1. SUPPLY AND DEMAND I: HOW MARKETS WORK2
SUPPLY AND DEMAND I: HOW MARKETS WORK

2. The Market Forces of Supply and Demand4
The Market Forces of Supply and Demand

3. 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. 2

4. 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 behaviour of people as they interact with one another in markets. 4

5. MARKETS AND COMPETITION
Buyers determine demand.
Sellers determine supply 4

6. Competitive Markets
A competitive market is a market in which there are many buyers and sellers so that each has a negligible impact on the market price.
In a perfectly competitive market:
All goods exactly the same
Buyers & sellers so numerous that no one can affect market price – each is a “price taker”
In this chapter, we assume markets are perfectly competitive. 5

7. Competition: Perfect and Otherwise
Perfect Competition
Products are identical
Many buyers and sellers so that each has no influence over price
Buyers and Sellers are price takers
Monopoly
One seller, and seller controls price
Broadband Internet Provider: TTNET (99%) 6

8. Competition: Perfect and Otherwise
Oligopoly
Few sellers
Not always aggressive competition
Network providers: Turkcell, Avea, Vodafone
Monopolistic Competition
Many sellers
Slightly differentiated products
Each seller may set price for its own product
Personal Computers: Dell, Acer, Toshiba, etc. 6

9. DEMAND
Quantity demanded is the amount of a good that buyers are willing and able to purchase.
What is the most influential factor that affects the quantity demanded?
PRICE OF THE GOOD!!!!
Law of Demand
The law of demand is the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises. 8

10. The Demand Curve: The Relationship between Price and Quantity Demanded
Demand Schedule
The demand schedule shows the quantitative relationship between the price of the good and the quantity demanded, other things being equal (i.e. ceteris paribus). 17

11. Sabine’s Demand Schedule17

12. The Demand Curve: The Relationship between Price and Quantity Demanded
The demand curve (also known as demand) is a graph of the relationship between the price of a good and the quantity demanded. 17

13. Figure 1 Sabine’s Demand Schedule and Demand Curve
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14. Demand & Willingness to Pay
Willingness and Ability to Pay
A demand curve is also a willingness-and-ability-to-pay curve.
The smaller the quantity available, the higher is the price that someone is willing to pay for another unit.
Willingness to pay measures marginal benefit.

15. 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.

16. Shifts in the Demand Curve
Change in Quantity Demanded
Movement along the demand curve.
Caused by a change in the price of the product. 19

17. Changes in Quantity Demanded
Price of Ice-Cream Cones
An increase in the price of ice-cream cones results in a movement along the demand curve. B
€2.00 A
€1.00 D 4 8
Quantity of Ice-Cream Cones

18. Shifts in the Demand Curve
Other factors that influence the demand of a good
Is the price of ice-cream cones ONLY factor that affect the quantity demanded of ice-cream cones?
NO! There are other factors such as:
Consumer income
Prices of related goods
Tastes
Expectations
Number of buyers 11

19. Shifts in the Demand Curve
Change in Demand
A shift in the demand curve (either to the left or right) is
caused by any change that alters the quantity demanded at every price. 19

20. Figure 3 Shifts in the Demand Curve
Price of
Ice-Cream
Cones
Increase
in demand
Decrease
in demand
Demand
curve, D 2
Demand
curve, D 1
Demand curve, D 3
Quantity of
Ice-Cream Cones
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21. Shifts in the Demand Curve
Consumer Income
As income increases the demand for a normal good will increase.
As income increases the demand for an inferior good will decrease.

22. Consumer Income Normal Good
Price of Ice-Cream Cones
€ 3.00
An increase in income...
2.50
Increase
in demand
2.00
1.50
1.00
0.50 D2 D1
Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 8 9 10 11 12

23. Consumer Income Inferior Good
Price of Ice-Cream Cones
€ 3.00
2.50
An increase in income...
2.00
Decrease
in demand
1.50
1.00
0.50 D2 D1
Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 8 9 10 11 12

24. 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.

25. Table 1 Variables That Influence Buyers
Variable A change in this variable…
Price …causes a movement along the D curve
# of buyers …shifts the D curve
Income …shifts the D curve
Price of related goods …shifts the D curve
Tastes …shifts the D curve
Expectations …shifts the D curve
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26. A C T I V E L E A R N I N G 1 Demand Curve
Draw a demand curve for music downloads. What happens to it in each of the following scenarios? Why?
A. The price of iPods falls
B. The price of music downloads falls
C. The price of CDs falls
In each case, there are only three possible answers:
- The curve shifts to the right
- The curve shifts to the left
- The curve does not shift (though there may be a movement along the curve) 26
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27. SUPPLY
Quantity supplied is the amount of a good that sellers are willing and able to sell.
Law of Supply
The law of supply is the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises. 25

28. 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. 29

29. Häagen’s Supply Schedule29

30. The Supply Curve: The Relationship between Price and Quantity Supplied
The supply curve is the graph of the relationship between the price of a good and the quantity supplied. 29

31. Figure 5 Häagen’s Supply Schedule and Supply Curve
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32. Copyright © 2013 Pearson Canada Inc., Toronto, Ontario
Supply
Minimum Supply Price
A supply curve is also a minimum-supply-price curve.
As the quantity produced increases, marginal cost increases.
The lowest price at which someone is willing to sell an additional unit rises.
This lowest price is marginal cost.
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33. 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.

