SUPPLY AND DEMAND: HOW MARKETS WORK
• A market is a group of buyers and sellers of a particular good or service.
MARKETS AND COMPETITION
MARKETS AND COMPETITION
• Buyers determine demand.
• Sellers determine supply
DEMAND
• Quantity demanded : the amount of a good that buyers are willing and able to purchase.
• Law of Demand• The quantity demanded of a good falls
when the price of the good rises.
# Demanded$
Cat’s Demand Schedule
Cat’s Demand Curve
Price ofIce-Cream Cone
0
2.50
2.00
1.50
1.00
0.50
1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones
$3.00
12
1. A decrease in price ...
2. ... increases quantity of cones demanded.
Change in Quantity Demanded
• Change in Quantity Demanded• Movement along the demand curve.• Caused by a change in the price of the
product.
0
D
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.
A
B
8
1.00
$2.00
4
Change in Quantity Demanded
SUPPLY
• Quantity supplied is the amount of a good that sellers are willing and able to sell.
• Law of Supply• The quantity supplied of a good rises
when the price of the good rises.
$#
supplied
Ben’s Supply Schedule
Price of Ice cream cone
Qty. of Cones supplied
Ben’s Supply Curve
Price ofIce-Cream
Cone
0
2.50
2.00
1.50
1.00
1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones
$3.00
12
0.50
1. Anincrease in price ...
2. ... increases quantity of cones.
Change in Quantity Supplied
• Change in Quantity Supplied• Movement along the supply curve.• Caused by a change in the price of the
product.
1 5
Price
Quantity of Ice-Cream Cones
0
S
1.00A
C$3.00 A rise in the
price of ice cream cones results in a movement along the
supply curve.
Change in Quantity Supplied
Airline Tickets
$ QD QS
200
24 1
300
16 10
400
10 16
500
4 22
600
0 25
600
500
400
300
200
100
0
Pri
ce
$
0 2 4 6 8 10 12 14 16 18 22 24 26 28Quantity #
D
S
350
13
SUPPLY AND DEMAND TOGETHER
Equilibrium
Qs= Qd Law of Supply and Demand:
The price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.
At $2.00, the quantity demanded is equal to the
quantity supplied!
SUPPLY AND DEMAND TOGETHER
Demand Schedule
Supply Schedule
The Equilibrium of Supply and Demand
Price ofIce-Cream
Cone
0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones
13
Equilibriumquantity
Equilibrium price Equilibrium
Supply
Demand
$2.00
If the price is too high (Qs > Qd)…
Price ofIce-Cream
Cone
0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones
13
Supply
Demand
$3.00
QuantitySupplied
QuantityDemanded
$2.00
The Price Will Drop!
If the price is too low (Qd > Qs)…
Price ofIce-Cream
Cone
0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones
13
Supply
Demand
$1.00
QuantityDemanded
QuantitySupplied
$2.00
The Price Will Rise!
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