The Market Forces of
Supply and Demand
1
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
PowerPoint Slides prepared by:
Andreea CHIRITESCU
Eastern Illinois University
Markets and Competition
2
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Markets and Competition
3
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Markets and Competition
4
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Markets and Competition
5
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Demand
6
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Demand
7
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 1
8
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Catherine’s Demand Schedule and Demand Curve
Demand curve
The demand schedule is a table that shows the quantity demanded at each price. The demand curve, which graphs the demand schedule, illustrates how the quantity demanded of the good changes as its price varies. Because a lower price increases the quantity demanded, the demand curve slopes downward.
Price of Ice-Cream Cone | Quantity of Cones Demanded |
$0.00 0.50 1.00 1.50 2.00 2.50 3.00 | 12 cones 10 8 6 4 2 0 |
0
12
10
11
9
1
2
3
4
5
6
7
8
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice-Cream Cones
1. A decrease
in price . . .
2. . . . increases quantity
of cones demanded.
Demand
9
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 2
10
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Market Demand as the Sum of Individual Demands
DCatherine
0
12
10
11
9
1
2
3
4
5
6
7
8
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice-Cream
Cones
Catherine’s demand
DNicholas
0
1
2
3
4
5
6
7
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice-Cream
Cones
Nicholas’s demand
+
=
DMarket
0
18
2
4
6
8
10
12
14
16
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice-Cream
Cones
Market demand
Figure 3
11
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Shifts in the Demand Curve
Price of
Ice-Cream
Cones
Quantity of Ice-Cream Cones
0
Demand
curve, D1
Demand
curve, D3
Demand
curve, D2
Increase in
Demand
Decrease in
Demand
Any change that raises the quantity that buyers wish to purchase at any given price shifts the demand curve to the right. Any change that lowers the quantity that buyers wish to purchase at any given price shifts the demand curve to the left.
Demand
12
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Demand
13
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Demand
14
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Demand
15
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Table 1
16
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Variables That Influence Buyers
This table lists the variables that affect how much consumers choose to buy of any good. Notice the special role that the price of the good plays: A change in the good’s price represents a movement along the demand curve, whereas a change in one of the other variables shifts the demand curve.
Figure 4
17
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Shifts in the Demand Curve versus Movements along the Demand Curve
Price of Cigarettes, per Pack
Number of Cigarettes Smoked per Day
0
D1
D2
A policy to discourage smoking shifts the demand curve to the left
10
20
$2.00
B
A
(a) A Shift in the Demand Curve
If warnings on cigarette packages convince smokers to smoke less, the demand curve for cigarettes shifts to the left. In panel (a), the demand curve shifts from D1 to D2. At a price of $2.00 per pack, the quantity demanded falls from 20 to 10 cigarettes per day, as reflected by the shift from point A to point B. By contrast, if a tax raises the price of cigarettes, the demand curve does not shift. Instead, we observe a movement to a different point on the demand curve. In panel (b), when the price rises from $2.00 to $4.00, the quantity demanded falls from 20 to 12 cigarettes per day, as reflected by the movement from point A to point C.
Price of Cigarettes, per Pack
Number of Cigarettes Smoked per Day
0
D1
A tax that raises the price of cigarettes results in a movement along the demand curve
12
20
2.00
C
A
(b) A Movement along the Demand Curve
$4.00
Supply
18
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Supply
19
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 5
20
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Ben’s Supply Schedule and Supply Curve
Price of Ice-cream Cone | Quantity Of Cones Supplied |
$0.00 0.50 1.00 1.50 2.00 2.50 3.00 | 0 cones 0 1 2 3 4 5 |
Supply curve
The supply schedule is a table that shows the quantity supplied at each price. This supply curve, which graphs the supply schedule, illustrates how the quantity supplied of the good changes as its price varies. Because a higher price increases the quantity supplied, the supply curve slopes upward.
0
12
10
11
9
1
2
3
4
5
6
7
8
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice-Cream Cones
1. An increase
in price . . .
2. . . . increases quantity of cones supplied.
Supply
21
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 6
22
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Market Supply as the Sum of Individual Supplies
SBen
0
1
2
3
4
5
6
7
Quantity of
Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice-Cream
Cones
Ben’s supply
SJerry
0
1
2
3
4
5
6
7
Quantity of
Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice-Cream
Cones
Jerry’s supply
+
=
SMarket
0
18
2
4
6
8
10
12
14
16
Quantity of
Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice-Cream
Cones
Market supply
Supply
23
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 7
24
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Shifts in the Supply Curve
Price of
Ice-Cream
Cones
Quantity of Ice-Cream Cones
0
Supply
curve, S1
Supply
curve, S3
Supply
curve, S2
Increase in
Supply
Decrease
In supply
Any change that raises the quantity that sellers wish to produce at any given price shifts the supply curve to the right. Any change that lowers the quantity that sellers wish to produce at any given price shifts the supply curve to the left.
