1. Copyright © 2004 South-Western Mods 5-6-7 The Market Forces of Supply and Demand

2. Copyright © 2004 South-Western Teach a parrot to say “supply and demand” and you have an economist! Supply and demand are the two words that economists use most often. Supply and demand are the forces that make market economies work. Modern microeconomics is about supply, demand, and market equilibrium.

3. Copyright © 2004 South-Western 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. MARKETS AND COMPETITION

4. Copyright © 2004 South-Western MARKETS AND COMPETITION Buyers—Consumers—Households—determine demand Sellers—Producers—Suppliers—determine supply

5. Copyright © 2004 South-Western Competitive Markets A competitive market is a market in which there are many buyers and sellers so that each has a negligible impact on the market price.

6. Copyright © 2004 South-Western The Law of Clowns

7. Copyright © 2004 South-Western DEMAND Law of Demand The law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises. Quantity demanded is the amount of a good that buyers are willing and able to purchase.

8. Copyright © 2004 South-Western The Demand Schedule Demand Schedule The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.

9. Copyright © 2004 South-Western Catherine’s Demand Schedule

10. Copyright © 2004 South-Western The Demand Curve Demand Curve The demand curve is a graph of the relationship between the price of a good and the quantity demanded.

11. Catherine’s Demand Schedule and Demand Curve Copyright © 2004 South-Western Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 0.50 1234567891011 Quantity of Ice-Cream Cones $3.00 12 1. A decrease in price... 2....increases quantity of cones demanded.

12. Copyright © 2004 South-Western Individual Demand Market Demand Graphically, individual demand curves are summed horizontally to obtain the market demand curve. Market demand refers to the sum of all individual demands for a particular good or service.

13. Copyright © 2004 South-Western Changes to the Demand Curve Change in Quantity Demanded Movement along the demand curve. Caused by a change in the price of the product.

14. Copyright © 2004 South-Western 0 D Price of Ice- Cream Cones Quantity of Ice-Cream Cones A tax that raises the price of ice-cream cones results in a movement along the demand curve. A B 8 1.00 $2.00 4 Changes in Quantity Demanded

15. Copyright © 2004 South-Western Changes to the Demand Curve Change in Demand A shift in the demand curve, either to the left or right. Caused by any change that alters the quantity demanded at every price.

16. Figure 3 Shifts in the Demand Curve Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone Quantity of Ice-Cream Cones Increase in demand Decrease in demand Demand curve,D 3 Demand curve,D 1 Demand curve,D 2 0

17. Copyright © 2004 South-Western Shifts in the Demand Curve— Determinants of Demand T astes R elated substitutes & Complements I ncome of Buyers B uyer #’s E xpectations

18. Copyright © 2004 South-Western Shifts in the Demand Curve— Determinants of Demand T —Changes in Tastes or Preferences New information New fad or trend Can shift demand to increase or decrease

19. Copyright © 2004 South-Western Shifts in the Demand Curve— Determinants of Demand R —Prices of Related Goods When an increase in the price of one good leads to an increase in the demand for another, the two goods are called substitutes. When an increase in the price of one good leads to a decrease in the demand for the other, the two goods are called complements.

20. Copyright © 2004 South-Western Shifts in the Demand Curve— Determinants of Demand I —Changes in Consumer Income As income increases, the demand for a normal good will increase. As income increases, the demand for an inferior good will decrease.

21. Copyright © 2004 South-Western $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 Consumer Income Normal Good

22. Copyright © 2004 South-Western $3.00 2.50 2.00 1.50 1.00 0.50 213456789101211 Price of Hamburger Quantity of Hamburger 0 Decrease in demand An increase in income... D1D1 D2D2 Consumer Income Inferior Good

23. Copyright © 2004 South-Western Shifts in the Demand Curve— Determinants of Demand B —Change in number of Buyers Increases or decreases in consumer population Can shift demand to increase or decrease

24. Copyright © 2004 South-Western Shifts in the Demand Curve— Determinants of Demand E —Change in Consumer Expectations Information that allows consumers to predict price increases or decreases in the future will change their demand today Can shift demand to increase or decrease

25. Demand Variables That Influence Buyers Copyright©2004 South-Western VariableA Change in This Variable… Price changesMovement ALONG the demand curve TastesShifts the demand curve Related GoodsShifts the demand curve IncomeShifts the demand curve Buyers—numbers changingShifts the demand curve ExpectationsShifts the demand curve

26. Copyright © 2004 South-Western SUPPLY Law of Supply The law of supply states that, other things equal, the quantity supplied of a good rises when the price of the good rises. Quantity supplied is the amount of a good that sellers are willing and able to sell.

27. Copyright © 2004 South-Western The Supply Schedule Supply Schedule The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied.

28. Copyright © 2004 South-Western Ben’s Supply Schedule Supplied

29. Copyright © 2004 South-Western The Supply Curve Supply Curve The supply curve is the graph of the relationship between the price of a good and the quantity supplied.

30. Ben’s Supply Schedule and Supply Curve Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 1234567891011 Quantity of Ice-Cream Cones $3.00 12 0.50 1. An increase in price... 2.... increases quantity of cones supplied. Supplied

31. Copyright © 2004 South-Western Individual Supply Market Supply Graphically, individual supply curves are summed horizontally to obtain the market supply curve. Market supply refers to the sum of all individual supplies for all sellers of a particular good or service.

