Supply-and-Demand-PPT IN APPLIED ECONOMICS

APPLIED ECONOMICS LESSON

1. APPLICATION OF SUPPLY AND
DEMAND

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3. Copyright © 2004 South-Western
The Market Forces of
Supply and Demand

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The Market Forces of Supply and
Demand
•Supply and demand are the two words that
economists use most often.
•Supply and demand are the forces that
make market economies work.
•Modern economics is about supply,
demand, and market equilibrium.

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•A market is a group of buyers and
sellers of a particular good or service.
•
The terms supply and demand refer to
the behaviour of people . . . as they
interact with one another in markets.
MARKETS AND COMPETITION

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MARKETS AND COMPETITION
•Buyers determine demand.
•Sellers determine supply

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Competitive Markets
•A competitive market is a market in
which there are many buyers and sellers
so that each has little impact on the
market price.
•For the purpose of these exercises, it
will be assumed there is perfect
competition.

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•Perfect Competition
•Products are the same
•Numerous buyers and sellers so that each has
no influence over price
•Monopoly
•One seller, and seller controls price
Competition: Perfect and
Otherwise

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DEMAND
•Quantity demanded is the amount of a good
that buyers are willing and able to purchase.
•Law of Demand
The law of demand states that, other things
equal, the quantity demanded of a good
falls when the price of the good rises.

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The Demand Curve: The
Relationship between Price and
Quantity Demanded
•Demand Schedule
•The demand schedule is a table
that shows the relationship
between the price of the good
and the quantity demanded.

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Catherine’s Demand
Schedule

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The Demand Curve:
The Relationship between Price and Quantity
Demanded
•Demand Curve
•The demand curve is a graph of the
relationship between the price of a good
and the quantity demanded.
•EXERCISE – using Catherine’s demand schedule,
put draw a demand curve for Catherine’s ice
cream.
•Does it follow the ‘law of demand’?

13. Figure 1 Catherine’s Demand Schedule and Demand Curve
Copyright © 2004 South-Western
Price of
Ice-Cream Cone
0
2.50
2.00
1.50
1.00
0.50
1234567891011 Quantity of
Ice-Cream Cones
$3.00
12
1. A decrease
in price ...
2. ...increases quantity
of cones demanded.

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Market Demand versus Individual
Demand
•Market demand refers to the sum of all
individual demands for a particular
good or service.
•Graphically, individual demand curves
are summed horizontally to obtain
the market demand curve.

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Movement
in the Demand
Curve

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1. Changes in Quantity
Demanded
•Movement along the
demand curve.
•Caused by a change in the
price of the product.

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0
D
Price of Ice-
Cream
Cones
Quantity of Ice-Cream Cones
A tax that raises
the price of ice-
cream cones
results in a
movement along
the demand
curve.
A
B
8
1.00
$2.0
0
4
Changes in Quantity
Demanded

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Shifts in the Demand Curve – due
to factors other than Price
The demand curve for ice cream shows how much ice
cream people buy at any given price. However, there
are many other factors beyond price that influence
customers’ buying decisions.
•Consumer income
•Prices of related goods(eg frozen yoghurt)
•Tastes (changing due to health reasons)
•Number of buyers (if buyers increase, demand curve
would shift to the right.

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Shifts in the Demand Curve
•Expectations (about the future may affect
Your demand today eg if your income is going
to increase next month, you may be willing to buy more
•Change in Demand
•A shift in the demand curve, either to the left or right.
•Caused by any change that alters the quantity
demanded other than price changes.

20. Figure 3 Shifts in the Demand Curve
Copyright©2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream Cones
Increase
in demand
Decrease
in demand
Demand curve, D
3
Demand
curve, D
1
Demand
curve, D
2
0

21. Table 1 Variables That Influence Buyers

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SUPPLY
•Quantity supplied is the
amount of a good that
sellers are willing and
able to sell.

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LAW OF SUPPLY
•Law of Supply
The law of supply states that, other things equal,
the quantity supplied of a good rises when the
price of the good rises.
(When the price of ice cream is high, selling ice
cream is profitable, so the quantity supplied is
large). When the price of ice cream falls, the
quantity supplied falls as well.

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The Supply Curve: The Relationship
between Price and Quantity Supplied
•Supply Schedule
•The supply schedule is a table
that shows the relationship
between the price of the good
and the quantity supplied.

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Ben’s Supply Schedule

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The Supply Curve: The
Relationship between Price and
Quantity Supplied
•Supply Curve
•The supply curve is the graph of the
relationship between the price of a good and
the quantity supplied.
•EXERCISE – Draw a supply curve for Ben who
supplies ice cream (on the same graph as
Catherine’s demand curve)
•Does the law of supply apply?

27. Figure 5 Ben’s Supply Schedule and Supply Curve
Copyright©2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
0
2.50
2.00
1.50
1.00
1234567891011 Quantity of
Ice-Cream Cones
$3.00
12
0.50
1. An
increase
in price ...
2. ... increases quantity of cones supplied.