Supply
25
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Supply
26
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Supply
27
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Table 2
28
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Variables That Influence Sellers
This table lists the variables that affect how much producers choose to sell of any good. Notice the special role that the price of the good plays: A change in the good’s price represents a movement along the supply curve, whereas a change in one of the other variables shifts the supply curve.
Supply and Demand Together
29
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 8
30
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Equilibrium of Supply and Demand
Supply
0
12
10
11
9
1
2
3
4
5
6
7
8
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice-Cream
Cones
Equilibrium
Demand
Equilibrium
price
Equilibrium
quantity
The equilibrium is found where the supply and demand curves intersect. At the equilibrium price, the quantity supplied equals the quantity demanded. Here the equilibrium price is $2.00: At this price, 7 ice-cream cones are supplied, and 7 ice-cream cones are demanded.
Supply and Demand Together
31
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 9
32
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Markets Not in Equilibrium
Price of
Ice-Cream
Cones
Quantity of Ice-Cream Cones
0
Demand
7
$2.50
(a) Excess Supply
In panel (a), there is a surplus. Because the market price of $2.50 is above the equilibrium price, the quantity supplied (10 cones) exceeds the quantity demanded (4 cones). Suppliers try to increase sales by cutting the price of a cone, and this moves the price toward its equilibrium level. In panel (b), there is a shortage. Because the market price of $1.50 is below the equilibrium price, the quantity demanded (10 cones) exceeds the quantity supplied (4 cones). With too many buyers chasing too few goods, suppliers can take advantage of the shortage by raising the price. Hence, in both cases, the price adjustment moves the market toward the equilibrium of supply and demand
(b) Excess demand
2.00
Supply
Surplus
4
Quantity
demanded
10
Quantity
supplied
Price of
Ice-Cream
Cones
Quantity of Ice-Cream Cones
0
Demand
7
1.50
$2.00
Supply
Shortage
4
Quantity
supplied
10
Quantity
demanded
Supply and Demand Together
33
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 10
34
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
How an increase in demand affects the equilibrium
Supply
New equilibrium
D2
An event that raises quantity demanded at any given price shifts the demand curve to the right. The equilibrium price and the equilibrium quantity both rise. Here an abnormally hot summer causes buyers to demand more ice cream. The demand curve shifts from D1 to D2, which causes the equilibrium price to rise from $2.00 to $2.50 and the equilibrium quantity to rise from 7 to 10 cones.
Price of
Ice-Cream
Cones
Quantity of Ice-Cream Cones
0
7
$2.50
2.00
10
D1
Initial equilibrium
1. Hot weather increases the demand for ice cream . . .
2. …resulting in
a higher price . . .
3. …and a higher
quantity sold.
Supply and Demand Together
35
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 11
36
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
How a Decrease in Supply Affects the Equilibrium
S1
New equilibrium
S2
An event that reduces quantity supplied at any given price shifts the supply curve to the left. The equilibrium price rises, and the equilibrium quantity falls. Here an increase in the price of sugar (an input) causes sellers to supply less ice cream. The supply curve shifts from S1 to S2, which causes the equilibrium price of ice cream to rise from $2.00 to $2.50 and the equilibrium quantity to fall from 7 to 4 cones.
Price of
Ice-Cream
Cones
Quantity of Ice-Cream Cones
0
7
$2.50
2.00
4
Demand
Initial equilibrium
1. An increase in the price of sugar reduces
the supply of ice cream . . .
2. …resulting in
a higher price . . .
3. …and a smaller
quantity sold.
Supply and Demand Together
37
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 12
38
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
A Shift in Both Supply and Demand
Price of
Ice-Cream
Cones
Quantity of Ice-Cream Cones
0
D1
P2
(a) Price Rises, Quantity Rises
Here we observe a simultaneous increase in demand and decrease in supply. Two outcomes are possible. In panel (a), the equilibrium price rises from P1 to P2, and the equilibrium quantity rises from Q1 to Q2. In panel (b), the equilibrium price again rises from P1 to P2, but the equilibrium quantity falls from Q1 to Q2.
(b) Price Rises, Quantity Falls
P1
S1
Q1
Q2
D2
S2
Initial equilibrium
New
equilibrium
Small decrease
in supply
Large increase
in demand
Price of
Ice-Cream
Cones
Quantity of Ice-Cream Cones
0
D1
P2
P1
S1
Q1
Q2
D2
S2
Initial
equilibrium
New
equilibrium
Large decrease
in supply
Small increase
in demand