Chapter 4: The Market Forces of Supply and Demand

Ch. 4: The Market Forces of Supply and Demand

Chapter 4: The Market Forces of Supply and Demand

A market is a group of buyers and sellers of a particular product.

(Trading places: 1:45-3:15)

A competitive market is one with many buyers and sellers, each

has a negligible effect on price.

In a perfectly competitive market

• All goods are exactly the same
• Buyers and sellers are so numerous that no one can affect
market price - each is a “price taker”.
Chapter 4: The Market Forces of Supply and Demand

Quantity demanded: the total quantity of a good that buyers are

willing and able to purchase.

Law of demand: the claim that the quantity demanded of a good

falls when the price of the good rises, other things equal.

Giffen good: a good that violates the law of demand.

A possible Giffen good: rice among poor Chinese consumers.
Chapter 4: The Market Forces of Supply and Demand
Demand schedule: a table that shows the relationship between
the price of a good and the quantity demanded.

Jake’s demand schedule for movies

Price for a movie ticket Number of movies
seen per month

$0 6

$2 5

$4 4

$6 3

$8 2

$10 1

$12 0
Chapter 4: The Market Forces of Supply and Demand
Demand schedule: a table that shows the relationship between
the price of a good and the quantity demanded.

Jake’s demand schedule for movies Jake’s demand curve for movies
Price for a movie ticket Number of movies Price for a
seen per month movie ticket

$0 6 $12
*Notice my demand
$10 schedule, which obeys
$2 5 the Law of Demand,
results in a downward
$4 4 $8 sloping demand curve.*

$6
$6 3
$4
$8 2
$2
$10 1
$0
$12 0 0 1 2 3 4 5 6
Jake’s number of
movies seen per
month
Chapter 4: The Market Forces of Supply and Demand
Demand schedule: a table that shows the relationship between
the price of a good and the quantity demanded.

Jake’s demand schedule for movies Jake’s demand curve for movies
Price for a movie ticket Number of movies Price for a
seen per month movie ticket

$0 6 $12
This solid line is Jake’s
$10 demand curve… but
$2 5 Jake’s preferences do
not represent market
$4 4 $8 preferences. Therefore,
this is not a market
$6 demand curve.
$6 3
$4
$8 2
$2
$10 1
$0
$12 0 0 1 2 3 4 5 6
Jake’s number of
movies seen per
month
Chapter 4: The Market Forces of Supply and Demand
Market demand versus individual demand
• The quantity demanded in the market is the sum of all
quantities demanded by all buyers for each price.

• Suppose the market for movies includes this entire class. The
market demand is the number of movies I would go see and
the number of movies each of you would go see.

Individual demand
Market demand
Chapter 4: The Market Forces of Supply and Demand
“Shifting” the demand curve: In the prior movie example, we
traced out our demand schedules based on the current state of the
world (all other things being equal).

Other factors, besides price, influence individuals’ (and market)

quantity demanded...

Changes in these factors will “shift” the demand curve.

Chapter 4: The Market Forces of Supply and Demand

Factors that shift a demand curve.

• The number of buyers.

• Income.

• Price of related goods.

• Tastes.

• Expectations.
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the number of buyers..
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the number of buyers..
More college students living at home...

Apartment Demand for apartments in a college town

price $900

Apartment
rental demand
$700 curve in 2011

$500

$300

0
0 1000 2000 3000 4000
Quantity of apartments
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the number of buyers..
More college students living at home...

Apartment Demand for apartments in a college town

price $900

Apartment
rental demand
$700 curve in 2011

$500
In 2012, we discovered
that more students were
living at home when
attending college.
$300 Apartment
rental demand
curve in 2012

0
0 1000 2000 3000 4000
Quantity of apartments
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the number of buyers..
More college students living at home...

Apartment Demand for apartments in a college town

price $900
Market demand for
Apartment apartments shifted left, it
rental demand decreased, in response to
$700 curve in 2011 fewer students in the
market for apartments.

