Microeconomics for

business economics
Lecturer P? U? E? R? T A S , J. M ? I ? Q ? U ? E ? L

mpuertas.blogspot.com

SUPPLY AND
DEMAND I:
HOW MARKETS
WORK
THE MARKET FORCES OF SUPPLY AND DEMAND
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

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.
Competition: Perfect and Otherwise

 Perfect Competition
 Products are the same
 Numerous buyers and sellers so that
each has no influence over price
 Monopoly
 One seller, and seller controls price
Competition: Perfect and Otherwise

 Oligopoly
 Few sellers
 Not always aggressive competition

 Monopolistic Competition
 Many sellers
 Slightly differentiated products
 Each seller may set price for its own
product
DEMAND

 Quantity demanded is the amount of a

good that buyers are willing and able
to purchase.
 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.
Maria’s Demand Schedule
 The Demand Curve: The
Relationship between Price and
Quantity Demanded

 Demand Curve
 Thedemand curve is a graph of the relationship
between the price of a good and the quantity
demanded.
Figure 1 Maria’s Demand Schedule and Demand Curve

Price of
Ice-Cream Cone
$3.00

2.50

1. A decrease
2.00
in price ...

1.50

1.00

0.50

0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
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.
Shifts in the Demand Curve

 Change in Quantity Demanded

 Movement along the demand curve.
 Caused by a change in the price of
the product.
 Changes in Quantity
Demanded
Price of Ice-
Cream A tax that raises the
Cones
price of ice-cream
B cones results in a
$2.0
0 movement along the
demand curve.

1.00 A

D
0 4 8Quantity of Ice-Cream Cones
Shifts in the Demand Curve

• Consumer income
• Prices of related goods
• Tastes
• Expectations
• Number of buyers
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.
 Figure 3 Shifts in the Demand Curve

Price of
Ice-Cream
Cone

Increase
in demand

Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0 Quantity of
Ice-Cream Cones
 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.
 Consumer Income
Normal
Price of Ice-
Good
Cream Cone
$3.0 An increase
0
2.5 in income...
0 Increase
2.0 in demand
0
1.5
0
1.0
0
0.5
0
D2
D1 Quantity
of Ice-
0 1 2 3 4 5 6 7 8 9 10 11 12 Cream
Cones
 Consumer Income
Inferior Good
Price of Ice-
Cream Cone
$3.0
0
2.5 An increase
0
2.0
in income...
0 Decrease
1.5 in demand
0
1.0
0
0.5
0
D2 D1 Quantity of
Ice-Cream
0 1 2 3 4 5 6 7 8 9 10 11 12 Cones
 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 (coke and pepsi)

 When a fall in the price of one good increases the

demand for another good, the two goods are
called complements (ketchup and burgers)
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
 Thelaw 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.
Antonio 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 HAAGEN DAAZ ICE CREAM FACTORY Supply
Schedule and Supply Curve

Price of
Ice-Cream
Cone
$3.00

2.50
1. An
increase
in price ... 2.00

1.50

1.00

0.50

0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity of cones supplied.
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
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.
 Change in Quantity Supplied
Price of Ice-
Cream S
Cone
C
$3.0
0 A rise in the price
of ice cream
cones results in a
movement along
A the supply curve.
1.00

Quantity of
Ice-Cream
0 1 5 Cones
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

Price of
Ice-Cream Supply curve, S3
Supply
Cone
curve, S1
Supply
Decrease curve, S2
in supply

Increase
in supply

0 Quantity of
Ice-Cream Cones
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
Demand Supply
Schedule Schedule

At $2.00, the quantity demanded

is equal to the quantity supplied!
 Figure 8 The Equilibrium of Supply and Demand

Price of
Ice-Cream
Cone Supply

Equilibrium price Equilibrium

$2.00

Equilibrium Demand
quantity

0 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of Ice-Cream Cones
Figure 9 Markets Not in Equilibrium

(a) Excess Supply

Price of
Ice-Cream Supply
Cone Surplus
$2.50

2.00

Demand

0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
demanded supplied Cones
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.
 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

(b) Excess Demand

Price of
Ice-Cream Supply
Cone

$2.00

1.50
Shortage

Demand

0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
supplied demanded Cones
 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
Price of
Ice-Cream 1. Hot weather increases
Cone the demand for ice cream . . .

Supply

$2.50 New equilibrium

2.00
2. . . . resulting Initial
in a higher equilibrium
price . . .
D

0 7 10 Quantity of
3. . . . and a higher Ice-Cream Cones
quantity sold.
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.
49
 Figure 11 How a Decrease in Supply Affects the
Equilibrium

Price of
Ice-Cream 1. An increase in the
Cone price of sugar reduces
the supply of ice cream. . .
S2
S1

New
$2.50 equilibrium

2.00 Initial equilibrium

2. . . . resulting
in a higher
price of ice
cream . . . Demand

0 4 7 Quantity of
3. . . . and a lower Ice-Cream Cones
quantity sold.
Table 4 What Happens to Price and Quantity When
Supply or Demand Shifts?
 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.
 Summary
 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.
 Summary
 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.
Summary

 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.