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

2. • Demand and supply are two words that
economists use most often.
• These are the forces that make market
economies work.
• They determine the quantity of each good
produced and the price at which it is sold.
2

3. Markets and Competition
• What is a Market?
– 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.
– Buyers determine demand for the product.
– Sellers determine supply of the product.
3

4. Markets and Competition
Cont…
• What is Competition?
– A business relation/rivalry in which two parties
compete to gain customers.
– Economists use the term competitive market to
describe a market in which there are many buyers
and sellers so that each has an impact on the
market price.
4

5. Markets and Competition
Cont…
• What is Competition? (Cont.)
– Economists believe that in order to be perfectly
competitive, markets must have the following
characteristics:
1. Products offered for sale are the same.
2. There are numerous buyers and sellers so that no
single buyer or seller has any influence over the
market price.
5

6. Markets and Competition
Cont…
• What is Competition? (Cont.)
– Not all goods and services are sold in perfectly
competitive markets.
– Some markets have only one seller, and this seller
sets the price.
– This situation refers to monopoly.
6

7. Demand
• Quantity demanded is the amount of the good that
buyers are willing and able to purchase.
• Many things determine the quantity demanded, but
one determinant plays a central role ---- the price of
the good.
• Quantity demanded falls as the price rises and rises
as the price falls, we say that these two are negatively
related.
7

8. Demand
Cont…
• This relationship is true in most cases, therefore,
economists term it as the law of demand.
• Law of Demand states that when the price of a good
rises, the quantity demanded falls and vice versa.
8

9. The Demand Curve: Relationship between Price
and Quantity Demanded
• Demand Schedule:
– It is a table that shows the relationship between
the price of the good and the quantity demanded.
9

10. Demand Schedule for Ice Cream
10

11. The Demand Curve: Relationship between Price
and Quantity Demanded (Cont.)
• Demand Curve:
– It is a graph of the relationship between the price
of a good and the quantity demanded.
11

12. Demand Schedule and Demand Curve
Price of
Ice-Cream
$3.00
2.50
1. A decrease
2.00
in price ...
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream
2. ... increases quantity
of cones demanded. 12

13. The Demand Curve: Relationship between Price
and Quantity Demanded (Cont.)
• Market Demand:
– To analyze how markets work, we need to
determine the market demand.
– Market demand is the sum of all the individual
demands for a particular good or service.
13

14. Shifts in the Demand Curve
• Change in Demand:
– A shift in the demand curve, either to the left or
right.
– Caused by a change that alters the quantity
demanded (e.g. increase in tax).
14

15. Shifts in the Demand Curve
Price
Increase
in Demand
Decrease
in Demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0 Quantity
15

16. Shifts in the Demand Curve
• Factors that Cause Shifts in Demand Curve:
1. Consumer Income:
• As income increases the demand for a normal good will
increase.
• As income increases the demand for an inferior good
will decrease.
16

17. Shifts in the Demand Curve
Cont…
• Factors that Cause Shifts in Demand Curve (Cont.):
2. Prices of Related Goods:
• 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 (e.g. cars and fuel).
17

18. Shifts in the Demand Curve
Cont…
• Factors that Cause Shifts in Demand Curve (Cont.):
3. Tastes.
4. Expectations:
• If the prices are expected to fall within a few days.
• Expect an increase in salary.
5. Number of Buyers:
• Increased number of buyers result in increased
demand.
18

19. Supply
• Quantity supplied is the amount of a good that sellers
are willing and able to sell.
• Like demand, many things determine the quantity
supplied, but in this also price plays the central role.
• Quantity supplied rises as the price rises and falls as
the price falls, we say that these two are positively
related.
19

20. Supply
Cont…
• This relationship price and quantity supplied is
called the law of supply.
• Law of Supply states that when the price of a good
rises, the quantity supplied also rises and vice versa.
20

21. The Supply Curve: Relationship between Price
and Quantity Supplied
• Supply Schedule:
– It is a table that shows the relationship between
the price of the good and the quantity supplied.
21

22. Supply Schedule
22

23. The Supply Curve: Relationship between Price
and Quantity Supplied (Cont.)
• Supply Curve:
– It is the graph of the relationship between the
price of a good and the quantity supplied.
23

24. Supply Schedule and Supply Curve
Price
$3.00
2.50
1. An
increase
in price ... 2.00
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity
2. ... increases quantity supplied. 24

25. The Supply Curve: Relationship between Price
and Quantity Supplied (Cont.)
• Market Supply:
– Market supply refers to the sum of the supplies of
all sellers.
25

26. Shifts in the Supply Curve
• Change in Quantity Supplied:
– A shift in the supply curve, either to the left or
right.
– Caused by a change that alters the quantity
supplied.
26

27. Shifts in the Supply Curve
Price
Supply curve, S3
Supply
curve, S1
Supply
Decrease curve, S2
in supply
Increase
in supply
0 Quantity
27

28. Shifts in the Supply Curve
• Factors that Cause Shifts in Supply Curve:
1. Input Prices:
• When the price of inputs rises, producing that good
becomes less profitable, thus, firms reduce supply.
2. Technology:
• Use of modern technology increases supply.
28

29. Shifts in the Supply Curve
Cont…
• Factors that Cause Shifts in Supply Curve (Cont.):
3. Number of Sellers:
• When the number of sellers increases, supply also
increases.
29

30. Supply And Demand Together:
Equilibrium
• There is one point at which supply and demand
curves intersect.
• This point is called the market’s equilibrium.
• The price at this intersection is called the
equilibrium price.
• The quantity at this point is called the equilibrium
quantity.
30

31. Supply And Demand Together:
Equilibrium (Cont.)
• At the equilibrium price, the quantity demanded
exactly balances the quantity supplied.
• Equilibrium price is also called market-clearing
price because at this price, everyone in the market is
satisfied:
– Buyers have bought all they wanted to buy.
– Sellers have sold all they wanted to sell.
31

32. Demand Schedule Supply Schedule
At $2.00, the quantity demanded
is equal to the quantity supplied!
32

33. Equilibrium of Supply and Demand
Price
Supply
Equilibrium price Equilibrium
$2.00
Equilibrium Demand
quantity
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity
33