28. Copyright © 2004 South-Western
Market Supply versus Individual
Supply
•Market supply refers to the sum of all
individual supplies for all sellers of a
particular good or service.
•Graphically, individual supply curves are
summed horizontally to obtain the
market supply curve.

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Shifts in the Supply Curve (caused by
factors
other than Price)
What influences producers’ decisions
about how much to sell?
•Input prices (raw ingredient prices)
•Technology (mechanisation)
•Expectations (for the future)?

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•Number of sellers
•Change in Quantity Supplied
Movement along the supply curve.
Caused by a change in anything that
alters the quantity supplied.

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1 5
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones0
S
1.00
A
C
$3.0
0
A rise in the
price of ice
cream cones
results in a
movement along
the supply curve.
Change in Quantity
Supplied

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Shifts in the Supply Curve
•Change in Supply
•A shift in the supply curve,
either to the left or right.
•Caused by a change in a
determinant other than price.

33. Figure 7 Shifts in the Supply Curve
Copyright©2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream Cones
0
Increase
in supply
Decrease
in supply
Supply curve, S
3
curve,
Supply
S
1
Supply
curve, S
2

34. Table 2 Variables That Influence Sellers

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SUPPLY AND DEMAND
TOGETHER
•Equilibrium refers to a
situation in which the price has
reached the level where
quantity supplied equals
quantity demanded.

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•Equilibrium Price
•The price that balances quantity
supplied and quantity demanded.
•On a graph, it is the price at which the
supply and demand curves meet.

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•Equilibrium Quantity
•The quantity supplied and the quantity
demanded at the equilibrium price.
•On a graph it is the quantity at which
the supply and demand curves meet.

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At $2.00, the quantity demanded is
equal to the quantity supplied!
SUPPLY AND DEMAND
TOGETHER
Demand Schedule Supply Schedule

39. Figure 8 The Equilibrium of Supply and Demand
Copyright©2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
0123456789101112
Quantity of Ice-Cream Cones
13
Equilibrium
quantity
Equilibrium price
Equilibrium
Supply
Demand
$2.00

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The claim that the price of any
good adjusts to bring the
quantity supplied and the
quantity demanded for that
good into balance
Law of Supply and
Demand

41. Figure 10 How an Increase in Demand Affects the
Equilibrium
Copyright©2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
0 Quantity of
Ice-Cream Cones
Supply
Initial
equilibrium
D
D
3. . . . and a higher
quantity sold.
2. . . . resulting
in a higher
price . . .
1. Hot weather increases
the demand for ice cream . . .
2.00
7
New equilibrium$2.50
10

42. Copyright © 2004 South-Western
Shifts in Curves versus Movements
along Curves
•A shift in the supply curve is called a change in supply.
•A movement along a fixed supply curve is called a
change in quantity supplied.
•A shift in the demand curve is called a change in
demand.
•A movement along a fixed demand curve is called a
change in quantity demanded.

43. Figure 11 How a Decrease in Supply Affects
the Equilibrium
Copyright©2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
0 Quantity of
Ice-Cream Cones
Demand
New
equilibrium
Initial equilibrium
S
1
S
2
2. . . . resulting
in a higher
price of ice
cream . . .
1. An increase in the
price of sugar reduces
the supply of ice cream. . .
3. . . . and a lower
quantity sold.
2.00
7
$2.50
4

44. Table 4 What Happens to Price and Quantity When Supply or Demand
Shifts?

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Summary
•Economists use the model of supply and
demand to analyze competitive markets.
•In a competitive market, there are many
buyers and sellers, each of whom has
little or no influence on the market price.

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Summary
•The demand curve shows how the quantity of a good depends
upon the price.
•According to the law of demand, as the price of a good falls, the
quantity demanded rises. Therefore, the demand curve slopes
downward.
•In addition to price, other determinants of how much consumers
want to buy include income, the prices of complements and
substitutes, tastes, expectations, and the number of buyers.
•If one of these factors changes, the demand curve shifts.

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Summary
•The supply curve shows how the quantity of a
good supplied depends upon the price.
•According to the law of supply, as the price of a good rises, the
quantity supplied rises. Therefore, the supply curve slopes
upward.
•In addition to price, other determinants of how much producers
want to sell include input prices, technology, expectations, and
the number of sellers.
•If one of these factors changes, the supply curve shifts.

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Summary
•Market equilibrium is determined by the
intersection of the supply and demand curves.
•At the equilibrium price, the quantity
demanded equals the quantity supplied.
•The behavior of buyers and sellers naturally
drives markets toward their equilibrium.

49. Copyright © 2004 South-Western
Summary
•To analyze how any event influences a
market, we use the supply-and-demand
diagram to examine how the even affects the
equilibrium price and quantity.
•In market economies, prices are the signals
that guide economic decisions and thereby
allocate resources.

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