$500
In 2012, we discovered
that more students were
living at home when
attending college.
$300 Apartment
rental demand
curve in 2012

0
0 1000 2000 3000 4000
Quantity of apartments
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the number of buyers..
More college students living at home...

Apartment Demand for apartments in a college town

price $900
Market demand for
Apartment apartments shifted left, it
rental demand decreased, in response to
$700 curve in 2011 fewer students in the
market for apartments.

$500
In 2012, we discovered
that more students were
living at home when
attending college.
$300 Apartment
rental demand
curve in 2012

0
0 1000 2000 3000 4000
Quantity of apartments
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: income..
Graduating from college and finding a full-time job...
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: income..
Graduating college and finding a good job is a positive
income shock...

Nutritious Demand for nutritious food

Food price $9

$7

$5

$3 Nutritious food
demand curve
for a college
student
0
0 10 20 30 40
Quantity of nutritious
food demanded
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: income..
Graduating college and finding a good job is a positive
income shock...

Nutritious Demand for nutritious food

Food price $9
Nutritious food
demand curve for a With a higher income, we
college graduate will likely purchase more
$7 (with a better job) nutritious food.

$5
When we graduate college,
we either find a better job
or receive a raise. This is
a positive income shock.
$3 Nutritious food
demand curve
for a college
student
0
0 10 20 30 40
Quantity of nutritious
food demanded
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: income..
Normal goods and inferior goods:

In the previous example, I assumed that increasing income would

lead to an increase in demand for nutritious food. That is, I
assumed nutritious food is a normal good.
A good for which, other things equal, an increase in income leads
to a decrease in demand is an inferior good.
Inferior goods: Normal goods:

Recreational equipment

Electricity

Gas/fuel

Jewelry
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the price of related
goods..

Train Demand for train tickets

ticket
$20
prices
Demand for train
tickets in 2008 – with
$15 high gas prices.

$10
In 2008, gas prices were
extremely high. Those prices
dropped in 2009, making
driving less expensive.
$5

0
0 100 200 300 400
Quantity of train
tickets sold
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the price of related
goods..

Train Demand for train tickets

ticket
$20
prices
Demand for train
tickets in 2008 – with
$15 high gas prices.

$10
In 2008, gas prices were
extremely high. Those prices
dropped in 2009, making
driving less expensive.
$5 Demand for
train tickets in
2009 – with
low gas prices.
0
0 100 200 300 400
Quantity of train
tickets sold
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the price of related
goods..

Price of a Demand for Oreos

package
$20
of Oreos

Demand for Oreos

when milk is cheap.
$15
Rising milk prices will
decrease demand for
milk… what will happen to
the demand for Oreos?
$10

$5

0
0 100 200 300 400
Quantity of Oreos sold
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the price of related
goods..

Price of a Demand for Oreos

package
$20
of Oreos

Demand for Oreos

when milk is cheap.
$15
Rising milk prices will
decrease demand for
milk… what will happen to
the demand for Oreos?
$10
Demand for Oreos
when milk is
expensive.

$5
When milk becomes less
affordable, demand for
Oreos decreases!

0
0 100 200 300 400
Quantity of Oreos sold
Chapter 4: The Market Forces of Supply and Demand

Factors that shift a demand curve: the price of related

goods..
In the first example, lower gasoline prices decreased demand for
train tickets.
In the second example, higher milk prices decreased demand for
Oreos.
Chapter 4: The Market Forces of Supply and Demand

Factors that shift a demand curve: the price of related

goods..
In the first example, lower gasoline prices decreased demand for
train tickets.
In the second example, higher milk prices decreased demand for
Oreos.
This is because gasoline and train tickets are substitute goods
while Oreos and milk are complementary goods; or complements.
Chapter 4: The Market Forces of Supply and Demand
Substitutes: two goods for which an increase in the price of one
leads to an increase in demand for the other (like gasoline and
train tickets).
Complements: two goods for which an increase in the price of
one leads to a decrease in the demand for the other (like Oreos
and milk).
Complements
Chapter 4: The Market Forces of Supply and Demand
Substitutes: two goods for which an increase in the price of one
leads to an increase in demand for the other (like gasoline and
train tickets).
Complements: two goods for which an increase in the price of
one leads to a decrease in the demand for the other (like Oreos
and milk).
Substitutes
Chapter 4: The Market Forces of Supply and Demand

