Lecture 2: Market forces of demand and

supply
Ref: Mankiw et al. (2011). Principles of
Economics. Chap 4

2007 Thomson South-Western

MARKETS AND COMPETITION

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.

2007 Thomson South-Western

What Is a Market?
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.
2007 Thomson South-Western

What Is a Market?
Buyers determine demand.
Sellers determine supply.

2007 Thomson South-Western

What Is Competition?
A competitive market is a market in which there
are many buyers and sellers so that each has a
negligible impact on the market price.
decision is not made buy one people
- when buyer and seller too many
- so the price set upon demand
- majority will control the price

2007 Thomson South-Western

What Is Competition?
Competition: Perfect and Otherwise
Perfect Competition
Products are the same
Numerous buyers and sellers so that each has no
influence over price
Buyers and sellers are price takers
- buyer and sellers will nvr change the price
- prices are fixed - palm oil

Monopoly
One seller, and seller controls price
- only one seller supply
- the seller control the price
- example : TnB

2007 Thomson South-Western

What Is Competition?
Competition: Perfect and Otherwise
Oligopoly
- price almost the same

Few sellers
Not always aggressive competition
- digi, celcom, maxis

Monopolistic Competition
- random pricing

Many sellers
Slightly differentiated products
Each seller may set price for its own product

- education of few universities

2007 Thomson South-Western

DEMAND
Quantity demanded is the amount of a good
that buyers are willing and able to purchase.
Law of Demand
no other factors are taking in

The law of demand states that, other things equal,

the quantity demanded of a good falls when the
price of the good rises.
price increase > demand drop

2007 Thomson South-Western

The Demand Curve: The 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.

2007 Thomson South-Western

Zarinas Demand Schedule

negative relationship
- demand decrease
- price increase

2011
Cengage
2007
ThomsonSouth-Western
South-Western

The Demand Curve: The Relationship

between Price and Quantity Demanded
Demand Curve
The demand curve is a graph of the relationship
between the price of a good and the quantity
demanded.

2007 Thomson South-Western

Figure 1 Zarinas Demand Schedule and

Demand Curve
Price of
Ice-Cream Cone
RM3.00
2.50
1. A decrease
in price ...

2.00
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
2011 Cengage South-Western
2007 Thomson South-Western

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.

2007 Thomson South-Western

The market demand curve is the horizontal sum of the

individual demand curves!
very important
When the price is RM2,
Zarina will demand 4 icecream cones.

Zarinas Demand
Price of IceCream Cone

When the price is RM2,

Nathan will demand 3 icecream cones.

Price of IceCream Cone

2.00

2.00

1.00

1.00

Quantity of Ice-Cream Cones

When the price is RM1,

Zarina will demand 8 icecream cones.

Nathans Demand

The market demand at

RM2 will be 7 ice-cream
cones.
Market Demand

Price of IceCream Cone

2.00
1.00

Quantity of Ice-Cream Cones

When the price is RM1,

Nathan will demand 5 icecream cones.

13

Quantity of Ice-Cream Cones

The market demand at

RM1, will be 13 ice-cream
cones.
2011 Cengage South-Western
2007 Thomson South-Western

Shifts in the Demand Curve

Change in Quantity Demanded
Movement along the demand curve.
Caused by a change in the price of the product.

2007 Thomson South-Western

Changes in Quantity Demanded

Price of IceCream
Cones

$2.00

A tax on sellers of icecream cones raises the

price of ice-cream
cones and results in a
movement along the
demand curve.
A

1.00

D
0

Quantity of Ice-Cream Cones

2007 Thomson South-Western

Shifts in the Demand Curve

Consumer income more income more spending

when starbucks doing promotions, demand of
Prices of related goods coffee bean increases
Tastes fashions
when the prices is expected increase, buyer intend to buy more before
Expectations the increase
Number of buyers demand increase

2007 Thomson South-Western

Shifts in the Demand Curve

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.

