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The Market Forces of

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A market is a group of buyers and sellerso a part cu ar goo or serv ce.

The terms supply and demand refer to thee av or o peop e . . . as t ey nteract

with one another in markets .

n conom cs, espec a yMicroeconomics is about how supply and

.

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Market T es or

Structures

Competitive Markets Products are the same rice takers

Monopoly

onopo s c ompe on

Oligopoly

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Price of Ice-CreamCone

$3.00

2.50

2.00

1.50

1.00

0.50

21 3 4 5 6 7 8 9 10 1211Quantity of Ice-CreamCones

0

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Wh does the DemandCurve Slope Downward?

Law of Demand Inverse relationshi between rice and

quantity.

Utility is the extra satisfaction that one

receives from consumin a roduct. Marginal means extra.

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ar e eman

Market demand refers to the sum of

particular good or service.Graphically, individual demandcurves are summed horizontally toobtain the market demand curve.

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Ceter is par ibus is a Latin hrase that

means all variables other than the

constant. Literally, ceter is par ibus .

The demand curve slopes downward, ,

imply a greater quantity demanded!

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Two Sim le Rules for Movements vs. Shifts

Rule One When an independent variable changes and thatvar a e oes no appear on e grap , e curve onthe graph will shift.

Rule Two When an independent variable does appear on the

graph, the curve on the graph will not shift, instead

Lets apply these rules to the following cases of supply and demand!

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Change in QuantityDemanded versus Change in

ange n uan y eman e

Movement along the demand curve.Caused by a change in the price of

the product.

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Changes in QuantityDemandedPrice of Cigarettes

er Pack

A tax that raises theprice of cigarettesresults in a movementC

along the demandcurve.

.

A2.00

D10

Number of CigarettesSmoked per Day2012

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Change in QuantityDemanded versus Change in

ange n eman

A shift in the demand curve, eitherto the left or right.

Caused by a change in adeterminant other than the price.

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e erm nan s o eman

Market price

Prices of related goodsastes

Expectations

What are some examples?

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Consumer Incomeorma oo

Price of Ice-CreamCone

$3.002.50

An increasein income...

2.00Increase

in demand

1.50

1.00

0.50 D2

21 3 4 5 6 7 8 9 10 1211Quantity of

Ice-CreamCones

0

1

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Consumer Incomen er or oo

Price of Ice-CreamCone

$3.002.50

2.00

in income...

1.50

1.00

in demand

0.50

21 3 4 5 6 7 8 9 10 1211Quantity of

Ice-CreamCones

0

12

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Substitutes & Complements

en a a n t e pr ce o one gooreduces the demand for another good,the two goods are called substitutes .

increases the demand for another

, wcomplements .

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Change in Quantity Demandedversus Change in Demand

Affect QuantityDemanded

A Change inThis Variable . . .

r ce epresen s a movemenalong the demand curve

Income Shifts the demand curve

Prices of relatedgoods

Shifts the demand curve

Tastes Shifts the demand curveExpectations Shifts the demand curve

Number of

buyers

Shifts the demand curve

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upp y urvePrice of Ice-CreamCone

$3.002.50

2.00

1.50

1.00

0.50

21 3 4 5 6 7 8 9 10 1211

Quantity of

Ice-CreamCones

0

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The law of supply states that there is adirect (posi tive) relationship between

rice and uantit su lied.

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upp y

Quantity supplied is the amount of agood that sellers are willing and able

to sell.

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Change in Quantity Supplied

Price of Ice-Cream Sone

C$3.00 A rise in the rice

of ice cream cones

results in a

1.00 A

the supply curve .

1 5

Quantity of

Ice-CreamCones0

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ar e upp y

Market supply refers to the sum of

of a particular good or service.Graphically, individual supplycurves are summed horizontally toobtain the market supply curve.

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Market pricenpu pr ces

TechnoloExpectations

um er o pro ucersWhat are some exam les?

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Change in Supply

Price of Ice-Cream S

S3one 2

Decrease inSupply

Increase inSupply

Quantity of

Ice-CreamCones0

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Ch n in n i li versus Change in SupplyVariables that Affect Quantity Supplied A Change in This Variable . . .

Price Represents a movement alongthe supply curve

Input prices Shifts the supply curve

Technology Shifts the supply curve

Expectations Shifts the supply curve

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Equilibrium of Price of Ice-Cream

Supply and Demand

Supplyone

$3.00

2.50

2.00

Equilibrium

1.50

Demand

1.00

0.50Quantity of

Ice-CreamCones21 3 4 5 6 7 8 9 10 12110

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Price of Ice-Cream

xcess upp yone

$3.00Supply

Surplus

2.50

2.00

1.50

1.00

0.50 Demand

Quantity of

Ice-CreamCones21 3 4 5 6 7 8 9 10 12110

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Price of

Ice-CreamCone

Su l

$2.00

Demand

$1.50

Shorta e

Quantity of Ice-Cream Cones0 1 2 34

5 6 7 8 9 10 11 12 13

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Thr T An l zin Changes in Equilibrium

Decide whether the event shifts thesupp y or eman curve or o .

Decide whether the curve(s) shift(s) to theleft or to the right.

Examine how the shift affectsequilibrium price and quantity.

H I i d d i d i i h 2001 b H I

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How an Increase in DemandHarcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.

Affects the EquilibriumPrice of 1. Hot weather increases

ce- ream

Cone

the demand for ice cream...

Supply

$2.50

2.00

Initial2. ...resulting

equ r um D2

price...

0 7 Quantity of Ice-Cream Cones

103. ...and a higherquantity sold.

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How a Decrease in Supplyec s e qu r um

Price of

S2

-Cone

S 1

.the supply of ice cream...

Newequilibrium$2.50

2.00 Initial equilibrium

2. ...resulting

Demand

price...

0 1 2 3 4 7 8 9 11 12 Quantity of

Ice-Cream Cones

1310

3. ...and a lowerquantity sold.