1. SUPPLY AND DEMAND:
HOW MARKETS WORK

2. MARKETS AND COMPETITION
• A market is a group of buyers and
sellers of a particular good or service.

3. MARKETS AND COMPETITION
• Buyers determine demand.
• Sellers determine supply

4. DEMAND
• Quantity demanded : the amount of a good
that buyers are willing and able to purchase.
• Law of Demand
• The quantity demanded of a good falls
when the price of the good rises.
#
$
Demanded

5. Cat’s Demand Schedule

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

7. Change in Quantity Demanded
• Change in Quantity Demanded
• Movement along the demand curve.
• Caused by a change in the price of the
product.

8. Change in Quantity Demanded
Price of IceCream
Cones
B
$2.0
0
A tax that raises the
price of ice-cream
cones results in a
movement along the
demand curve.
A
1.00
D
0
4
8
Quantity of Ice-Cream Cones

9. SUPPLY
• Quantity supplied is the amount of a good
that sellers are willing and able to sell.
• Law of Supply
• The quantity supplied of a good rises when
the price of the good rises.
#
supplied
$

10. Ben’s Supply Schedule
Price of Ice
cream cone
Qty. of Cones
supplied

11. Ben’s Supply Curve
Price of
Ice-Cream
Cone
$3.00
1. An
increase
in price...
2.50
2.00
1.50
1.00
0.50
0
1 2
3
4
5
6
7
8
9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity of cones.

12. Change in Quantity Supplied
• Change in Quantity Supplied
• Movement along the supply curve.
• Caused by a change in the price of the
product.

13. Change in Quantity Supplied
Price
C
$3.0
0
A rise in the price
of ice cream
cones results in a
movement along
the supply curve.
A
1.00
0
S
1
5
Quantity of
Ice-Cream
Cones

14. $
QD QS
200
24
300
16
10
400
10
16
500
4
22
600
0
Airline
1
25
Tickets
600
S
Price $
500
400
350
300
200
D
100
0
0
2
4
6
8
10
121314
Quantity #
16 18
22 24 26 28

15. SUPPLY AND DEMAND TOGETHER
Equilibrium
Qs= Qd
Law of Supply and Demand:
The price of any good adjusts to bring the
quantity supplied and the quantity
demanded for that good into balance.

16. SUPPLY AND DEMAND TOGETHER
Demand Schedule
Supply Schedule
At $2.00, the quantity demanded is
equal to the quantity supplied!

17. The Equilibrium of Supply and Demand
Price of
Ice-Cream
Cone
Supply
Equilibrium
Equilibrium price
$2.00
Equilibrium
quantity
0
1
2
3
4
5
6
7
8
Demand
9 10 11 12 13
Quantity of Ice-Cream Cones

18. If the price is too high (Qs > Qd)…
Price of
Ice-Cream
Cone
The Price Will Drop!
Supply
$3.00
$2.00
Quantity
Supplied
Quantity
Demanded
0
1
2
3
4
5
6
7
8
9
Demand
10 11 12 13
Quantity of Ice-Cream Cones

19. If the price is too low (Qd > Qs)…
Price of
Ice-Cream
Cone
The Price Will Rise!
Supply
$2.00
$1.00
Demand
Quantity
Demanded
Quantity
Supplied
0
1
2
3
4
5
6
7
8
9
10 11 12 13
Quantity of Ice-Cream Cones