ch04 presentationMEe

N. Gregory Mankiw & Mohamed H.
Rashwan
Principles of
Economics Middle East Edition
Chapter 4
The Market Forces of
Supply and Demand
© 2012 Cengage Learning EMEA. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
In this chapter,
look for the answers to these questions:
• What factors affect buyers’ demand for goods?

• What factors affect sellers’ supply of goods?
• How do supply and demand determine the price
of a good and the quantity sold?
• How do changes in the factors that affect
demand or supply affect the market price and
quantity of a good?
• How do markets allocate resources?
© 2012 Cengage Learning. EMEA. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
2
Markets and Competition
 A market is a group of buyers and sellers of a
particular product.
 A competitive market is one with many buyers
and sellers, each has a negligible effect on 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.
3
Demand
 The quantity demanded of any good is the
amount of the good that buyers are willing and
able to purchase.
 Law of demand: the claim that the quantity
demanded of a good falls when the price of the
good rises, other things equal
4
The Demand Schedule
Price Quantity
 Demand schedule: of of coffees
a table that shows the lattes demanded
relationship between the $0.00 16
price of a good and the 1.00 14
quantity demanded 2.00 12
3.00 10
 Example:
4.00 8
Amisi’s demand for coffees.
5.00 6
 Notice that Amisi’s 6.00 4
preferences obey the
law of demand.
5
Amisi’s Demand Schedule & Curve
Price of Price Quantity
Coffees of of coffees
coffees demanded
$6.00
$0.00 16
$5.00 1.00 14
$4.00 2.00 12
3.00 10
$3.00
4.00 8
$2.00 5.00 6
$1.00 6.00 4
$0.00
Quantity
0 5 10 15 of Coffees
6
Market Demand versus Individual Demand
 The quantity demanded in the market is the sum of
the quantities demanded by all buyers at each price.
 Suppose Amisi and Haji are the only two buyers in the
Coffee market. (Qd = quantity demanded)
Price Amisi’s Qd Haji’s Qd Market Qd

$0.00 16 + 8 = 24
1.00 14 + 7 = 21
2.00 12 + 6 = 18
3.00 10 + 5 = 15
4.00 8 + 4 = 12
5.00 6 + 3 = 9
6.00 4 + 2 = 6
The Market Demand Curve for Coffees
Qd
P P
(Market)
$6.00
$0.00 24
$5.00 1.00 21
$4.00 2.00 18
3.00 15
$3.00
4.00 12
$2.00
5.00 9
$1.00 6.00 6
$0.00 Q
0 5 10 15 20 25
8
Demand Curve Shifters
 The demand curve shows how price affects
quantity demanded, other things being equal.
 These “other things” are non-price determinants
of demand (i.e., things that determine buyers’
demand for a good, other than the good’s price).
 Changes in them shift the D curve…
9
Demand Curve Shifters: # of Buyers
 Increase in # of buyers
increases quantity demanded at each price,
shifts D curve to the right.
10
Demand Curve Shifters: # of Buyers
P Suppose the number

$6.00 of buyers increases.
Then, at each P,
$5.00
Qd will increase
$4.00 (by 5 in this example).
$3.00
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25 30
11
Demand Curve Shifters: Income
 Demand for a normal good is positively related
to income.
 Increase in income causes
increase in quantity demanded at each price,
shifts D curve to the right.
(Demand for an inferior good is negatively
related to income. An increase in income shifts
D curves for inferior goods to the left.)
12
Demand Curve Shifters: Prices of
Related Goods
 Two goods are substitutes if
an increase in the price of one
causes an increase in demand for the other.
 Example: tea and coffee.
An increase in the price of tea
increases demand for coffee,
shifting coffee demand curve to the right.
 Other examples: laptops and desktop computers,
CDs and music downloads, lamb and chicken
13
Demand Curve Shifters: Prices of
Related Goods
 Two goods are complements if
an increase in the price of one
causes a fall in demand for the other.
 Example: computers and software.
If price of computers rises,
people buy fewer computers,
and therefore less software.
Software demand curve shifts left.
 Other examples: university tuition and textbooks,
bread and cheese, DVD players and DVD’s
14
Demand Curve Shifters: Tastes
 Anything that causes a shift in tastes toward a
good will increase demand for that good
and shift its D curve to the right.
 Example:
If scientists say that Oranges help to stop people
getting colds this may increase in demand for
Oranges and shift the Orange demand curve to the
right.
15
Demand Curve Shifters: Expectations
 Expectations affect consumers’ buying decisions.

