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1、The Market Forces of Supply and DemandChapter 4Copyright 2001 by Harcourt, Inc.Allrightsreserved.Requestsforpermissiontomakecopiesofanypartoftheworkshouldbemailedto:PermissionsDepartment,HarcourtCollegePublishers,6277SeaHarborDrive,Orlando,Florida32887-6777.Harcourt,Inc.itemsandderiveditemscopyright
2、2001byHarcourt,Inc.The Market Forces of Supply and DemanduSupply 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.Harcourt,Inc.itemsandderiveditemscopyr
3、ight2001byHarcourt,Inc.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. Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Markets u Buyers de
4、termine demand.u Sellers determine supply.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Market Type: A Competitive MarketA competitive market is a market. . .withmanybuyersandsellers.thatisnotcontrolledbyanyoneperson.inwhichanarrow range of pricesareestablishedthatbuyersandsellersactu
5、pon.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Competition: Perfect and OtherwiseuProducts are the sameuNumerous buyers and sellers so that each has no influence over priceuBuyers and Sellers are price takersPerfect CompetitionHarcourt,Inc.itemsandderiveditemscopyright2001byHarcour
6、t,Inc.Competition: Perfect and OtherwiseuMonopolyuOne seller, and seller controls priceuOligopolyuFew sellersuNot always aggressive competitionHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Competition: Perfect and OtherwiseuMonopolistic CompetitionuMany sellersuSlightly differentiated
7、 productsuEach seller may set price for its own productHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.DemandQuantity demanded is the amount of a good that buyers are willing and able to purchase.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Law of DemandThe law of demand
8、 states that there is an inverse relationship between price and quantity demanded.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Demand ScheduleThe demand schedule is a table that shows the relationship between the price of the good and the quantity demanded. Harcourt,Inc.itemsandderiv
9、editemscopyright2001byHarcourt,Inc.Demand ScheduleHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Determinants of DemanduMarket priceuConsumer incomeuPrices of related goodsuTastesuExpectationsHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Demand CurveThe demand curve is t
10、he downward-sloping line relating price to quantity demanded. Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Demand Curve$3.002.502.001.501.000.502134 56789 101211Price of Ice-Cream ConeQuantity of Ice-Cream Cones0Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Ceteris Par
11、ibusCeteris 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!Harcourt,
12、Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Market DemanduMarket 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.Harcourt,Inc.itemsandderiveditemscopyright2001
13、byHarcourt,Inc.Determinants of DemanduMarket priceuConsumer incomeuPrices of related goodsuTastesuExpectationsHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Change in Quantity Demanded versus Change in DemandChange in Quantity DemandeduMovement along the demand curve.uCaused by a chang
14、e in the price of the product.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Changes in Quantity Demanded0D1Price of Cigarettes per PackNumber of Cigarettes Smoked per DayA tax that raises the price of cigarettes results in a movement along the demand curve.AC202.00$4.0012Harcourt,Inc.