32. Copyright © 2004 South-Western Changes in the Supply Curve Change in Quantity Supplied Movement along the supply curve. Caused by a change in the quantity supplied due to price

33. Copyright © 2004 South-Western 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. Change in Quantity Supplied

34. Copyright © 2004 South-Western Changes in the Supply Curve Change in Supply A shift in the supply curve, either to the left or right. Caused by a change in a determinant other than price.

35. Shifts in the Supply Curve Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in supply Decrease in supply Supply curve,S 3 curve, Supply S 1 curve,S 2

36. Copyright © 2004 South-Western Shifts in the Supply Curve— Determinants of Supply T echnology R elated prices of substitutes & complements in production I nput Prices C ompetition E xpectations

37. Copyright © 2004 South-Western Shifts in the Supply Curve— Determinants of Supply T —Changes in Technology New technology applied to an industry Will shift supply to increase

38. Copyright © 2004 South-Western Shifts in the Supply Curve— Determinants of Supply R —Prices of Related Goods or Services Produced When an increase in the price of one good leads to an increase in the supply of another, the two goods are called substitutes. When an increase in the price of one good leads to a decrease in the supply of another, the two goods are called complements.

39. Copyright © 2004 South-Western Shifts in the Supply Curve— Determinants of Supply I —Changes in Input Prices When an increase in the price of inputs or factors of production occur, a shift in supply will occur If an input or resource increases in price, supply will decrease If an input or resource decreases in price, supply will increase

40. Copyright © 2004 South-Western Shifts in the Supply Curve— Determinants of Supply C —Change in number of Competitors Increases or decreases in suppliers Can shift supply to increase or decrease

41. Copyright © 2004 South-Western Shifts in the Supply Curve— Determinants of Supply E —Change in Producer Expectations Information that allows suppliers to predict price increases or decreases in the future Can shift supply to increase or decrease

42. Supply Variables That Influence Producers Copyright©2004 South-Western VariableA Change in This Variable… Price changesMovement ALONG the supply curve TechnologyShifts the supply curve Related Goods ProducedShifts the supply curve Input PricesShifts the supply curve Competitors—numbers changing Shifts the supply curve Expectations (of Suppliers)Shifts the supply curve

43. Copyright © 2004 South-Western SUPPLY AND DEMAND TOGETHER Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded.

44. Copyright © 2004 South-Western SUPPLY AND DEMAND TOGETHER Equilibrium Price The price that balances quantity supplied and quantity demanded. On a graph, it is the price at which the supply and demand curves intersect. Equilibrium Quantity The quantity supplied and the quantity demanded at the equilibrium price. On a graph it is the quantity at which the supply and demand curves intersect.

45. Copyright © 2004 South-Western At $2.00, the quantity demanded is equal to the quantity supplied! SUPPLY AND DEMAND TOGETHER Demand ScheduleSupply Schedule

46. The Equilibrium of Supply and Demand Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0123456789101112 Quantity of Ice-Cream Cones 13 Equilibrium quantity Equilibrium price Equilibrium Supply Demand $2.00

47. Markets Not in Equilibrium Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0 Supply Demand Excess Supply Quantity demanded Quantity supplied Surplus Quantity of Ice-Cream Cones 4 $2.50 10 2.00 7

48. Copyright © 2004 South-Western Equilibrium Surplus When price > equilibrium price, then quantity supplied > quantity demanded. There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby moving toward equilibrium.

49. Markets Not in Equilibrium Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Supply Demand Excess Demand Quantity supplied Quantity demanded 1.50 10 $2.00 7 4 Shortage

50. Copyright © 2004 South-Western Equilibrium Shortage When price 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.

51. Copyright © 2004 South-Western Equilibrium Law of supply and demand The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.

52. How an Increase in Demand Affects the Equilibrium Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Supply Initial equilibrium D D 3....and a higher quantity sold. 2.... resulting in a higher price... 1. Hot weather increases the demand for ice cream... 2.00 7 New equilibrium $2.50 10

53. How a Decrease in Supply Affects the Equilibrium Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Demand New equilibrium Initial equilibrium S1S1 S2S2 2.... resulting in a higher price of ice cream... 1. An increase in the price of sugar reduces the supply of ice cream... 3....and a lower quantity sold. 2.00 7 $2.50 4

54. Copyright © 2004 South-Western Three Steps to Analyzing Changes in Equilibrium 1.Ask yourself: Does this event shift the supply or demand curve—which Determinant (TRIBE or TRICE) is at play? 2.Ask yourself: Which direction would the curve shift—to the left or to the right? 3.Draw the supply and demand graphs to see how the shift affects equilibrium price and quantity.

55. Copyright © 2004 South-Western Summary: Movements along Curves vs. Shifts in Curves A movement along a fixed demand curve is called a change in quantity demanded. That movement is a response to price changes. A shift in the demand curve is called a change in demand. That shift is a response to Determinants (TRIBE). A movement along a fixed supply curve is called a change in quantity supplied. That movement is a response to price changes. A shift in the supply curve is called a change in supply. That shift is a response to Determinants (TRICE).

56. What Happens to Price and Quantity When Supply or Demand Shifts? Copyright©2004 South-Western