 Examples:
 If people expect their incomes to rise,
their demand for meals at expensive
restaurants may increase now.
 If the economy sours and people worry about
their future job security, demand for new autos
may fall now.
16
Summary: 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
17
ACTIVE LEARNING 1
Demand Curve
Draw a demand curve for software downloads.

What happens to it in each of
the following scenarios? Why?
A. The price of
computers falls
B. The price of software
downloads falls
C. The price of software
CDs falls
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
ACTIVE LEARNING 1
A. Price of computers falls
Software downloads
Price of and computers are
software
down- complements.
loads A fall in price of
computers shifts the
P1 demand curve for
software downloads
to the right.
D1 D2
Q1 Q2 Quantity of
software downloads
ACTIVE LEARNING 1
B. Price of music downloads falls
Price of
software The D curve
down-
loads
does not shift.
Move down along
P1 curve to a point with
lower P, higher Q.
P2
D1
Q1 Q2 Quantity of
software downloads
ACTIVE LEARNING 1
C. Price of software CDs falls
Price of Software CDs and

software software downloads
down-
loads are substitutes.
A fall in price of CDs
P1 shifts demand for
downloads to the
left.
D2 D1
Q2 Q1 Quantity of
software downloads
Supply
 The quantity supplied of any good is the
amount that sellers are willing and able to sell.
 Law of supply: the claim that the quantity
supplied of a good rises when the price of the
good rises, other things equal
22
The Supply Schedule
Price Quantity
 Supply schedule:
of of teas
A table that shows the teas supplied
relationship between the $0.00 0
price of a good and the 1.00 3
quantity supplied. 2.00 6
 Example: 3.00 9
A café’s supply of teas. 4.00 12
5.00 15
 Notice that the café supply 6.00 18
schedule obeys the
law of supply.
23
Café Supply Schedule & Curve
Price Quantity
P of of teas
$6.00 teas supplied
$0.00 0
$5.00
1.00 3
$4.00 2.00 6
$3.00 3.00 9
4.00 12
$2.00
5.00 15
$1.00 6.00 18
$0.00 Q
0 5 10 15
24
Market Supply versus Individual Supply
 The quantity supplied in the market is the sum of
the quantities supplied by all sellers at each price.
 Suppose Café A and Café B are the only two sellers
in this market. (Qs = quantity supplied)
Price Café A Café B Market Qs
$0.00 0 + 0 = 0
1.00 3 + 2 = 5
2.00 6 + 4 = 10
3.00 9 + 6 = 15
4.00 12 + 8 = 20
5.00 15 + 10 = 25
6.00 18 + 12 = 30
The Market Supply Curve
QS
P
(Market)
P
$6.00 $0.00 0
1.00 5
$5.00
2.00 10
$4.00 3.00 15
$3.00 4.00 20
$2.00 5.00 25
6.00 30
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
26
Supply Curve Shifters
 The supply curve shows how price affects
quantity supplied, other things being equal.
 These “other things” are non-price determinants
of supply.
 Changes in them shift the S curve…
27
Supply Curve Shifters: Input Prices
 Examples of input prices:
wages, prices of raw materials.
 A fall in input prices makes production
more profitable at each output price,
so firms supply a larger quantity at each price,
and the S curve shifts to the right.
28
Supply Curve Shifters: Input Prices
P Suppose the price

$6.00 of milk falls.
At each price, the
$5.00 quantity of
$4.00 teas supplied
(where it is served
$3.00 with milk) will
increase (by 5 in
$2.00
this example).
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
29
Supply Curve Shifters: Technology
 Technology determines how much inputs are
required to produce a unit of output.
 A cost-saving technological improvement has
the same effect as a fall in input prices,
shifts S curve to the right.
30
Supply Curve Shifters: # of Sellers
 An increase in the number of sellers increases
the quantity supplied at each price,
shifts S curve to the right.
31
Supply Curve Shifters: Expectations
 Example:
 Events in the Middle East lead to expectations
of higher oil prices.
 In response, owners of Texas oilfields reduce
supply now, save some inventory to sell later at
the higher price.
 S curve shifts left.
 In general, sellers may adjust supply* when their
expectations of future prices change.
(*If good not perishable)
32
Summary: 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
33
ACTIVE LEARNING 2
Supply Curve
Draw a supply curve for ice

