ECON-UA 1 INTRODUCTION TO MACROECONOMICS CHAPTER 04 HANDOUT
DR. ANDREW PAIZIS - NYU
N. GREGORY MANKIW
NINTH EDITION
BRIEF PRINCIPLES OF
• What factors affect buyers’ demand for
goods?
• What factors affect sellers’ supply of goods?
• How do supply and demand determine the
price of a good and the quantity sold?
• How do changes in the factors that affect
demand or supply affect the market price and
quantity of a good?
• How do markets allocate resources?
MACRO
ECONOMICS
CHAPTER
4
The Market Forces
of Supply and Demand
Interactive PowerPoint Slides by:
V. Andreea Chiritescu
Eastern Illinois University
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1
Markets and Competition
IN THIS CHAPTER
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
2
Markets and Competition
• Market
• Competitive market
– Many buyers and many sellers, each has a
negligible impact on market price
– A group of buyers and sellers of a
particular good or service
• Perfectly competitive market
– Buyers as a group
– All goods are exactly the same
– Price takers: so many buyers and sellers
that no one can affect the market price
– At the market price, buyers can buy all they
want, and sellers can sell all they want
• Determine the demand for the product
– Sellers as a group
• Determine the supply of the product
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
3
Demand
4
Demand Schedule and Demand Curve
• Quantity demanded
• Demand schedule:
– Amount of a good that buyers are willing
and able to purchase
− A table that shows the relationship
between the price of a good and the
quantity demanded
• Law of demand
– Other things equal
– When the price of a good rises, the
quantity demanded of the good falls
– When the price falls, the quantity
demanded rises
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
• Demand curve
− A graph of the relationship between the
price of a good and the quantity
demanded
5
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6
1
ECON-UA 1 INTRODUCTION TO MACROECONOMICS CHAPTER 04 HANDOUT
DR. ANDREW PAIZIS - NYU
EXAMPLE 1A: Sofia’s demand for muffins
Sofia’s demand
schedule for muffins
Price
of
muffins
Quantity
of muffins
demanded
$0.00
16
1.00
14
2.00
12
3.00
10
4.00
8
5.00
6
6.00
4
− Notice that Sofia’s
preferences obey the
law of demand.
EXAMPLE 1B: Sofia’s demand schedule and
demand curve
Price
Quantity
Price of
Muffins
of
of muffins
muffins demanded
$6.00
$5.00
$0.00
16
$4.00
1.00
14
2.00
12
3.00
10
$2.00
4.00
8
$1.00
5.00
6
6.00
4
A decrease
in price…
$3.00
$0.00
0
5
Quantity of
15 Muffins
10
… increases the quantity of muffins demanded.
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7
Suppose Sofia and Diego are the only two buyers in
the market for muffins. (Qd = quantity demanded)
• Market demand
– Sum of all individual demands for a good
or service
Price Sofia’s Qd
16
$0.00
14
1.00
12
2.00
10
3.00
8
4.00
6
5.00
4
6.00
– Market demand curve: sum the individual
demand curves horizontally
• To find the total quantity demanded at any
price, we add the individual quantities
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9
EXAMPLE 1D: Market demand curve for muffins
P
$6.00
P
Qd
(Market)
$5.00
$0.00
24
1.00
21
2.00
18
3.00
15
$2.00
4.00
12
$1.00
5.00
9
$0.00
6.00
6
A movement
along the
demand curve
An
increase in
price…
$3.00
0
5
10
15
20
25
Q
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Diego’s Qd
Market Qd
+
8
=
24
+
7
=
21
+
6
=
18
+
5
=
15
+
4
=
12
+
3
=
9
+
2
=
6
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
10
Demand Curve Shifters
• The demand curve
– Shows how price affects quantity
demanded, other things being equal
• These “other things” are non-price
determinants of demand
– Things that determine buyers’ demand for
a good, other than the good’s price
• Changes in them shift the D curve
… decreases the quantity of muffins demanded.
®
8
EXAMPLE 1C: Market vs. individual demand
Market Demand
$4.00
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11
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2
ECON-UA 1 INTRODUCTION TO MACROECONOMICS CHAPTER 04 HANDOUT
DR. ANDREW PAIZIS - NYU
Demand Curve Shifters
Changes in Number of Buyers
• Shifts in the demand curve are caused by
changes in:
• Increase in number of buyers
– Increases the quantity demanded at each
price
– Shifts the demand curve to the right
– Number of buyers
– Income
• Decrease in number of buyers
– Prices of related goods
– Decreases the quantity demanded at each
price
– Shifts the demand curve to the left
– Tastes
– Expectations
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13
EXAMPLE 1E: Demand curve shifts
P
• Then, at each P, Qd
will increase (by 5 in
this example).
