,The Market Forces of Supply and Demand,Chapter 4,The Market Forces of 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,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,Buyers determine demand.,Sellers determine supply.,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.,Competition: Perfect and Otherwise,Products are the same Numerous buyers and sellers so that each has no influence over price Buyers and Sellers are price takers,Perfect Competition,Competition: Perfect and Otherwise,Monopoly One seller, and seller controls price Oligopoly Few sellers Not always aggressive competition,Competition: Perfect and Otherwise,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 there is an inverse 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.,Demand Schedule,Determinants of Demand,Market price Consumer income Prices of related goods Tastes Expectations,Demand Curve,The demand curve is the downward-sloping line relating price to quantity demanded.,Demand Curve,$3.00,2.50,2.00,1.50,1.00,0.50,2,1,3,4,5,6,7,8,9,10,12,11,Price of Ice-Cream Cone,Quantity of Ice-Cream Cones,0,Ceteris Paribus,Ceteris 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!,Market 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.,Determinants of Demand,Market price Consumer income Prices of related goods Tastes Expectations,Change in Quantity Demanded versus Change in Demand,Change in Quantity Demanded Movement along the demand curve. Caused by a change in the price of the product.,Changes in Quantity Demanded,0,D1,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,20,2.00,Change in Quantity Demanded versus Change in Demand,Change in Demand A shift in the demand curve, either to the left or right. Caused by a change in a determinant other than the price.,Changes in Demand,0,D1,Price of Ice-Cream Cone,Quantity of Ice-Cream Cones,D3,D2,Increase in demand,Decrease in demand,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 Good,$3.00,2.50,2.00,1.50,1.00,0.50,2,1,3,4,5,6,7,8,9,10,12,11,Price of Ice-Cream Cone,Quantity of Ice-Cream Cones,0,Increase in demand,An increase in income.,D1,D2,Consumer Income Inferior Good,$3.00,2.50,2.00,1.50,1.00,0.50,2,1,3,4,5,6,7,8,9,10,12,11,Price of Ice-Cream Cone,Quantity of Ice-Cream Cones,0,Decrease in demand,An increase in income.,D1,D2,Prices of Related Goods Substitutes & Complements,When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. When a fall in the price of one good increases the demand for another good, the two goods are called complements.,Change in Quantity Demanded versus Change in Demand,Supply,Quantity supplied is the amount of a good that sellers are willing and able to sell.,Law of Supply,The law of supply states that there is a direct (positive) relationship between price and quantity supplied.,Determinants of Supply,Market price Input prices Technology Expectations Number of producers,Supply Schedule,The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied.,Supply Schedule,Supply Curve,The supply curve is the upward-sloping line relating price to quantity supplied.,Supply Curve,$3.00,2.50,2.00,1.50,1.00,0.50,2,1,3,4,5,6,7,8,9,10,12,11,Price of Ice-Cream Cone,Quantity of Ice-Cream Cones,0,Market 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