15、itemsandderiveditemscopyright2001byHarcourt,Inc.Change in Quantity Demanded versus Change in DemandChange in DemanduA shift in the demand curve, either to the left or right.uCaused by a change in a determinant other than the price.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Changes
16、in Demand0D1Price of Ice-Cream ConeQuantity of Ice-Cream ConesD3D2Increase in demandDecrease in demandHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Consumer IncomeuAs income increases the demand for a normal good will increase.uAs income increases the demand for an inferior good will
17、decrease.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Consumer IncomeNormal Good$3.002.502.001.501.000.502134 56789 101211Price of Ice-Cream ConeQuantity of Ice-Cream Cones0Increasein demandAn increase in income.D1D2Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Consume
18、r IncomeInferior Good$3.002.502.001.501.000.502134 56789 101211Price of Ice-Cream ConeQuantity of Ice-Cream Cones0Decreasein demandAn increase in income.D1D2Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Prices of Related GoodsSubstitutes & ComplementsuWhen a fall in the price of one g
19、ood 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.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Change in Quantity Demanded versus Change in De
20、mandVariables that Affect Quantity DemandedA Change in This Variable . . .PriceRepresents a movementalong the demand curveIncomeShifts the demand curvePrices of relatedgoodsShifts the demand curveTastesShifts the demand curveExpectationsShifts the demand curveNumber ofbuyersShifts the demand curveHa
21、rcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.SupplyQuantity supplied is the amount of a good that sellers are willing and able to sell. Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Law of SupplyThe law of supply states that there is a direct (positive) relationship betw
22、een price and quantity supplied.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Determinants of SupplyuMarket priceuInput pricesuTechnologyuExpectations uNumber of producersHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Supply ScheduleThe supply schedule is a table that sh
23、ows the relationship between the price of the good and the quantity supplied. Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Supply ScheduleHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Supply CurveThe supply curve is the upward-sloping line relating price to quantity su
24、pplied. Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Supply Curve$3.002.502.001.501.000.5021345 6789 101211Price of Ice-Cream ConeQuantity of Ice-Cream Cones0Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Market SupplyuMarket supply refers to the sum of all individual s
25、upplies for all sellers of a particular good or service.uGraphically, individual supply curves are summed horizontally to obtain the market supply curve.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Determinants of SupplyuMarket priceuInput pricesuTechnologyuExpectations uNumber of pr
26、oducersHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Change in Quantity Supplied versus Change in SupplyChange in Quantity SupplieduMovement along the supply curve.uCaused by a change in the market price of the product.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Chang
27、e in Quantity Supplied1 5Price of Ice-Cream ConeQuantity of Ice-Cream Cones0S 1.00AC$3.00A rise in the price of ice cream cones results in a movement along the supply curve.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Change in Quantity Supplied versus Change in SupplyChange in Suppl
28、yuA shift in the supply curve, either to the left or right. uCaused by a change in a determinant other than price.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Change in SupplyPrice of Ice-Cream ConeQuantity of Ice-Cream Cones0S1S2S3Increase in SupplyDecrease in SupplyHarcourt,Inc.ite
29、msandderiveditemscopyright2001byHarcourt,Inc.Change in Quantity Supplied versus Change in SupplyHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Supply and Demand TogetherEquilibrium PriceuThe price that balances supply and demand. On a graph, it is the price at which the supply and dema
30、nd curves intersect.Equilibrium QuantityuThe quantity that balances supply and demand. On a graph it is the quantity at which the supply and demand curves intersect. Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Supply and Demand TogetherDemand ScheduleSupply ScheduleAt $2.00, the qua
31、ntity demanded is equal to the quantity supplied!Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.SupplyDemandPrice of Ice-Cream ConeQuantity of Ice-Cream ConesEquilibrium of Supply and Demand21345 6789 1012110$3.002.502.001.501.000.50EquilibriumHarcourt,Inc.itemsandderiveditemscopyright
32、2001byHarcourt,Inc.Price of Ice-Cream ConeQuantity of Ice-Cream Cones21345 678 9 1012110$3.002.502.001.501.000.50SupplyDemandSurplusExcess SupplyHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.SurplusWhen the price is above the equilibrium price, the quantity supplied exceeds the quanti
33、ty demanded. There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby moving toward equilibrium.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Excess DemandQuantity ofIce-Cream ConesPrice ofIce-CreamCone$2.000123456789 10 11 12 13SupplyDemand$1.50S