• The demand curve
shifts to the right
$5.00
$4.00
$3.00
$2.00
0
5
10
15
20
25
30
– An increase in income leads to an
increase in demand
– Shifts the demand curve to the right
– An increase in income leads to a decrease
in demand
– Shifts the demand curve to the left
Q
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
• Normal good, other things constant
• Inferior good, other things constant
$1.00
$0.00
15
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Changes in Prices of Related Goods
Changes in Prices of Related Goods
• Two goods are substitutes if
• Two goods are complements if
– An increase in the price of one leads to an
increase in the demand for the other
16
– An increase in the price of one leads to a
decrease in the demand for the other
• Example: pizza and hamburgers
– An increase in the price of pizza increases
demand for hamburgers, shifting hamburger
demand curve to the right
• Other examples:
– Coke and Pepsi, laptops and tablets, movie
streaming and movie theater
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14
Changes in Income
Suppose the number of
buyers increases.
$6.00
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• Example: smartphones and apps
– If price of smartphones rises, people buy
fewer smartphones, and therefore fewer
apps; App demand curve shifts to the left
• Other examples:
– College tuition and textbooks, bagels and
cream cheese, milk and cookies
17
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3
ECON-UA 1 INTRODUCTION TO MACROECONOMICS CHAPTER 04 HANDOUT
DR. ANDREW PAIZIS - NYU
Changes in Tastes
Expectations about the Future
• Tastes
• People expect an increase in income
– Anything that causes a shift in tastes
toward a good will increase demand for
that good and shift its demand curve to
the right
– Example:
– The current demand increases
• People expect higher prices
– The current demand increases
• Example:
– If people expect their incomes to rise
(because they got a promotion at work), their
demand for meals at expensive restaurants
may increase now
• Advertising convinces consumers that
drinking 3 glasses of orange juice a day will
help lower cholesterol: demand for orange
juice increases
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
19
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
20
Summary: variables that influence buyers
Shift vs. Movement Along Curve
• Change in demand:
– A shift in the demand curve
– Occurs when a non-price determinant of
demand changes (like income or number
of buyers)
• Change in the quantity demanded:
– A movement along a fixed demand curve
– Occurs when the price changes
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
21
Supply
22
Supply Schedule and Supply Curve
• Quantity supplied
• Supply schedule:
– Amount of a good
– Sellers are willing and able to sell
− A table that shows the relationship
between the price of a good and the
quantity supplied
• Law of supply
– Other things equal
– When the price of a good rises, the
quantity supplied of the good rises
– When the price falls, the quantity supplied
falls
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
• Supply curve
− A graph of the relationship between the
price of a good and the quantity supplied
23
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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4
ECON-UA 1 INTRODUCTION TO MACROECONOMICS CHAPTER 04 HANDOUT
DR. ANDREW PAIZIS - NYU
EXAMPLE 2A: Starbucks’ supply of muffins
Price
of
muffins
Starbucks’ supply
schedule of muffins
− Notice that Starbucks’
supply schedule obeys
the law of supply
Quantity
of muffins
supplied
EXAMPLE 2B: Starbucks’ supply schedule and
supply curve
Price
Quantity
of
of muffins
muffins supplied
P
$6.00
$0.00
0
1.00
3
2.00
6
3.00
9
$3.00
4.00
12
$2.00
5.00
15
6.00
18
$5.00
$0.00
0
$4.00
1.00
3
2.00
6
3.00
9
4.00
12
$1.00
5.00
15
$0.00
6.00
18
0
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
25
– Sum of the supplies of all sellers of a good
or service
• To find the total quantity supplied at any
price, we add the individual quantities
27
$0.00
$5.00
An
increase in
price…
$4.00
$3.00
A movement
along the
supply curve
QS
0
5
2.00
10
3.00
15
$2.00
4.00
20
$1.00
5.00
25
6.00
30
$0.00
0
5
10 15
20 25
30
35
26
=
=
=
=
=
=
=
Market Qs
0
5
10
15
20
25
30
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28
• The supply curve
(Market)
1.00
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Supply Curve Shifters
EXAMPLE 2D: Market supply curve of muffins
P
Q
Qs
Qs
Price Starbucks
Peet’s
0
$0.00
+
0
3
1.00
+
2
6
2.00
+
4
9
3.00
+
6
12
4.00
+
8
15
5.00
+
10
18
6.00
+
12
– Market supply curve: sum of individual
supply curves horizontally
$6.00
15
Suppose Starbucks and Peet’s Coffee are the only
two sellers in this market. (Qs = quantity supplied)
• Market supply
P
10
EXAMPLE 2C: Market vs. individual supply
Market Supply vs. Individual Supply
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
5
– Shows how price affects quantity supplied,
other things being equal
• These “other things”
– Are non-price determinants of supply
• Changes in them shift the S curve…
Q
… increases the quantity of muffins supplied.
