ECON 1202 Mankiw Chapter 4
Market, Supply, Demand
Market
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Definition: A group of buyers and sellers of a particular good or service.
o Many forms, could be very organized (agriculture committee) or less
organized (candy shops)
o Retail, Stock, Online, Labor
o Buyers determine the demand of a market
o Sellers determine the supply of a market.
Competition
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Definition: A market in which there are so many buyers and sellers that each has a
small impact on the market price.
o Everyone in the market knows that everyone is essentially powerless
o Everything (P&Q) is determined by all buyers and sellers.
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In this chapter, we assume the market is perfectly competitive.
o Goods offered are exactly the same
o Buyers and sellers are numerous, and there is single person that can influence
the market
o They take prices as given, price takers.
o There could be other kinds of markets like monopoly or duopoly, but we
assume perfect competition for now. Easy, and findings apply to other
settings with small tweaks.
Demand
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Quantity Demanded: the amount of goods that buyers are willing to buy, given the
price.
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The Demand Curve: The relationship between Price and Quantity Demanded.
o Law of Demand: Quantity Demanded is negatively related to price. Meaning
if price goes up, quantity demanded goes down, when other things are held
constant.
o When we talk about the relationship between QD and P, we hold everything
else constant.
o Demand Schedule is a table.
Price of Ice Cream Cone
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
o
Quantity of Cones Demanded
12
10
8
6
4
2
0
o
o Demand curve: a graph of the relationship between price and QD.
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
P is on y-axis

QD on x-axis
o
The market demand and individual demand.
o The market demand is the sum of all individual’s demand
o The demand curve is summed horizontally.
o The market demand curve shows how the total quantity demanded of a good
varies with the price of the good, holding constant all other factors that
affect how much consumers want to buy.
o When P changes, we move along the demand curve, because a demand curve
maps out the ENTIRE relationship between QD and P, holding everything
constant.
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What if other things change?
o An increase in demand is represented by a shift of the D curve to the right
o A decrease in demand is represented by a shift of the D curve to the left
o Income

The relationship between income and QD depends on what type of
good the product is.

Normal good. An increase in income leads to an increase in demand.

Inferior good. An increase in income leads to a decrease in demand.
o Prices of related goods

Substitute: two goods for which an increase in the price of one good
leads to an increase in the demand for the other.


McDonald’s and Wendy’s burgers

Public grid electricity or personal solar system

Coca Cola or Pepsi
Complements: two goods for which an increase in the price of one
good leads to a decrease in the demand for the other.

Tennis balls and tennis racquets.

Pencils and erasers.

DVD players and DVDs
o Tastes
o Expectations

Future Income. Positive

Future Price. Positive
o Number of buyers

Positive
Supply
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Quantity supplied is the amount of a good that sellers are willing and able to sell
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Supply: The relationship between price and quantity supplied.
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Law of Supply: Holding everything equal, ceteris paribus, the quantity supplied of a
good rises when the price of the good rises.
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Supply Schedule: Table
Price of Ice Cream Cone
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Quantity of Cones Supplied
0
0
1
2
3
4
5
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Supply Curve: A Graph that represent the relationship between thr price and the QS.
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The Market Supply curve can be found by summing individual supply curves.
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Summed horizontally.
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The market supply curve shows how the total quantity supplied varies as the price of
the good varies.
o Move along the supply curve: P changes
o Shifting the supply curve: other things change
o Increase: shift to the right; Decrease: shift to the left

Input Price: Higher input price means lower supply

Technology: positive

Expectation about future: expect higher price in the future, decrease
current supply

Number of sellers: positive
Combine S and D together
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Equilibrium
o Where D and S intersect.
o Definition: a situation in which the market price has reached the level at
which quantity supplied equals quantity demanded.
o Equilibrium price: the price that balances quantity supplied and quantity
demanded.
o Equilibrium quantity: the QS and QD at the equilibrium price.
o You can also call it “market clearing”
o
o
o Surplus: a situation in which QS>QD, price is too high, excess supply

To combat it, producer lowers the price. Movement along.
o Shortage: a situation in which QD>QS, price is too low, excess demand

To combat it, seller will raise the price. Movement along.
o Law of Supply and Demand: Price of any good adjusts to bring the S and D
into equilibrium.
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Tips on how to analyze
o Determine which curve would move
o Determine whether it is moving along or shifting
o Determine the direction
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Movement along the S/D curve, changes in QS/D
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Shift the S/D curve, changes in S/D
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Example: Very Hot Summer
o Hot summer, more people have cravings for ice creams.
o Effect on the market for ice cream. Does it affect supply or demand?
Demand, because it is a change in taste.
o Demand shifts right
o Higher P, higher Q.
o A change in D will result in QS changed.
o
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Example: Hurricane destroys part of sugarcane crop, higher price for sugar.
o Effect on ice cream market.
o Higher input price, S changes.
o S shifts to the left.
o Higher P, lower Q.
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Example: Hot summer and a hurricane.
o D shifts right
o S shifts left
o P is guaranteed to increase, but you don’t know whether Q would change.
o If D and S shift right
o Q is guaranteed to increase, but you don’t know whether Q would change.
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