Econ 200 – Mankiw
Pasita Chaijaroen
Chapter 4: Market Forces: Supply and Demand
Markets and Competition
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Market: a group of buyers and sellers of a particular good or service
Competitive market: a market in which there are many buyers and sellers so that each has a
negligible impact on market price
o We assume that market is perfectly competitive in this chapter.
 Goods must be all the same
 There must be numerous buyers and sellers, so each buyer or seller is a price
taker.
 Example: markets of some agricultural products such as rice, corn.
 Counter examples: cable service, space companies that are NASA’s
suppliers.
 Counter examples: do you think clothing is a perfectly competitive
market? Many buyers and many sellers but goods are not all the same.
Demand
<ask for two volunteers and ask him how many notebooks he would buy given different prices, repeat
with another volunteer. Make it blind test. Make a table.>
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Demand schedule: a table that shows the relationship between the price of a good and the
quantity demanded. <don’t have to write down defn, just show them what it is>
Quantity demanded: the amount of a good that buyers are willing and able to purchase
Demand curve: a graph of the relationship between price of a good and the quantity
demanded. <draw a demand curve>
Law of demand: other things being equal, the quantity demanded of a good falls when the
price of the good rises.
Market demand: What is the total quantity demanded at a given price?
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a sum of individuals’ quantities demanded – horizontal sum. <draw second person’s demand
curve and show how to sum both in the schedule and the graph>
Shifts in the Demand Curve
When we draw a demand curve, we assume that other things but price and quantity are held constant.
Demand curve just tells you how quantity demanded responses to changes in price. When price falls,
Econ 200 – Mankiw
Pasita Chaijaroen
quantity demanded rises, and vice versa. We move along the demand curve when price or quantity
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Q
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changes.
Shifts in the demand curve happens when other things than price change.
Increase in demand – demand curve shifts outward. More quantity demanded at any given price.
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D_0
Q
Decrease in demand – demand curve shifts inward. Less quantity demanded at any given price.
P
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D_0
Q
Econ 200 – Mankiw
Pasita Chaijaroen
Factors that shift demand curve include
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Income: increase in income increases demand in general
o Example: would you buy more or less clothes if you get a pay raise?
o Example: would you buy more or less Top Ramen if you get a pay raise?
o Normal good: demand increases when income increases <draw graph side by side with
inferior good>
 most goods are normal goods
o
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Inferior good: demand decreases when income increases
 Example: Top Ramen, bus service, economy class plane ticket (in some income
ranges)
Price of substitutes
o Substitutes are two goods that are usually used in place of each other.
o When price of a substitute increases, demand for a good increases, and vice versa.
o Example: when price of tea increases, people tend to consume more coffee. The
demand for coffee increases. <draw graph>
Price of complements
o Complements are usually two goods that are used together.
o When price of a complement increases, demand for a good decreases, and vice versa.
o Example: when price of creamer increases, people may consume less coffee. The
demand for coffee decreases.
Tastes and preferences: if you like something, you buy more of it.
Expectation:
o Example: if you expect price of gas to increase next week, you fill you tank now.
o Example: if you expect an increase in income, you buy more clothes now.
Econ 200 – Mankiw
Factors
Price of a good
Income
Pasita Chaijaroen
Changes in demand curve
Movements along the curve
Shifts
What happens when that factor increases…
Quantity demanded falls along the demand curve
Normal good: demand increases
Inferior good: demand decreases
Price of other goods
Shifts
Substitutes: demand increases
Complements: demand decreases
Expectations
Shifts
various effects
**** When factors that are listed on the axis change, you move along the curve. When all other factors
change, you shift the curve.
Example: show what happens to the demand curve of iPhone 5 when iPhone 6 is launched
Example: show what happens to the demand curve of gas when gas price increases
Exercise: how to reduce traffic on I-90? – Goal: reduce quantity demanded for I-90
1. Try to move up along the demand curve. <draw graph>
a. Collect toll
2. Try to shift demand for I-90 inward. <draw graph>
a. Increase number of buses or reduce bus fares - substitutes
b. Make 520 cheaper - substitutes
c. Make cars more expensive - complements
Supply
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Quantity supplied: the amount of a good that sellers are willing and able to sell
Law of supply: other things being equal, the quantity supplied of a good rises when the price of
the good rises
o Higher price means higher profit. Some sellers might shut down at very low prices.
Supply curve: a graph of the relationship between the price of a good and the quantity supplied
Price of notebook
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Company A
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Company B
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Market
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Econ 200 – Mankiw
Pasita Chaijaroen
<draw supply curves for A based on this supply schedule>
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Market supply curve: a relationship between total quantity supplied by all sellers and price <Ask
them to draw B’s supply curve. Ask them to calculate market supply in the table and graph it.>
Shifts in Supply Curve
 Supply curve is drawn holding everything but price constant.
o When price changes, we move along the supply curve.
o
When other things change, we shift the supply curve.