Up to this point, we have only discussed demand, which is created

by consumers. Supply is created by firms that produce goods and
services.
The quantity supplied of any good is the amount that sellers are
willing and able to sell.
Law of supply: the claim that the quantity supplied of a good
rises when the price of that good rises, other things equal.
Chapter 4: The Market Forces of Supply and Demand
Law of supply: the claim that the quantity supplied of a good
rises when the price of that good rises, other things equal.

Movie theater’s supply schedule for movies

Price for a movie ticket Number of movies
provided per month

$0 0

$2 1

$4 2

$6 3

$8 4

$10 5

$12 6
Chapter 4: The Market Forces of Supply and Demand
Law of supply: the claim that the quantity supplied of a good
rises when the price of that good rises, other things equal.

Movie theater’s supply schedule of movies Jake’s demand curve for movies
Price for a movie ticket Number of movies Price for a
provided per month movie ticket

$0 0 $12 This solid line is the

theater’s supply
$10 curve… but the
$2 1 theater’s supply
curve may not be
$8 representative of the
$4 2
entire market.
$6 Therefore, this is not
$6 3 a market supply
$4 curve.
$8 4
$2
$10 5
$0
$12 6 0 1 2 3 4 5 6
Number of movies provided
per month
Chapter 4: The Market Forces of Supply and Demand
“Shifting the supply curve: many factors will shift the supply curve
increase or decreasing the quantity produced for a given price.

Gold
jewelry?
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a supply curve: price of inputs.

Supply of Electricity
Price electricity

Supply 1
Supply 2

Quantity of electricity Q
Chapter 4: The Market Forces of Supply and Demand
Supply and demand together: back to the movies example
A market for movies with two firms and two consumers
Movie theater’s supply schedules for movies Consumers’ demand schedules for movies
Price for a Wyo Fox Market Price for a Barack George Market
movie Theater Theater Supply movie Demand
ticket ticket

$0 0 0 0 $0 9 9 18

$2 2 1 3 $2 7 8 15

$4 4 2 6 $4 6 6 12

$6 6 3 9 $6 3 6 9

$8 8 4 12 $8 2 4 6

$10 10 5 15 $10 1 2 3

$12 12 6 18 $12 0 0 0

These are theaters’ These are consumers’

individual supply curves individual demand curves
Chapter 4: The Market Forces of Supply and Demand
Supply and demand together: back to the movies example
Price of Market supply and demand of movies
movies

$12

$10
Recall: by the Law of
Demand, the demand curve
$8
is always downward sloping.

$6

$4

$2

0
0 3 6 9 12 15 18
Quantity of movies
Chapter 4: The Market Forces of Supply and Demand
Supply and demand together: back to the movies example
Price of Market supply and demand of movies
movies

$12

$10 Recall: by the Law of

Supply, the supply
$8 curve is always
upward sloping.

$6

$4

$2

0
0 3 6 9 12 15 18
Quantity of movies
Chapter 4: The Market Forces of Supply and Demand
Supply and demand together: back to the movies example
Price of Market supply and demand of movies
movies

$12

Demand curve Supply curve

$10

$8

$6

$4

$2

0
0 3 6 9 12 15 18
Quantity of movies
Chapter 4: The Market Forces of Supply and Demand
Equilibrium: a situation in which the market price has reached the
level at which quantity supplied equals quantity demanded.
Equilibrium price: the price that balances quantity supplied and
quantity demanded
Equilibrium quantity: the quantity supplied and the quantity
demanded at the equilibrium price.
Price of Market supply and demand of movies
movies