cream machines.
What happens to it in each
of the following scenarios?
A. Ice Cream Machine sellers cut the price of
the machine.
B. A technological advancement that
allows the machine to be produced at lower
cost.
C. Ice cream makers raise the price of ice
creams.
© 2012 Cengage Learning. EMEA All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
ACTIVE LEARNING 2
A. Ice Cream Machine sellers cut the price of the machine.
Price of
ice cream S curve does
S1
machines
not shift.
P1 Move down
along the curve
P2 to a lower P
and lower Q.
Q2 Q1 Quantity of ice
cream
machines
A C T I V E L E A R N I N G 2
B. A technological advancement that
allows the machine to be produced at lower cost.
Price of
ice cream
S1
S curve shifts
machines S2
to the right:
at each price,
P1
Q increases.
Q1 Q2 Quantity of ice
cream
machines
ACTIVE LEARNING 2
C. Ice cream makers raise the price of the ice creams they provide.
Price of
ice cream
S1 This shifts the
machines
demand curve for
ice cream
machines, not the
supply curve.
Quantity of ice
cream
machines
Supply and Demand Together
P
$6.00 D S Equilibrium:
P has reached
$5.00
the level where
$4.00 quantity supplied
$3.00 equals
quantity demanded
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
38
Equilibrium price:
the price that equates quantity supplied
with quantity demanded
P
$6.00 D S P QD QS
$5.00 $0 24 0
$4.00 1 21 5
2 18 10
$3.00
3 15 15
$2.00 4 12 20
$1.00 5 9 25
$0.00 6 6 30
Q
0 5 10 15 20 25 30 35
39
Equilibrium quantity:
the quantity supplied and quantity demanded
at the equilibrium price
P
$6.00 D S P QD QS
$5.00 $0 24 0
$4.00 1 21 5
2 18 10
$3.00
3 15 15
$2.00 4 12 20
$1.00 5 9 25
$0.00 6 6 30
Q
0 5 10 15 20 25 30 35
40
Surplus (a.k.a. excess supply):
when quantity supplied is greater than
quantity demanded
P Example:
$6.00 D Surplus S
If P = $5,
$5.00
then
$4.00 QD = 9 teas
$3.00 and
QS = 25 teas
$2.00
resulting in a
$1.00 surplus of 16 teas
$0.00 Q
0 5 10 15 20 25 30 35
41
quantity demanded
P
$6.00 D Surplus S Facing a surplus,
sellers try to increase
$5.00 sales by cutting price.
$4.00 This causes
$3.00 QD to rise and QS to fall…
$2.00 …which reduces the

surplus.
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
42
quantity demanded
P
$6.00 D Surplus S Facing a surplus,
sellers try to increase
$5.00 sales by cutting price.
$4.00 This causes
$3.00 QD to rise and QS to fall.
$2.00 Prices continue to fall

until market reaches
$1.00 equilibrium.
$0.00 Q
0 5 10 15 20 25 30 35
43
Shortage (a.k.a. excess demand):
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Example:
If P = $1,
$5.00
then
$4.00 QD = 21 teas
$3.00 and
QS = 5 teas
$2.00
resulting in a
$1.00 shortage of 16 teas
$0.00 Shortage Q
0 5 10 15 20 25 30 35
44
quantity supplied
P
$6.00 D S Facing a shortage,
sellers raise the price,
$5.00
causing QD to fall
$4.00 and QS to rise,
$3.00 …which reduces the
shortage.
$2.00
$1.00
Shortage
$0.00 Q
0 5 10 15 20 25 30 35
45
quantity supplied
P
$6.00 D S Facing a shortage,
sellers raise the price,
$5.00
causing QD to fall
$4.00 and QS to rise.
$3.00 Prices continue to rise
$2.00 until market reaches
equilibrium.
$1.00
Shortage
$0.00 Q
0 5 10 15 20 25 30 35
46
Three Steps to Analyzing Changes in Eq’m
To determine the effects of any event,
1. Decide whether event shifts S curve,

