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The Market Forces of Supply and Demand

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.

MARKETS AND COMPETITION

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

Buyers determine demand.

Sellers determine supply

DEMAND

Quantity demanded is the amount of a good that buyers are willing and able to purchase at a given price, ceteris paribus.

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.

The Demand Curve: The Relationship between Price and Quantity Demanded

Demand Schedule

The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.

Demand Curve

The demand curve is a graph of the relationship between the price of a good and the quantity demanded.

Figure 1 Catherine’s Demand Schedule and Demand Curve

Market Demand versus Individual Demand

Market demand refers to the sum of all individual demands for a particular good or service.

Graphically, individual demand curves are summed horizontally to obtain the market demand curve.

Not all changes in quantity demanded are due to Shifts in the Demand Curve

Change in Quantity Demanded as a result of changes in Supply

Movement along the demand curve.

Caused by a change in the price of the product.

As we’ll see later, this can be caused by a change (shift) in supply!

Changes in Quantity Demanded

Shifts in 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.

Consumer income

Prices of related goods

Tastes

Expectations

Number of buyers

Consumer Income

As income increases the demand for a normal good will increase.

As income increases the demand for an inferior good will decrease.

Consumer Income
Normal Good

Consumer Income
Inferior Good

Shifts in the Demand Curve

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.

Table 1 Variables That Influence Buyers

SUPPLY

Quantity supplied is the amount of a good that sellers are willing and able to sell.

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.

The Supply Curve: The Relationship between Price and Quantity Supplied

Supply Schedule

The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied.

Ben’s Supply Schedule

The Supply Curve: The Relationship between Price and Quantity Supplied

Supply Curve

The supply curve is the graph of the relationship between the price of a good and the quantity supplied.

Figure 5 Ben’s Supply Schedule and Supply Curve

Market Supply versus Individual Supply

Market supply refers to the sum of all individual supplies for all sellers of a particular good or service.

Graphically, individual supply curves are summed horizontally to obtain the market supply curve.

Shifts in the Supply Curve

Input prices

Technology

Expectations

Number of sellers

Movement along the Supply Curve

Change in Quantity Supplied

Movement along the supply curve.

Caused by a change in price (due to a shift in demand)

Change in Quantity Supplied

Shifts 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.

Figure 7 Shifts in the Supply Curve

Table 2 Variables That Influence Sellers

SUPPLY AND DEMAND TOGETHER

Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded.

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.

SUPPLY AND DEMAND TOGETHER

Figure 8 The d Demand

Figure 9 Markets Not in 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.

Equilibrium

Shortage

When price < equilibrium price, then quantity demanded > 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.

Figure 9 Markets Not in Equilibrium

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.

Three Steps to Analyzing Changes in Equilibrium

Decide whether the event shifts the supply or demand curve (or both).

Decide whether the curve(s) shift(s) to the left or to the right.

Use the supply-and-demand diagram to see how the shift affects equilibrium price and quantity.

Figure 10 How an Increase in Demand Affects the Equilibrium

Three Steps to Analyzing Changes in Equilibrium

Shifts in Curves versus Movements along Curves

A shift in the supply curve is called a change in supply.

A movement along a fixed supply curve is called a change in quantity supplied.

A shift in the demand curve is called a change in demand.

A movement along a fixed demand curve is called a change in quantity demanded.

Figure 11 How a Decrease in Supply Affects the Equilibrium

Summary

Economists use the model of supply and demand to analyze competitive markets.

In a competitive market, there are many buyers and sellers, each of whom has little or no influence on the market price.

The demand curve shows how the quantity of a good depends upon the price.

According to the law of demand, as the price of a good falls, the quantity demanded rises. Therefore, the demand curve slopes downward.

In addition to price, other determinants of how much consumers want to buy include income, the prices of complements and substitutes, tastes, expectations, and the number of buyers.

If one of these factors changes, the demand curve shifts.

The supply curve shows how the quantity of a good supplied depends upon the price.

According to the law of supply, as the price of a good rises, the quantity supplied rises. Therefore, the supply curve slopes upward.

In addition to price, other determinants of how much producers want to sell include input prices, technology, expectations, and the number of sellers.

If one of these factors changes, the supply curve shifts.

Market equilibrium is determined by the intersection of the supply and demand curves.

At the equilibrium price, the quantity demanded equals the quantity supplied.

The behavior of buyers and sellers naturally drives markets toward their equilibrium.

To analyze how any event influences a market, we use the supply-and-demand diagram to examine how the even affects the equilibrium price and quantity.

In market economies, prices are the signals that guide economic decisions and thereby allocate resources.