34、hortageHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.ShortageWhen 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 m
35、oving toward equilibrium.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Three Steps To Analyzing Changes in EquilibriumuDecide 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
36、equilibrium price and quantity.How an Increase in Demand Affects the EquilibriumPrice ofIce-CreamCone2.0007Quantity ofIce-Cream ConesSupplyInitialequilibriumD11. Hot weather increasesthe demand for ice cream.D22. .resultingin a higherprice.$2.50103. .and a higherquantity sold.New equilibriumHarcourt
37、,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Shifts in Curves versus Movements along CurvesuA 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
38、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.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.S2How a Decrease in Supply Affects the EquilibriumPrice ofIce-CreamCone2.000123478 911 12Quantity ofIce-C
39、ream Cones13DemandInitial equilibriumS1101. An earthquake reducesthe supply of ice cream.Newequilibrium2. .resultingin a higherprice.$2.503. .and a lowerquantity sold.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.What Happens to Price and Quantity When Supply or Demand Shifts?Harcourt
40、,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.SummaryuEconomists 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.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.SummaryuAccording to the la
41、w 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.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.SummaryuThe supply cu
42、rve 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.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.SummaryuIn addition to price, other determinants of quantity supplied include i
43、nput prices, technology, and expectations.uMarket equilibrium is determined by the intersection of the supply and demand curves.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.SummaryuSupply and demand together determine the prices of the economys goods and services.uIn market economies
44、, prices are the signals that guide the allocation of resources.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Graphical ReviewHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.How an Increase in Demand Affects the EquilibriumPrice ofIce-CreamCone2.000710Quantity ofIce-Cream
45、 ConesSupplyInitialequilibriumD1Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.How an Increase in Demand Affects the EquilibriumPrice ofIce-CreamCone2.000710Quantity ofIce-Cream ConesSupplyInitialequilibriumD11. Hot weather increasesthe demand for ice cream.Harcourt,Inc.itemsandderived
46、itemscopyright2001byHarcourt,Inc.How an Increase in Demand Affects the EquilibriumPrice ofIce-CreamCone2.000710Quantity ofIce-Cream ConesSupplyInitialequilibriumD11. Hot weather increasesthe demand for ice cream.D2New equilibrium$2.50Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.How a
47、n Increase in Demand Affects the EquilibriumPrice ofIce-CreamCone2.000710Quantity ofIce-Cream ConesSupplyInitialequilibriumD11. Hot weather increasesthe demand for ice cream.D2New equilibrium2. .resultingin a higherprice.$2.50How an Increase in Demand Affects the EquilibriumPrice ofIce-CreamCone2.00
48、0710Quantity ofIce-Cream ConesSupplyInitialequilibriumD11. Hot weather increasesthe demand for ice cream.D2New equilibrium2. .resultingin a higherprice.$2.503. .and a higherquantity sold.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.How an Increase in Demand Affects the EquilibriumPri
49、ce ofIce-CreamCone2.000710Quantity ofIce-Cream ConesSupplyInitialequilibriumD11. Hot weather increasesthe demand for ice cream.D2New equilibrium2. .resultingin a higherprice.$2.503. .and a higherquantity sold.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Harcourt,Inc.itemsandderivedit
50、emscopyright2001byHarcourt,Inc.How a Decrease in Supply Affects the EquilibriumPrice ofIce-CreamCone2.00012345678 911 12Quantity ofIce-Cream Cones13DemandInitial equilibriumS110Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.How a Decrease in Supply Affects the EquilibriumPrice ofIce-Cr
51、eamCone2.00012345678 911 12Quantity ofIce-Cream Cones13DemandInitial equilibriumS1101. An earthquake reducesthe supply of ice cream.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.How a Decrease in Supply Affects the EquilibriumPrice ofIce-CreamCone2.00012345678 911 12Quantity ofIce-Cre
52、am Cones13DemandInitial equilibriumS1101. An earthquake reducesthe supply of ice cream.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.How a Decrease in Supply Affects the EquilibriumPrice ofIce-CreamCone2.00012345678 911 12Quantity ofIce-Cream Cones13DemandInitial equilibriumS1101. An
53、earthquake reducesthe supply of ice cream.Newequilibrium$2.50Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.How a Decrease in Supply Affects the EquilibriumPrice ofIce-CreamCone2.00012345678 911 12Quantity ofIce-Cream Cones13DemandInitial equilibriumS1101. An earthquake reducesthe supp
54、ly of ice cream.Newequilibrium$2.502. .resultingin a higherprice.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.How a Decrease in Supply Affects the EquilibriumPrice ofIce-CreamCone2.000123478 911 12Quantity ofIce-Cream Cones13DemandInitial equilibriumS1101. An earthquake reducesthe supply of ice cream.Newequilibrium$2.502. .resultingin a higherprice.3. .and a lowerquantity sold.