34. Shifts in the Supply Curve
Other factors that influence the supply of a good
Is the price of ice-cream cones ONLY factor that affect the quantity supplied of ice-cream cones?
NO! There are other factors such as:
Input prices
Technology
Expectations
Number of sellers
Nature 27

35. Shifts in the Supply Curve
Change in Quantity Supplied
Movement along the supply curve.
Caused by a change in anything that alters the quantity supplied at each price. 30

36. Change in Quantity Supplied
Price of Ice-Cream Cones S C
€3.00
A rise in the price of ice cream cones results in a movement along the supply curve. A
€1.00
Quantity of Ice-Cream Cones 1 5 30

37. Shifts in the Supply Curve
Change in Supply
A shift in the supply curve (either to the left or right) is caused by a change in a determinant other than price. 30

38. Figure 7 Shifts in the Supply Curve
Price of
Supply curve, S 3
Ice-Cream
curve,
Supply S 1
Cones
Supply
curve, S 2
Decrease
in supply
Increase
in supply
Quantity of
Ice-Cream Cones
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39. Table 2 Variables That Influence Sellers
Variable A change in this variable…
Price …causes a movement along the S curve
Input Prices …shifts the S curve
Technology …shifts the S curve
# of Sellers …shifts the S curve
Expectations …shifts the S curve
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40. SUPPLY AND DEMAND TOGETHER
Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded. 36

41. 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. 36

42. SUPPLY AND DEMAND TOGETHER
Demand Schedule
Supply Schedule
At €2.00, the quantity demanded is equal to the quantity supplied! 36

43. Figure 8 The Equilibrium of Supply and Demand
Price of
Ice-Cream
Cones
Supply
Demand
Equilibrium
Equilibrium price
€ 2.00
Equilibrium
quantity 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of Ice-Cream Cones
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44. Equilibrium
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.

45. Figure 9 Markets Not in Equilibrium
(a) Excess Supply
Price of
Ice-Cream
Supply
Cones
Surplus
Demand
€ 2.50 10 4
2.00 7
Quantity of
Quantity
demanded
Quantity
supplied
Ice-Cream
Cones
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46. 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.

47. Figure 9 Markets Not in Equilibrium
(b) Excess Demand
Price of
Ice-Cream
Supply
Cones
Demand
€ 2.00 7
1.50 10 4
Shortage
Quantity of
Quantity
supplied
Quantity
demanded
Ice-Cream
Cones
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48. Law of supply and demand
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.

49. Figure 10 How an Increase in Demand Affects the Equilibrium
Price of
Ice-Cream
1. Hot weather increases
the demand for ice cream . . .
Cones D D
Supply
New equilibrium
€ 2.50 10
resulting
in a higher
price . . .
2.00 7
Initial
equilibrium
Quantity of 3.
. . .
and a higher
quantity sold.
Ice-Cream Cones
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50. Figure 11 How a Decrease in Supply Affects the Equilibrium
Price of
1. An increase in the
price of sugar reduces
the supply of ice cream. . .
Ice-Cream
Cones S2 S1
Demand
New
equilibrium
€ 2.50 4
resulting
in a higher
price of ice
cream . . .
Initial equilibrium
2.00 7
Quantity of 3.
. . .
and a lower
quantity sold.
Ice-Cream Cones
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51. Table 4 What Happens to Price and Quantity When Supply or Demand Shifts?
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52. 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. 45

53. A C T I V E L E A R N I N G 3 Shifts in supply and demand
Use the three-step method to analyze the effects of each event on the equilibrium price and quantity of music downloads.
Event A: A fall in the price of CDs
Event B: Sellers of music downloads negotiate a reduction in the royalties they must pay for each song they sell.
Event C: Events A and B both occur.
Important note about Event B:
The royalties that sellers must pay the artists are part of sellers’ “costs of production.” Typically, this royalty is a fixed amount each time one of the artist’s songs is downloaded. Event B, therefore, describes a reduction in sellers’ “costs of production.”
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54. A C T I V E L E A R N I N G 3 A. Fall in price of CDs
The market for music downloads
STEPS P Q
1. D curve shifts S1
2. D shifts left D2 D1
This is an extension of Active Learning exercise 1C, where we saw that a fall in the price of compact discs would cause a fall in demand for music downloads, because the two goods are substitutes. P1 Q1
3. P and Q both fall. P2 Q2
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55. A C T I V E L E A R N I N G 3 B. Fall in cost of royalties
The market for music downloads
STEPS P Q
1. S curve shifts S1 S2 D1
2. S shifts right
NOTE: Don’t worry that the text on this slide looks garbled in “Normal view” (i.e., edit mode). It works fine in “Slide Show” (i.e., presentation mode).
Event B: Sellers of music downloads negotiate a reduction in the royalties they must pay for each song they sell. This event causes a fall in “costs of production” for sellers of music downloads. Hence, the S curve shifts to the right. P1 Q1
(Royalties are part of sellers’ costs) Q2 P2
3. P falls, Q rises.
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56. 1. Both curves shift (see parts A & B).
A C T I V E L E A R N I N G C. Fall in price of CDs and fall in cost of royalties
STEPS
1. Both curves shift (see parts A & B).
2. D shifts left, S shifts right.
3. P unambiguously falls.
Effect on Q is ambiguous: The fall in demand reduces Q, the increase in supply increases Q.
It’s not necessary to draw a graph here. The answers to steps 1 and 2 should be clear from parts A and B. The answer to step 3 is a combination of the results from A and B.
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57. It’s not necessary to draw a graph here
It’s not necessary to draw a graph here. The answers to steps 1 and 2 should be clear from parts A and B. The answer to step 3 is a combination of the results from A and B.
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