 2.00 01234567891112 Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S1 10 1. An earthquake reduces the supply of ice cream... New equilibrium $2.50

78. How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 2.00 01234567891112 Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S1 10 1. An earthquake reduces the supply of ice cream... New equilibrium $2.50 2....resulting in a higher price...

79. How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 2.00 012347891112 Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S1 10 1. An earthquake reduces the supply of ice cream... New equilibrium $2.50 2....resulting in a higher price... 3....and a lower quantity sold.