1. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Market Forces of Supply and Demand u Supply and demand are the two words that economists use most often. u Supply and demand are the forces that make market economies work.

2. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Market Forces of Supply and Demand u Modern microeconomics is about supply, demand, and market equilibrium. äHow prices harmonize the behaviors of buyers and sellers

3. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Competition: Perfect and Otherwise u Products are the same u Numerous buyers and sellers so that each has no influence over price u Buyers and Sellers are price takers Perfect Competition

4. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Competition: Perfect and Otherwise u Monopoly u One seller, and seller controls price u Oligopoly u Few sellers u Not always aggressive competition

5. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Markets u Buyers determine demand. u Sellers determine supply.

6. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Demand n Demand for a good is the relationship between PRICE and QUANTITY DEMANDED, other things equal.

7. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Quantity Demanded Quantity demanded is the amount of a good that buyers are willing and able to purchase at a particular price.

8. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Law of Demand People buy more at a low price than at a high price, ceteris paribus. Quantity demanded is greater at low price.

9. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Determinants of Demand u Consumer income u Prices of related goods u Tastes u Expectations u Also … u Number of consumers in the market

10. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Demand Schedule

11. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Demand Curve $3.00 2.50 2.00 1.50 1.00 0.50 213456789101211 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0

12. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Market Demand u Market demand refers to the sum of all individual demands for a particular good or service. u Graphically, individual demand curves are summed horizontally to obtain the market demand curve.

13. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Change in Quantity Demanded u Movement along the demand curve. u Caused by a change in the price of the product.

14. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Changes in Quantity Demanded 0 D1D1 Price of Cigarettes per Pack Number of Cigarettes Smoked per Day A tax that raises the price of cigarettes results in a movement along the demand curve. A C 20 2.00 $4.00 12

15. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Change in Demand u A shift in the demand curve, either to the left or right. u Caused by a change in a determinant of demand other than the price. uA change in consumer income will cause demand to change … the demand curve will shift.

16. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Changes in Demand 0 D1D1 Price of Ice-Cream Cone Quantity of Ice-Cream Cones D3D3 D2D2 Increase in demand Decrease in demand

17. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Consumer Income u As income increases the demand for a normal good will increase. u As income increases the demand for an inferior good will decrease.

18. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Consumer Income Normal Good $3.00 2.50 2.00 1.50 1.00 0.50 213456789101211 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in demand An increase in income... D1D1 D2D2

19. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Consumer Income Inferior Good $3.00 2.50 2.00 1.50 1.00 0.50 213456789101211 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Decrease in demand An increase in income... D1D1 D2D2

20. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Prices of Related Goods Substitutes & Complements u When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. u When a fall in the price of one good increases the demand for another good, the two goods are called complements.

21. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Changes in Demand 0 D1D1 Price of Ice-Cream Cone Quantity of Ice-Cream Cones D3D3 D2D2 Increase in demand when price of a substitute rises Decrease in demand when price of a complement rises

22. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Markets u Buyers determine demand. u Sellers determine supply.

23. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Supply Supply is the relationship between a product’s PRICE and QUANTITY SUPPLIED, other things equal. Quantity supplied is the amount of a good that sellers are willing and able to sell at a particular price.

24. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Law of Supply Firms offer to sell more at a high price than at a low price, ceteris paribus. Quantity supplied is greater at a high price.

25. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Determinants of Supply: COSTS u Input prices u Technology u Expectations u Also … u Number of producers

26. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Supply Schedule

27. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Supply Curve $3.00 2.50 2.00 1.50 1.00 0.50 213456789101211 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0

28. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Market Supply u Market supply is the sum of all individual supplies for all sellers of a product. u Graphically, individual supply curves are summed horizontally to obtain the market supply curve.

29. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Determinants of Supply u Input prices u Technology u Expectations u Number of producers

30. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Change in Quantity Supplied 1 5 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 S 1.00 A C $3.00 A rise in the price of ice cream cones results in a movement along the supply curve.

31. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Change in Supply Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 S1S1 S2S2 S3S3 Increase in Supply when technology improves Decrease in Supply when wages rise

32. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Change in Quantity Supplied versus Change in Supply

33. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Supply and Demand Together Demand ScheduleSupply Schedule At $2.00, the quantity demanded is equal to the quantity supplied!

34. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Supply Demand Price of Ice-Cream Cone Quantity of Ice-Cream Cones Equilibrium of Supply and Demand 2134567891012110 $3.00 2.50 2.00 1.50 1.00 0.50 Equilibrium

35. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Price of Ice-Cream Cone Quantity of Ice-Cream Cones 2134567891012110 $3.00 2.50 2.00 1.50 1.00 0.50 Supply Demand Surplus Excess Supply

36. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Excess Demand Quantity of Ice-Cream Cones Price of Ice-Cream Cone $2.00 0123 4 5678910111213 Supply Demand $1.50 Shortage

37. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Three Steps To Analyzing Changes in Equilibrium u Decide whether the event shifts the supply or demand curve (or both). u Decide whether the curve(s) shift(s) to the left or to the right. u Examine how the shift affects equilibrium price and quantity.

38. How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 2.00 0 7 Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1 1. Hot weather increases the demand for ice cream... D2D2 2....resulting in a higher price... $2.50 10 3....and a higher quantity sold. New equilibrium Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

39. S2S2 How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 2.00 012347891112 Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S1 10 1. An earthquake reduces the supply of ice cream... New equilibrium 2....resulting in a higher price... $2.50 3....and a lower quantity sold.

40. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. What Happens to Price and Quantity When Supply or Demand Shifts?

41. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u Economists use the model of supply and demand to analyze competitive markets. u The demand curve shows how the quantity of a good depends upon the price.

42. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u According to the law of demand, as the price of a good rises, the quantity demanded falls. u In addition to price, other determinants of quantity demanded include income, tastes, expectations, and the prices of complements and substitutes.

43. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u The supply curve shows how the quantity of a good supplied depends upon the price. u According to the law of supply, as the price of a good rises, the quantity supplied rises.

44. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u In addition to price, other determinants of quantity supplied include input prices, technology, and expectations. u Market equilibrium is determined by the intersection of the supply and demand curves.

45. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u Supply and demand together determine the prices of the economy’s goods and services. u In market economies, prices are the signals that guide the allocation of resources.

46. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Graphical Review

47. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 2.00 0 710 Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1

48. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 2.00 0 710 Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1 1. Hot weather increases the demand for ice cream...

49. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 2.00 0 710 Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1 1. Hot weather increases the demand for ice cream... D2D2 New equilibrium $2.50

50. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 2.00 0 710 Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1 1. Hot weather increases the demand for ice cream... D2D2 New equilibrium 2....resulting in a higher price... $2.50

51. How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 2.00 0 710 Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1 1. Hot weather increases the demand for ice cream... D2D2 New equilibrium 2....resulting in a higher price... $2.50 3....and a higher quantity sold. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

52. How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 2.00 0 710 Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1 1. Hot weather increases the demand for ice cream... D2D2 New equilibrium 2....resulting in a higher price... $2.50 3....and a higher quantity sold. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

53. How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 2.00 01234567891112 Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S1 10

54. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 2.00 01234567891112 Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S1 10 1. An earthquake reduces the supply of ice cream...

55. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 2.00 01234567891112 Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S1 10 1. An earthquake reduces the supply of ice cream...

56. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 2.00 01234567891112 Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S1 10 1. An earthquake reduces the supply of ice cream... New equilibrium $2.50

57. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 2.00 01234567891112 Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S1 10 1. An earthquake reduces the supply of ice cream... New equilibrium $2.50 2....resulting in a higher price...

58. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 2.00 012347891112 Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S1 10 1. An earthquake reduces the supply of ice cream... New equilibrium $2.50 2....resulting in a higher price... 3....and a lower quantity sold.