Factors that shift supply curve:
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Input prices: When input price increases, profit declines. Therefore, a firm supplies less. If input
price rises significantly, a firm might not stay in business.
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Technology: Technology makes turning inputs into an output easier, so an introduction of a new
techonology increases supply.
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Expectations: A supply today may depend on expectation about the futures. For example, if a
rice farmer expects a fall in rice price next season, he might grow less rice for next season.
Econ 200 – Mankiw

Pasita Chaijaroen
Number of sellers: Market supply depends on number of sellers.
**** When factors that are listed on the axis change, you move along the curve. When all other factors
change, you shift the curve.
Factors
Price of a good
Input prices
Technology
Expectations
Number of sellers
Changes in supply curve
Movements along the curve
Shifts
Shifts
Shifts
Shifts
What happens when that factor increases…
Quantity supplied increases along the supply curve
Supply decreases
Supply increases
various effects
Supply increases
Example: what happens to the supply curve of oranges if a new harvesting machine is introduced?
Exercise: what happens to a supply curve of oranges if there is a flood in California?
Supply and Demand Together
Equilibrium
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Market equilibrium is where supply and demand curves intersect. The price at this intersection
is the equilibrium price and the quantity here is the equilibrium quantity.
o At the equilibrium price, the quantity of the good that buyers are willing and able to buy
exactly balances the quantity of the good that sellers are willing and able to sell.
o Quantity demanded is equal to quantity supplied.
Econ 200 – Mankiw
Pasita Chaijaroen

Surplus (or excess supply): quantity supplied is greater than quantity demanded
o happens when market price is higher than equilibrium price
o Seller then reduces production, so we move down along the supply curve. This results in
a fall in market price, so quantity demanded decreases. This process continues until
market equilibrium is reached. At the equilibrium, neither the seller nor the buyer has
an incentive to change.
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Shortage (or excess demand): quantity demanded is greater than quantity supplied
o happens when market price is lower than equilibrium price
o Sellers can increase the price without losing sales. An increase in price reduces quantity
demanded. We have movements along the supply and demand curves until we reach
the market equilibrium.
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.
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Numerical example: (find eqbm price and quantity, find shortage, explain how market adjusts to reach
eqbm again)
Econ 200 – Mankiw
Three Steps to Analyzing Changes in Equilibrium
1. Which curve(s) shift(s)?
2. In which direction?
3. Use the supply and demand diagram to see how price and quantity adjust.
Example <of a shift in demand curve>
What happens in the market of iPhone 5 cases when iPhone 6 is launched?
1. Demand must change
Pasita Chaijaroen
Econ 200 – Mankiw
Pasita Chaijaroen
2. An decrease in demand >> demand curve shifts inward (quantity demanded decreases at every
price)
3. At the old price, there is now surplus. >> Sellers lower the price >> quantity demanded increases
>> market adjusts to a new equilibrium where equilibrium price and quantity are lower.
Note that
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iPhone 6 is a substitute for iPhone 5, but cases are complements to the phones.
An introduction of iPhone 6 shifts the demand curve for iPhone 5 cases because it is not a
change in either price or quantity of iPhone 5 cases. This shift is called a change in demand.
When seller lowers the price of iPhone 5 cases, we then have a movement along the demand
curve for iPhone 5 cases. This is called a change in quantity demanded.
Example <of a shift in supply curve>
What happens in a market for shirts when cotton price decreases?
1. Supply must change.
2. An increase in supply >> supply curve shifts rightward
3. At the old price, there is now surplus. >> Sellers lower the price >> quantity demanded increases
>> market adjusts to a new equilibrium where eqbm price is lower but eqbm quantity is larger.
Example <of shifts in both supply and demand curve>
What happens in the market of of iPhone 5 cases when iPhone 6 is launched and silicone becomes more
expensive?
Econ 200 – Mankiw
Pasita Chaijaroen
1. Both supply and demand change.
2. An decrease in demand >> demand curve shifts inward. Also, input price increases so we have a
decrease in supply >> supply curve shifts leftward.
3. New eqbm price and quantity may increase or decrease depending on the magnitudes of the
shifts.
Exercise: We know that there are changes in the market of oranges. We observe higher equilibrium
price but the same equilibrium quantity. What must have happened to supply and demand? Give
examples of factors that might have caused those changes.
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Increase in demand: higher income, higher price of substitutes, lower price of complements
Increase in supply: favorable weather condition, new technology, lower fertilizer price
Experiment: Assume that this is a magic notebook that would disappear in one year. For each of the
prices below, how many notebooks do you want to buy?
Price of a notebook
$0.1
$1
$2
$3
$8
How many do you want to buy?