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
29
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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ECON-UA 1 INTRODUCTION TO MACROECONOMICS CHAPTER 04 HANDOUT
DR. ANDREW PAIZIS - NYU
Supply Curve Shifters
Changes in Input Prices
• Shifts in the supply curve are caused by
changes in:
• Examples of input prices
– Wages, prices of raw materials
• A fall in input prices
– Input prices
– Makes production more profitable at each
output price
– Firms supply a larger quantity at each
price: the supply curve shifts to the right
– Supply is negatively related to prices of
inputs
– Technology
– Number of sellers
– Expectations about the future
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
31
EXAMPLE 2E: Changes in input prices
P
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
0
5
10 15
20 25
30
35
• The supply curve
Q shifts to the right
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
33
Changes in Number of Sellers
• Technology
– Determines how much inputs are required
to produce a unit of output
• A cost-saving technological improvement
– Has the same effect as a fall in input
prices
– Shifts the supply curve to the right
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
34
Expectations about Future
• An increase in the number of sellers
• Example: Events in the Middle East lead
to expectations of higher oil prices
– Increases the quantity supplied at each
price
– Shifts the supply curve to the right
– Owners of Texas oil fields reduce supply
now, save some inventory to sell later at
the higher price
– The supply curve shifts left
• A decrease in the number of sellers
– Decreases the quantity supplied at each
price
– Shifts the supply curve to the left
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
32
Changes in Technology
Suppose the price
of oranges falls.
• At each price,
the quantity of
orange juice
supplied will
increase (by 5 in
this example).
$6.00
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
• Sellers may adjust supply* when their
expectations of future prices change
(*If good not perishable)
35
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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6
ECON-UA 1 INTRODUCTION TO MACROECONOMICS CHAPTER 04 HANDOUT
DR. ANDREW PAIZIS - NYU
Summary: variables that influence sellers
Shift vs. Movement Along the Supply
• Change in supply:
– A shift in the supply curve
– Occurs when a non-price determinant of
supply changes (like technology or costs)
• Change in the quantity supplied:
– A movement along a fixed supply curve
– Occurs when the price changes
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
37
Active Learning 2: The supply curve
Price of
apple
juice
P2
P1
S2
39
• At each price, QS
increases.
• The supply curve
shifts to the right
Q2
Quantity of
apple juice
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
• S curve does not shift.
B
Quantity of
apple juice
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
P
D
$6.00
S
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
0
41
40
Supply and demand together
Equilibrium:
• Price has
reached the
level where
quantity
supplied
equals quantity
demanded
• Better technology
reduces production
costs
A
Q1
A
Q2 Q1
Active Learning 2B. Technological advance
S1
• Move down along the
supply curve to a
lower P and lower Q.
S1
P1
A. Grocery stores cut the price of apple juice.
B. A technological advance allows apple juice
to be produced at lower cost.
C. Grocery stores cut the price of orange
juice.
Price of
apple
juice
38
Active Learning 2A. Decrease in price of apple juice
Draw a supply curve for apple juice, S1, and a
point A (P1, Q1) on the supply curve. What
happens to it in each of the following
scenarios? Why?
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
5
10 15 20 25 30 35
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Q
42
7
ECON-UA 1 INTRODUCTION TO MACROECONOMICS CHAPTER 04 HANDOUT
DR. ANDREW PAIZIS - NYU
Supply and demand together
Equilibrium price: price where
Q
D
P
QS
Markets not in equilibrium: surplus
= equilibrium
P
S
$6.00
=
QD
P
QD
QS
$6.00
$5.00
$0
24
0
$5.00
$4.00
1
21
5
$4.00
2
18
10
$3.00
3
15
15
4
12
20
5
9
25
6
6
30
$3.00
$2.00
$1.00
$0.00
0
5
10 15 20 25 30 35
Q
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
D
Surplus
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
0
5
10 15 20 25 30 35
$0.00
0
43
D
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
Shortage
0
5
10 15 20 25 30 35
45
Q
44
Shortage (excess
demand): quantity
S demanded is greater than
quantity supplied
D
$6.00
$5.00
If P = $1,
- then QD = 21 muffins
- and QS = 5 muffins
- Resulting in a
shortage of 16 muffins
$4.00
$3.00
$2.00
$1.00
Shortage
5
10 15 20 25 30 35
Q
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46
Supply and Demand Together
Three steps to analyzing changes in equilibrium:
1. Decide whether the event shifts the supply
curve, the demand curve, or, in some cases,
both curves
2. Decide whether the curve(s) shifts to the right
or to the left
3. Use the supply-and-demand diagram
• Compare the initial and the new
equilibrium
• Effects on equilibrium price and quantity
Q
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
P
0
Facing a shortage,
sellers raise the price,
S
- Causing QD to fall
- and QS to rise,
- …which reduces the
shortage.