2007 Thomson South-Western

Figure 3 Shifts in the Demand Curve

Price of
Ice-Cream
Cone

demand shift
-whole demand curve move

Increase
in demand

movement
- move within the demand curve

Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0

Quantity of
Ice-Cream
Cones
2007 Thomson South-Western

Shifts in the Demand Curve

Consumer Income
As income increases the demand for a normal good
will increase.
As income increases the demand for an inferior
good will decrease.

2007 Thomson South-Western

Consumer Income Normal Good

Price of IceCream Cone

$3.00

An increase
in income...

2.50
Increase
in demand

2.00
1.50
1.00
0.50

D1
0 1

2 3 4 5 6 7 8 9 10 11 12

D2
Quantity of
Ice-Cream
Cones
2007 Thomson South-Western

Consumer Income Inferior Good

Price of IceCream Cone

$3.00
2.50

An increase
in income...

2.00
Decrease
in demand

1.50
1.00
0.50

D2
0 1

D1

2 3 4 5 6 7 8 9 10 11 12

Quantity of
Ice-Cream
Cones
2007 Thomson South-Western

Shifts in the Demand Curve

Prices of Related Goods
When a fall in the price of one good reduces the
demand for another good, the two goods are called
substitutes. can use either one
- starbuck or coffee bean
When a fall in the price of one good increases the
demand for another good, the two goods are called
use together
complements. must
- car and petrol

2007 Thomson South-Western

very important

Table 1 Variables That Influence Buyers

2007 Thomson South-Western

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. price increase, supply increase

2007 Thomson South-Western

The Supply Curve: The Relationship

between Price and Quantity Supplied
Supply Schedule
The supply schedule is a table that shows the
relationship between the price of the good and the
quantity supplied.

2007 Thomson South-Western

Beng Huats Supply Schedule

2011
Cengage
2007
ThomsonSouth-Western
South-Western

The Supply Curve: The Relationship

between Price and Quantity Supplied
Supply Curve
The supply curve is the graph of the relationship
between the price of a good and the quantity
supplied.

2007 Thomson South-Western

Figure 5 Beng Huats Supply Schedule

and Supply Curve
Price of
Ice-Cream
Cone
RM3.00
1. An
increase
in price ...

2.50
2.00
1.50
1.00
0.50

9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity of cones supplied.

1 2

2011 Cengage South-Western

2007 Thomson South-Western

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.

2007 Thomson South-Western

Shifts in the Supply Curve

Input prices material and labour

Technology better technology, produce more
expected going up, buying increase, supply decrease
Expectations markets
until price increased
Number of sellers

2007 Thomson South-Western

Shifts in the Supply Curve

Change in Quantity Supplied
Movement along the supply curve.
Caused by a change in anything that alters the
quantity supplied at each price.

2007 Thomson South-Western

Change in Quantity Supplied

Price of IceCream
Cone

S
C

$3.00

A rise in the price

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

1.00

Quantity of
Ice-Cream
Cones
2007 Thomson South-Western

Shifts in the Supply Curve

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.

2007 Thomson South-Western

Figure 7 Shifts in the Supply Curve

Price of
Ice-Cream
Cone

Supply curve, S3

Decrease
in supply

Supply
curve, S1

Supply
curve, S2

Increase
in supply

Quantity of
Ice-Cream Cones
2007 Thomson South-Western

very important

Table 2: Variables That Influence Sellers

2007 Thomson South-Western

SUPPLY AND DEMAND TOGETHER

Equilibrium refers to a situation in which the
price has reached the level where quantity
supplied equals quantity demanded.
-where supply and demand meet together

2007 Thomson South-Western

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.
2007 Thomson South-Western

SUPPLY AND DEMAND TOGETHER

Demand Schedule

Supply Schedule

At RM2, the quantity demanded is

equal to the quantity supplied!
2007 Thomson South-Western

Figure 8 The Equilibrium of Supply and Demand

important

Price of
Ice-Cream
Cone

Supply

Equilibrium

Equilibrium price
$2.00

Equilibrium
quantity
0

Demand

9 10 11 12 13
Quantity of Ice-Cream Cones
2007 Thomson South-Western

Equilibrium
Surplus
When price > equilibrium price, then quantity
supplied > quantity demanded.
demand drop

There is excess supply or a surplus.

