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SUPPLY AND DEMAND I: HOW MARKETS WORK
The Market Forces of Supply and
Demand
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Learning Targets:
What is a demand curve?
What factors can cause demand for a product to change?
What is the difference between a change in demand and a
change in quantity demanded?
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Figure 1 Catherine’s Demand Schedule and
Demand Curve
What happens to the
quantity demanded as the
price moves lower from
$2 to $1.50?
Why is the demand curve
downward sloping?
Quantity
demanded
increases
from 4 to 6
ice cream
cones.
The Law of Demand- As price
increases, demand decreases.
Price inversely proportional to
demand.
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Figure 2 Market Demand as the Sum of Individual
Demands
Just add each of the demand schedules together to get the
demand schedule for the entire market.
Catherine’s demand + Nicholas’ demand = Total Market
Demand
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Figure 3 Shifts in the Demand Curve
Sometimes the demand for a product
changes.
If for some reason
the demand for a
product is reduced.
Less quantity of the
product is
demanded at every
price level.
Therefore the
demand curve
shifts left.
If demand for a product
increases, the demand
curve shifts right.
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Table 1 Variables That Influence Buyers
what might cause demand CURVE for a
product to change?
**Income affects “normal goods” the opposite of “inferior goods.”
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Changes in the income level of buyers can cause different
changes in the demand curve for different types of goods.
Normal Goods
Demand is Directly Proportional to changes in income of
buyers.
ie – Abercrombie (Normal Good)–
An increase in buyers’ income should cause an
increase in demand for Abercrombie products.
Inferior Goods
Demand is Inversely Proportional to changes in income
of buyers.
ie- TJ Maxx (Inferior Good)
An increase in buyers’ income should cause a
decrease in demand for TJ Maxx products.
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Related Goods can be Substitutes or Compliments
Substitutes
Changes in demand for a specific good affects demand for its
substitutes in the opposite way. (Inversely proportional)
For example: Coke and Pepsi are substitutes.
If the demand for Coke increases the demand for Pepsi will
decrease.
Compliments
Changes in demand for a specific good affects the demand for
its complimentary goods in the same way. (Directly
proportional)
For example: Popcorn and butter are complimentary goods
If the price of tickets to the movies drops, demand for popcorn
increases.
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Figure 4 Shifts in the Demand Curve versus
Movements along the Demand Curve
“Ceteris Paribus” – “All else being equal”
Change
Demand
Change
Quantity
Demanded
If the government wanted to reduce demand for cigarettes they
could do it in different ways. They could change the “quantity
demanded” or change demand.
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Do you know demand?
Read the following headlines and decide if the
event will cause a change in the demand for
BEEF
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Figure 5 Ben’s Supply Schedule and Supply Curve
Why does the supply curve
slope upward?
Law of Supply: As price increases,
quantity supplied increases.
Price is directly proportional to
quantity supplied.
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Figure 6 Market Supply as the Sum of Individual
Supplies
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Figure 6 Market Supply as the Sum of Individual
Supplies
Total market supply curve is the sum of individual
supply curves.
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Figure 7 Shifts in the Supply Curve
The Supply
curve can shift,
just like the
demand curve.
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Table 2 Variables That Influence Sellers
What can cause supply CURVE to change?
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Figure 8 The Equilibrium of Supply and Demand
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Figure 9 Markets Not in Equilibrium
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Table 3 The Three-Step Program for Analyzing
Changes in Equilibrium
Keep in Mind:
“Ceteris Paribus”- “All other things
remaining the same.”
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Figure 10 How an Increase in Demand Affects the
Equilibrium
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Figure 11 How a Decrease in Supply Affects the
Equilibrium
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How
a few practice
problems.
Figureabout
8 The Equilibrium
of Supply
and Demand
New equilibrium price is lower and equilibrium
quantity is lower
Salmonella outbreak, customers eat at home.
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Figure
The Equilibrium
Cost of8Milk
doubles. of Supply and Demand
New equilibrium price is higher and quantity is lower
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Figure
8 The
Equilibrium
of Supply and Demand
Heat wave
hits
the region.
New equilibrium price is higher and quantity is higher.
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Figure
8 The
Equilibrium
of Supply
and Demand
New ice
cream
shop opens
next door.
New equilibrium price is lower and equilibrium quantity is
higher.
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Figure
8 The
Equilibrium
Landlord
raises
the rent. of Supply and Demand
New equilibrium price is higher and quantity is lower.
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Steep price
causes
quantity
Figure
8 Theincrease
Equilibrium
of Supply
and Demand
demanded to decrease.
Price is the only thing that changed. Neither curve
moved, but quantity demanded decreased, because price
is higher.
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Figure
8 The
Equilibrium
of Supply
Wendy’s
begins
selling Frosties
forand
50 Demand
cents.
Wendy’s Frosty is a substitute for ice cream cones, so the
new equilibrium price is lower and quantity is lower (for
ice cream cones).
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Figure
8 The
Equilibrium
of the
Supply
and Demand
The State
of Illinois
raises
minimum
wage.
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Figure 12 A Shift in Both Supply and Demand
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Table 4 What Happens to Price and Quantity
When Supply or Demand Shifts?
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