– And so on… until
market reaches
equilibrium
$0.00
10 15 20 25 30 35
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
$0.00
Markets not in equilibrium: shortage
P
5
Markets not in equilibrium: shortage
Q
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Surplus (excess supply):
quantity supplied is
S
greater than quantity
demanded
If P = $5,
– then QD = 9 muffins
– and QS = 25 muffins,
– Resulting in a
surplus of 16 muffins
$1.00
Facing a surplus, sellers
try to increase sales by
S cutting the price:
– This causes QD to rise
– and QS to fall…
– …which reduces the
surplus.
– And so on… until
market reaches
equilibrium.
$0.00
Surplus
$2.00
Markets not in equilibrium: surplus
P
D
47
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
48
8
ECON-UA 1 INTRODUCTION TO MACROECONOMICS CHAPTER 04 HANDOUT
DR. ANDREW PAIZIS - NYU
EXAMPLE 3: The market for muffins
EXAMPLE 3A: A shift in demand
P
price of
muffins
EVENT A: Increase in the price of doughnuts.
STEP 1: D curve shifts
S1
P
• muffins and doughnuts
Market
equilibrium
P1
are substitutes.
STEP 2: D shifts right
S1
P2
• Consumers will buy
fewer expensive doughnuts
and switch to muffins.
D1
Q
Q1
STEP 3: Increase in price
quantity of
muffins
49
EXAMPLE 3B: A shift in supply
S2
STEP 1: Both curves shift. P
STEP 2: Both shift
to the right.
• because new technology
reduces production costs
P1
• because lower
P2
production cost makes
production more profitable
at any given price.
STEP 3:
Q rises but the effect
on P is ambiguous:
D1
Q
Q1 Q2
STEP 3: Decrease in price and increase in quantity
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
51
EXAMPLE 3C: A Shift in Both S and D
STEP 3:
Q rises, but the effect
on P is ambiguous:
S1
S1
S2
P2
P1
If demand increases more
than supply, P rises.
D1
Q1
D2
Q2
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Q
52
• “Markets are usually a good way to
organize economic activity”
• In market economies
S2
– Prices adjust to balance supply and
demand
P1
P2
If supply increases more
than demand, P falls.
50
How Prices Allocate Resources
EVENTS: Price of doughnuts rises AND new
technology reduces production costs
P
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
EVENTS: Price of doughnuts rises AND new
technology reduces production costs.
P
STEP 2: S shifts right
Q
Q1 Q2
EXAMPLE 3C: A shift in both S and D
EVENT B: New technology of producing muffins.
S1
D2
D1
and quantity of muffins.
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
STEP 1: S curve shifts
P1
• These equilibrium prices
D1
Q1
D2
Q2
Q
– Are the signals that guide economic
decisions and thereby allocate scarce
resources
53
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
54
9
ECON-UA 1 INTRODUCTION TO MACROECONOMICS CHAPTER 04 HANDOUT
DR. ANDREW PAIZIS - NYU
Active Learning 3: Shifts in supply and demand
Use the three-step method to analyze the
effects of each event on the equilibrium price
and quantity of orange juice.
Event A: A fall in the price of apple juice
Event B: The price of oranges declines
because of an abundant orange
crop.
Event C: Events A and B both occur
simultaneously.
Active Learning 3A. A fall in price of apple juice
The market for orange juice
STEPS:
P
1. D curve shifts
2. D curve shifts left
S1
P1
P2
3. P and Q both fall
D2
D1
Q2 Q1
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
55
Active Learning 3B. Fall in the price of oranges
STEPS:
STEPS:
The market for orange juice
1. Both curves shift
P
(see parts A & B)
S1 S3
2. D shifts left, S shifts
S2
right
P1
3. P falls.
P3
Effect on Q is
ambiguous:
P2
- the fall in demand
D1
D2
reduces Q,
Q
- the increase in supply
Q3 Q1 Q2
increases Q.
P
2. S curve shifts right
S1
S2
P1
P2
3. P falls, Q rises
D1
Q1 Q2
Q
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
56
Active Learning 3C. Events A and B together
The market for orange juice
1. S curve shifts
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Q
57
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
58
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