1. The Market Forces of Supply and Demand

2. 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

3. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Markets u A market is a group of buyers and sellers of a particular good or service.

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

5. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Market Type: A Competitive Market A competitive market is a market...  with many buyers and sellers.  that is not controlled by any one person.  in which a narrow range of prices are established that buyers and sellers act upon.

6. 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

7. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Demand Quantity demanded is the amount of a good that buyers are willing and able to purchase. How many state championship jackets does Mr. Hinsvark want? How many can he afford?

8. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Law of Demand The law of demand states that there is an inverse relationship between price and quantity demanded.

9. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Determinants of Demand u Market price u Consumer income u Prices of related goods u Tastes u Expectations

10. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Demand Curve The demand curve is the downward- sloping line relating price to quantity demanded.

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

13. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Change in Quantity Demanded versus Change in Demand 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 Quantity Demanded versus Change in Demand Change in Demand u A shift in the demand curve, either to the left or right. u Caused by a change in a determinant other than the price.

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.

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

20. 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

21. 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 Ex: u When a fall in the price of one good increases the demand for another good, the two goods are called complements. u Ex:

22. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Change in Quantity Demanded versus Change in Demand

23. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Supply Quantity supplied is the amount of a good that sellers are willing and able to sell.

24. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Law of Supply The law of supply states that there is a direct (positive) relationship between price and quantity supplied.

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

26. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Supply Curve The supply curve is the upward- sloping line relating price to quantity supplied.

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. Supply and Demand Together Equilibrium Price u The price that balances supply and demand. On a graph, it is the price at which the supply and demand curves intersect. Equilibrium Quantity  The quantity that balances supply and demand. On a graph it is the quantity at which the supply and demand curves intersect.

29. 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!

30. 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

31. 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

32. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Surplus When the price is above the equilibrium price, the quantity supplied exceeds the quantity demanded. There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby moving toward equilibrium.

33. 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

34. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Shortage When 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 moving toward equilibrium.

35. 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.

36. 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.

37. Shifts in Curves versus Movements along Curves u A shift in the supply curve is called a change in supply. u A movement along a fixed supply curve is called a change in quantity supplied. u A shift in the demand curve is called a change in demand. u A movement along a fixed demand curve is called a change in quantity demanded.

38. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 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.

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

40. 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.

41. 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.

42. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u According to the law of supply, as the price of a good rises, the quantity supplied rises.

43. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u Market equilibrium is determined by the intersection of the supply and demand curves.

44. 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.

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

46. 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

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 1. Hot weather increases the demand for ice cream...

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... D2D2 New equilibrium $2.50

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....resulting in a higher price... $2.50

50. 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.

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 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

53. 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...

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... New equilibrium $2.50

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 2....resulting in a higher price...

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 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.