Lecture Notes: Econ 203 Introductory Microeconomics
Lecture/Chapter 4: Market forces of supply and demand
M. Cary Leahey
Manhattan College
Fall 2012
Goals
•
•
•
•
•
Explain markets and the underlyig simplifying assumptions
Explain the two blades of the Marshallian scissors
supply and demand
Movements off and along the curves
Market equilibrium and why it holds
2
Markets and assumptions behind them
• Market is a group of buyers and sellers (of a particular product).
• Competitive market is one with many (infinite?) number of buyers
and sellers (atomistic).
•
Price is given so everyone is a price taker.
•
Homogenous goods (all same in quality).
• When in doubt, economists assume perfect (pure) competition.
• How realistic: is ice cream really homogeneous?
• Assumptions sure make life easier!
3
Demand
• Quantity demanded is the amount of the good buyers are willing and
able to purchase.
• Law of demand: quantity demanded is inversely related to the goods
(relative) price. If (relative) price goes up, demand goes down.
• The demand schedule: the relationship (table/graph) of quantity
demanded and price of the good.
4
Example: Demand Schedule & Curve
Price of
Javas
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
0
5
10
Price
of javas
Quantity
of javas
demanded
$0.00
1.00
2.00
3.00
4.00
5.00
6.00
16
14
12
10
8
6
4
Quantity
15 of Javas
Demand curve – shifts of the curve and movements along the curve
• The demand curve (or schedule) shows how price affects quantity
demands, other things being equal (ceteris paribus).
• Other things are non-price considerations such as tastes, etc.
• Changes in non-price considerations shift the demand curve.
• Some examples of non-price factors:
•
Changing the number of buyers
•
Changing income (non-inferior or normal goods; margarine/butter)
•
Changing prices of related goods-substitutes or complements
•
Substitutes – increasing price of x, increases demand for y.
•
Complements - increasing price of x, decreases demand for y.
•
Changing tastes/expectations
6
Summary of demand influences
• Variable
• Price
•
•
•
•
•
A change in this variable means
causes a movement along the D curve
Increase buyers
Income
Price of related goods
Tastes
Expectations
shifts the D curve
shifts the D curve
shifts the D curve
shifts the D curve
shifts the D curve
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Supply
• Quantity supplied of any good is the amount that sellers willing and
able to sell.
• Law of supply: quantity supplied is positively related to the goods
(relative) price. If (relative) price goes up, supply goes up.
• The supply schedule: the relationship (table/graph) of quantity
supplied and price of the good.
8
Supply Schedule & Curve
P
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
Q
0
5
10
15
Price
of javas
Quantity
of javas
supplied
$0.00
1.00
2.00
3.00
4.00
5.00
6.00
0
3
6
9
12
15
18
Supply curve – shifts of the curve and movements along the curve
• The demand curve (or schedule) shows how price affects quantity
supplied, other things being equal (ceteris paribus).
• Other things are non-price considerations such as tastes, etc.
• Changes in non-price considerations shift the supply curve.
• Some examples of non-price factors:
•
Changing number of sellers
•
Changing the input prices: materials, labor, capital.
•
Changing technology – technological progress.
•
Changing tastes/expectations
10
Summary of supply influences
• Variable
• Price
•
•
•
•
•
Increase sellers
Input prices
Technology
Tastes
Expectations
A change in this variable means
causes a movement along the S curve
shifts the S curve
shifts the S curve
shifts the S curve
shifts the S curve
shifts the S curve
11
Equilibrium – supply and demand together
• Equilibrium has been reached when quantity demanded and
supplied are equal.
• Equilibrium price is the price that equates demand and supply.
• Almost a tautology as movements along the two curves eventually
returns to equilibrium, after trial and error
12
Surplus (excess supply), when quantity supplied is
greater than quantity demanded
P
$6.00
D
Surplus
S
$5.00
Example:
If P = $5,
then
QD = 9 javas
$4.00
and
QS = 25 javas
$3.00
$2.00
resulting in a
surplus of 16 javas
$1.00
$0.00
Q
0
5
10 15 20 25 30 35
Supply shortage (excess demand), when quantity
demanded is greater than quantity supplied
P
$6.00
S
D
$5.00
Facing a shortage,
sellers raise the price,
causing QD to fall
and QS to rise,
…which reduces the
shortage.
$4.00
$3.00
$2.00
$1.00
Shortage
$0.00
Q
0
5
10 15 20 25 30 35
How to analyze changes in market equilibrium
•
•
•
•
Decide if event shifts S, D curve or both
Decide which direction the curve(s) shift
Use equilibrium diagram to see how shift changes P and Q.
The ultimate changes in P and Q depend on the relative slopes of
the curves and the elasticity (sensitivity) of supply and demand to
price, something we will look at later in the course.
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Terms for Shift vs. Movement Along Curve
 Change in supply: a shift in the S curve occurs when a non-price
determinant of supply changes (like technology or costs)
 Change in the quantity supplied: a movement along a fixed S
curve occurs when P changes
 Change in demand: a shift in the D 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 D
curve occurs when P changes
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16
How prices allocate resources
• In market economies, prices adjust supply and demand.
• Prices are signals that guide economic decisionmaking and allocate
(scarce) resources.
17
Summary
• Competitive (pure/atomistic) market – many buyers and sellers,
each of whom has no influence on prices. They are price takers.
• Supply and demand curves are simplifying tools (models) used to
study markets.
• Demand curve is downward sloping, as price is inversely related to
quantity demanded.
• Supply curve is upward sloping, as prices in positively related to
quantity supplied.
• Prices move along the curve; other factors shift the curves.
• The intersection of supply and demand determines the equilibrium
price.
• To analyze impacts on markets, see if the example studied sifts
supply, demand or both. Examine the relative shifts in the curve and
where the new equilibrium plays out and is compared to the old one.
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