Suppliers will lower the price to increase sales, thereby
moving toward equilibrium.

2007 Thomson South-Western

Figure 9 Markets Not in Equilibrium

(a) Excess Supply
Price of
Ice-Cream
Cone

Supply
Surplus

$2.50
2.00

Demand

4
Quantity
demanded

10
Quantity
supplied

Quantity of
Ice-Cream
Cones
2007 Thomson South-Western

Equilibrium
Shortage
When price < equilibrium price, then quantity
demanded > the quantity
supplied.
supply limited
There is excess demand or a shortage.
Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward
equilibrium.
only need to know how to draw the graph

2007 Thomson South-Western

Figure 9 Markets Not in Equilibrium

(b) Excess Demand
Price of
Ice-Cream
Cone

Supply

$2.00
1.50
Shortage
Demand

4
Quantity
supplied

10
Quantity of
Quantity
Ice-Cream
demanded
Cones
2007 Thomson South-Western

Equilibrium
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 balance.

2007 Thomson South-Western

very important

Table 3: Three Steps for Analyzing Changes in Equilibrium

2007 Thomson South-Western

Figure 10 How an Increase in Demand Affects the Equilibrium

Price of
Ice-Cream
Cone

1. Hot weather increases

the demand for ice cream . . .

Supply
New equilibrium

$2.50
2.00
2. . . . resulting
in a higher
price . . .

Initial
equilibrium
D
D
0

7
3. . . . and a higher
quantity sold.

10

Quantity of
Ice-Cream Cones
2007 Thomson South-Western

Three Steps to Analyzing Changes in

Equilibrium
Shifts in Curves versus Movements along
Curves
A shift in the supply curve is called a change in
supply.
A movement along a fixed supply curve is called a
change in quantity supplied.
A shift in the demand curve is called a change in
demand.
A movement along a fixed demand curve is called a
change in quantity demanded.
2007 Thomson South-Western

Figure 11 How a Decrease in Supply Affects the Equilibrium

Price of
Ice-Cream
Cone
S2

1. An increase in the
price of sugar reduces
the supply of ice cream. . .
S1

New
equilibrium

$2.50

Initial equilibrium

2.00
2. . . . resulting
in a higher
price of ice
cream . . .

Demand

7
3. . . . and a lower
quantity sold.

Quantity of
Ice-Cream Cones
2007 Thomson South-Western

important - must memorize

Table 4: What Happens to Price and Quantity When Supply

or Demand Shifts?

2007 Thomson South-Western

Summary
Economists use the model of supply and
demand to analyze competitive markets.
In a competitive market, there are many buyers
and sellers, each of whom has little or no
influence on the market price.

2007 Thomson South-Western

Summary
The demand curve shows how the quantity of a
good depends upon the price.
According to the law of demand, as the price of a good
falls, the quantity demanded rises. Therefore, the demand
curve slopes downward.
In addition to price, other determinants of how much
consumers want to buy include income, the prices of
complements and substitutes, tastes, expectations, and the
number of buyers.
If one of these factors changes, the demand curve shifts.

2007 Thomson South-Western

Summary
The supply curve shows how the quantity of a
good supplied depends upon the price.
According to the law of supply, as the price of a good rises,
the quantity supplied rises. Therefore, the supply curve
slopes upward.
In addition to price, other determinants of how much
producers want to sell include input prices, technology,
expectations, and the number of sellers.
If one of these factors changes, the supply curve shifts.

2007 Thomson South-Western

Summary
Market equilibrium is determined by the
intersection of the supply and demand curves.
At the equilibrium price, the quantity
demanded equals the quantity supplied.
The behavior of buyers and sellers naturally
drives markets toward their equilibrium.

2007 Thomson South-Western

Summary
To analyze how any event influences a market,
we use the supply-and-demand diagram to
examine how the event affects the equilibrium
price and quantity.
In market economics, prices are the signals
that guide economic decisions and thereby
allocate resources.

2007 Thomson South-Western