$12

Demand curve Supply curve

$10

$8
Equilibrium
Equilibrium
$6
price

$4

$2

0
0 3 6 9 12 15 18
Equilibrium quantity
Quantity of movies
Chapter 4: The Market Forces of Supply and Demand
Suppose the government imposes a price floor on movies: movies
cannot be sold for any less than $8 per ticket.
How does this affect our market for movies?
Chapter 4: The Market Forces of Supply and Demand
Suppose the government imposes a price floor on movies: movies
cannot be sold for any less than $8 per ticket.
How does this affect our market for movies?
Price of Market supply and demand of movies
movies

$12

Demand curve Surplus: quantity Supply curve

supplied exceeds
$10 quantity demanded

Price floor $8

Equilibrium
$6
price

$4

$2

0
0 3 6 9 12 15 18 Quantity of movies
Quantity Equilibrium Quantity
demanded Quantity supplied
Chapter 4: The Market Forces of Supply and Demand
Suppose the government imposes a price ceiling on movies:
movies cannot be sold for any more than $4 per ticket.
How does this affect our market for movies?
Chapter 4: The Market Forces of Supply and Demand
Suppose the government imposes a price ceiling on movies:
movies cannot be sold for any more than $4 per ticket.
How does this affect our market for movies?
Price of Market supply and demand of movies
movies

$12

Demand curve Supply curve

$10

$8

Equilibrium
$6
price

Price ceiling $4

$2 Shortage: quantity
demanded exceeds
quantity supplied.

0
0 3 6 9 12 15 18 Quantity of movies
Quantity Equilibrium Quantity
supplied Quantity demanded
Chapter 4: The Market Forces of Supply and Demand

The law of supply and demand: the claim that the price of any
good adjusts to bring the quantity supplied and the quantity
demanded for that good into equilibrium.

What happens if a new university opens in town doubling the

number of students who go to the movie theater?
Chapter 4: The Market Forces of Supply and Demand
What happens to equilibrium price and equilibrium quantity
demanded if a new university opens in town, doubling the number
of students who go to the movie theater?
Price of Market supply and demand of movies: a new university
movies opens and the number of students in-town doubles.

$12

Demand curve Supply curve

$10

$8

Equilibrium
$6
price

$4

$2

0
0 3 6 9 12 15 18 Quantity of movies
Equilibrium
Quantity
Chapter 4: The Market Forces of Supply and Demand
Demand shifts to the right because there are more buyers in the
market. This increases the equilibrium price and the equilibrium
quantity demanded.
Price of Market supply and demand of movies: a new university
movies opens and the number of students in-town doubles.

$12
New demand
Old demand curve Supply curve
curve
$10
New
equilibrium $8
price
Equilibrium
$6
price

$4

$2

0
0 3 6 9 12 15 18 Quantity of movies
Equilibrium New equilibrium
Quantity quantity
Chapter 4: The Market Forces of Supply and Demand
What happens to equilibrium price and equilibrium quantity
demanded if legislation makes it cheaper for theater to purchase
movies for showing?
Price of Market supply and demand of movies: a new legislation
movies makes it cheaper for theaters to purchase movies for showing
(decrease price of an input into production).
$12
Demand
Supply curve
curve
$10

$8

Equilibrium
$6
price

$4

$2

0
0 3 6 9 12 15 18 Quantity of movies
Equilibrium
Quantity
Chapter 4: The Market Forces of Supply and Demand
Supply shifts to the right because an input price into production
has decreased. This decreased the equilibrium price and increases
equilibrium quantity demanded.
Price of Market supply and demand of movies: a new legislation
movies makes it cheaper for theaters to purchase movies for showing
(decrease price of an input into production).
$12
Demand
Old supply curve
curve
$10

$8

New supply
Equilibrium
$6 curve
price

New
equilibrium $4
price
$2

0
0 3 6 9 12 15 18 Quantity of movies
Equilibrium New equilibrium
Quantity quantity