The Market Forces of Supply and DemandChapter 4Copyright 2001 by Harcourt, Inc.All rights reserved. Requests for permission to make copies of any part of the work should be mailed to:Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.The Market Forces of Supply and DemanduSupply and demand are the two words that economists use most often.uSupply and demand are the forces that make market economies work.uModern microeconomics is about supply, demand, and market equilibrium.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Markets uA market is a group of buyers and sellers of a particular good or service. uThe terms supply and demand refer to the behavior of people . . . as they interact with one another in markets. Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Markets u Buyers determine demand.u Sellers determine supply.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Market Type: A Competitive MarketA 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.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Competition: Perfect and OtherwiseuProducts are the sameuNumerous buyers and sellers so that each has no influence over priceuBuyers and Sellers are price takersPerfect CompetitionHarcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Competition: Perfect and OtherwiseuMonopolyuOne seller, and seller controls priceuOligopolyuFew sellersuNot always aggressive competitionHarcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Competition: Perfect and OtherwiseuMonopolistic CompetitionuMany sellersuSlightly differentiated productsuEach seller may set price for its own productHarcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.DemandQuantity demanded is the amount of a good that buyers are willing and able to purchase.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Law of DemandThe law of demand states that there is an inverse relationship between price and quantity demanded.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Demand ScheduleThe demand schedule is a table that shows the relationship between the price of the good and the quantity demanded. Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Demand ScheduleHarcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Determinants of DemanduMarket priceuConsumer incomeuPrices of related goodsuTastesuExpectationsHarcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Demand CurveThe demand curve is the downward- sloping line relating price to quantity demanded. Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Demand Curve$3.002.502.001.501.000.502134 56789 101211Price of Ice -Cream ConeQuantity of Ice-Cream Cones0Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Ceteris ParibusCeteris paribus is a Latin phrase that means all variables other than the ones being studied are assumed to be constant. Literally, ceteris paribus means “other things being equal.”The demand curve slopes downward because, ceteris paribus, lower prices imply a greater quantity demanded!Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Market DemanduMarket demand refers to the sum of all individual demands for a particular good or service.uGraphically, individual demand curves are summed horizontally to obtain the market demand curve.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Determinants of DemanduMarket priceuConsumer incomeuPrices of related goodsuTastesuExpectationsHarcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Change in Quantity Demanded versus Change in DemandChange in Quantity DemandeduMovement along the demand curve.uCaused by a change in the price of the product.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Changes in Quantity Demanded0D1Price of Cigarettes per PackNumber of Cigarettes Smoked per DayA tax that raises the price of cigarettes results in a movement along the demand curve.AC202.00$4.0012Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Change in Quantity Demanded versus Change in DemandChange in DemanduA shift in the demand curve, either to the left or right.uCaused by a change in a determinant other than the price.Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.Changes in Demand0D1Price of Ice -Cream ConeQuantity of Ice-Cream ConesD3D2Increase in demandDecrease in demandHarcourt, Inc. items an