D curve, or both.
2. Decide in which direction curve shifts.
3. Use supply—demand diagram to see

how the shift changes eq’m P and Q.
47
EXAMPLE: The Market for Electric Cars
P
price of
S1
electric
cars
P1
D1
Q
Q1
quantity of
electric cars
48
EXAMPLE 1: A Shift in Demand
EVENT TO BE
ANALYZED: P
Increase in price of gas. S1
STEP 1: P2
D curve shifts
because
STEP 2:
price of gas P1
affects demand for
D shifts right
electrics.
because
STEP 3: high gas
S curve
price doeselectrics
makes not D1 D2
The shift
shift, causes
because an
price
more attractive Q
increase
of gas in price
does not cars. Q1 Q2
relative to other
and quantity
affect cost of of
electric cars.
producing electrics.
49
EXAMPLE 1: A Shift in Demand
Notice: P
When P rises,
S1
producers supply
a larger quantity P2
of electrics, even
though the S curve P1
has not shifted.
Always be careful
D1 D2
to distinguish b/w
a shift in a curve Q
Q1 Q2
and a movement
along the curve.
50
Terms for Shift vs. Movement Along Curve
 Change in supply: a shift in the S curve
occurs when a non-price determinant of supply
changes (like technology or costs)
 Change in the quantity supplied:
a movement along a fixed S curve
occurs when P changes
 Change in demand: a shift in the D curve
occurs when a non-price determinant of demand
changes (like income or # of buyers)
 Change in the quantity demanded:
a movement along a fixed D curve
occurs when P changes
51
EXAMPLE 2: A Shift in Supply
EVENT: New technology
reduces cost of P
producing electric cars. S1 S2
STEP 1:
S curve shifts
because
STEP 2:
event affects P1
cost of production.
S shifts right P2
D curve does
because event not
STEPbecause
shift, 3:
reduces cost, D1
The shift causes
production technology
makes production Q
price
is not to
onefallof the Q1 Q2
more profitable at
and quantity
factors that to rise.
affect
any given price.
demand.
52
EXAMPLE 3: A Shift in Both Supply
EVENTS:
and Demand
Price of gas rises AND P
new technology reduces S1 S2
production costs
STEP 1: P2
Both curves shift.
P1
STEP 2:
Both shift to the right.
STEP 3: D1 D2
Q rises, but effect Q
on P is ambiguous: Q1 Q2
If demand increases more
than supply, P rises.
53
EXAMPLE 3: A Shift in Both Supply
EVENTS:
and Demand
price of gas rises AND P
new technology reduces S1 S2
production costs
STEP 3, cont.
P1
But if supply
increases more P2
than demand,
D1 D2
P falls.
Q
Q1 Q2
54
ACTIVE LEARNING 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
software downloads.
Event A: A fall in the price of software CDs
Event B: Sellers of software downloads negotiate
a reduction in the royalties they must pay
for each copy they sell.
Event C: Events A and B both occur.
ACTIVE LEARNING 3
A. Fall in price of software CDs
The market for

STEPS
P software downloads
1. D curve shifts S1
2. D shifts left
P1
3. P and Q both
P2
fall.
D2 D1
Q
Q2 Q1
ACTIVE LEARNING 3
B. Fall in cost of royalties
STEPS The market for

P software downloads
1. S curve shifts
S1 S2
2. S shifts right
P1
3. P falls,
Q rises. P2
(Royalties are part

of sellers’ costs) D1
Q
Q1 Q2
ACTIVE LEARNING 3
C. Fall in price of software CDs and
fall in cost of royalties
STEPS
STEPS
1.
1. Both
Both curves
curves shift
shift (see
(see parts
parts AA && B).
B).
2.
2. D
D shifts
shifts left,
left, SS shifts
shifts right.
right.
3.
3. PP falls.
falls.
Effect
Effect onon Q Q is
is ambiguous:
ambiguous:
The
The fall
fall in
in demand
demand reduces
reduces Q,
Q,
the
the increase
increase in in supply
supply increases
increases Q.
Q.
the increase in supply increases Q.
C. Fall in price of P
software CDs and S1 S2
fall in cost of
royalties P1
Scenario 1
D2 D1
Q
Q1 59
the increase in supply increases Q.
P
C. Fall in price of
S1 S2
software CDs and
fall in cost of
P1
royalties
Scenario 2
D2
D1
Q
Q1
60
CONCLUSION:
How Prices Allocate Resources
 One of the Ten Principles from Chapter 1:
Markets are usually a good way
to organize economic activity.
 In market economies, prices adjust to balance
supply and demand. These equilibrium prices
are the signals that guide economic decisions
and thereby allocate scarce resources.
61
S U M M A RY
• A competitive market has many buyers and

