Copyright © 2004 South-Western 4 The Market Forces of Supply and Demand.

44The Market Forces of Supply and Demand

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.

Catherine’s Demand Schedule

Figure 1 Catherine’s Demand Schedule and Demand Curve

Price ofIce-Cream Cone

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

1. A decrease in price ...

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.

Price of Ice-Cream Cones

Quantity of Ice-Cream Cones

A tax that raises the price of ice-cream cones results in a

movement along the demand curve.

Changes in Quantity Demanded

• Consumer income

• Prices of related goods

• Tastes

• Expectations

• Number of buyers

• 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 ofIce-Cream

Quantity ofIce-Cream Cones

Increasein demand

Decreasein demand

Demand curve, D3

Demandcurve, D1

Demandcurve, D2

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• The law of supply states that, other things equal, the

quantity supplied of a good rises when the price of the good rises.

Ben’s Supply Schedule

Figure 5 Ben’s Supply Schedule and Supply Curve

Price ofIce-Cream

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

1. Anincrease in price ...

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

• Change in Quantity Supplied

• Movement along the supply curve.• Caused by a change in anything that alters the

quantity supplied at each price.

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones0

C$3.00 A rise in the price

of ice cream cones results in a movement along the supply curve.

Change in Quantity Supplied

• 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 ofIce-Cream

Quantity ofIce-Cream Cones

Increasein supply

Decreasein supply

Supply curve, S3

curve, Supply

S1Supply

curve, S2

Table 2 Variables That Influence Sellers

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.

At $2.00, the quantity demanded is equal to the quantity supplied!

SUPPLY AND DEMAND TOGETHER

Demand Schedule

Supply Schedule

Figure 8 The Equilibrium of Supply and Demand

Price ofIce-Cream

0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones

Equilibriumquantity

Equilibrium price Equilibrium

Supply

Demand

Figure 9 Markets Not in Equilibrium

Price ofIce-Cream

Supply

Demand

(a) Excess Supply

Quantitydemanded

Quantitysupplied

Surplus

Quantity ofIce-Cream

Figure 9 Markets Not in Equilibrium

Price ofIce-Cream

0 Quantity ofIce-Cream

Supply

Demand

(b) Excess Demand

Quantitysupplied

Quantitydemanded

Shortage

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 ofIce-Cream

0 Quantity of Ice-Cream Cones

Supply

Initialequilibrium

3. . . . and a higherquantity sold.

2. . . . resultingin a higherprice . . .

1. Hot weather increasesthe demand for ice cream . . .

New equilibrium$2.50

Figure 11 How a Decrease in Supply Affects the Equilibrium

Price ofIce-Cream

0 Quantity of Ice-Cream Cones

Demand

Newequilibrium

Initial equilibrium

2. . . . resultingin a higherprice of icecream . . .

1. An increase in theprice of sugar reducesthe supply of ice cream. . .

3. . . . and a lowerquantity sold.

Table 4 What Happens to Price and Quantity When Supply or Demand Shifts?

Copyright © 2004 South-Western 4 The Market Forces of Supply and Demand.

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