sellers, each of whom has little or no influence
on the market price.
• Economists use the supply and demand model
to analyze competitive markets.
• The downward-sloping demand curve reflects
the law of demand, which states that the quantity
buyers demand of a good depends negatively
on the good’s price.
S U M M A RY
• Besides price, demand depends on buyers’

incomes, tastes, expectations, the prices of
substitutes and complements, and number of
buyers.
If one of these factors changes, the D curve shifts.
• The upward-sloping supply curve reflects the Law
of Supply, which states that the quantity sellers
supply depends positively on the good’s price.
• Other determinants of supply include input prices,
technology, expectations, and the # of sellers.
Changes in these factors shift the S curve.
S U M M A RY
• The intersection of S and D curves determines

the market equilibrium. At the equilibrium price,
quantity supplied equals quantity demanded.
• If the market price is above equilibrium,
a surplus results, which causes the price to fall.
If the market price is below equilibrium,
a shortage results, causing the price to rise.
S U M M A RY
• We can use the supply-demand diagram to

analyze the effects of any event on a market:
First, determine whether the event shifts one or
both curves. Second, determine the direction of
the shifts. Third, compare the new equilibrium to
the initial one.
• In market economies, prices are the signals that
guide economic decisions and allocate scarce
resources.
Problems
 Coffee and milk are complements because they
are often enjoyed together. When the price of
coffee rises, what can you predict might happen
to the supply, demand, quantity demanded, and
the price in the market for milk?
 STEP 1: BREAK DOWN THE QUESTION
66
 When the price of coffee rises, what can you
predict might happen to the supply in the market
for milk?
The supply curve will not change.
predict might happen to the demand in the
market for milk?
Because there is an increase in the price of a
complement, the demand curve will shift to the left.
67
predict might happen to the quantity demanded
in the market for milk?
The quantity demanded will decrease following the
new equilibrium after the demand curve shift.
predict might happen to the price in the market
for milk?
The price of milk will fall following the new
equilibrium point (show you answer in graph)
68
Problems
C. below
69
 a. Quantity supplied equals quantity
demanded at a price of $6 and quantity of 81
pizzas (Figure 30).
70
 b. If the price were above $6, quantity
supplied would exceed quantity demanded, so
suppliers would reduce the price to gain sales.
 c. If the price were below $6, quantity
demanded would exceed quantity supplied, so
suppliers could raise the price without losing
sales. In both cases, the price would continue to
adjust until it reached $6, the only price at which
there is neither a surplus nor a shortage.
71
Problems
 Jumah prefers asparagus to spinach. His
income declines and as a results he buys more
spinach. Is spinach an inferior or a normal good
to Jumah? Explain your answer.
Inferior good, because they are the goods that with

an increase in income the demand for them shifts
to the left. (decrease in demand)
72
Problems
Over the past 30 years, technological advances
have reduced the cost of computer chips.
a. How do you think this has affected the market
for computers?
b. For computer software?
c. For typewriters?
73
a. Technological advances that reduce the cost of producing
computer chips represent a decline in an input price for producing
a computer.
The result is a shift to the right in the supply of computers to the right
The equilibrium price falls and the equilibrium quantity rises, as the
figure shows.
74
b. Because computer software is a complement to computers, the lower
equilibrium price of computers increases the demand for software (shifts the
demand curve outwards)
As Figure shows, the result is a rise in both the equilibrium price and quantity of
software.
75
c. Because typewriters are substitutes for computers, the lower
equilibrium price of computers reduces the demand for typewriters
(shift the demand curve to the left).
As Figure shows, the result is a decline in both the equilibrium price
and quantity of typewriters.
76

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N. Gregory Mankiw & Mohamed H.

• What factors affect buyers’ demand for goods?

Price Amisi’s Qd Haji’s Qd Market Qd

 Changes in them shift the D curve…

P Suppose the number

 Expectations affect consumers’ buying decisions.

Draw a demand curve for software downloads.

Price of Software CDs and

P Suppose the price

Variable A change in this variable…

Draw a supply curve for ice

$2.00 …which reduces the

$2.00 Prices continue to fall

To determine the effects of any event,

1. Decide whether event shifts S curve,

3. Use supply—demand diagram to see

Use the three-step method to analyze the effects of

The market for

STEPS The market for

(Royalties are part

• A competitive market has many buyers and

• Besides price, demand depends on buyers’

• The intersection of S and D curves determines

• We can use the supply-demand diagram to

 STEP 1: BREAK DOWN THE QUESTION

Inferior good, because they are the goods that with

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