THE MARKET

FORCES OF SUPPLY
AND DEMAND
Chapter 4

Copyright 2014 by Nelson Education Ltd.

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Learning Outcomes
# 4. Explain the key features of competitive
markets.
# 5. Use the supply and demand model to
illustrate and predict the impact of changes in the
economic environment on equilibrium market
prices and quantities.

Copyright 2014 by Nelson Education Ltd.

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Learning Objectives
What is a competitive market?
What determines the demand and supply of a good in
a competitive market?
How supply and demand together set equilibrium
Price and Quantity in the market?
What is the role of prices in allocating scarce
resources in market economies?

Copyright 2014 by Nelson Education Ltd.

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Markets and Competition

Market: a group of buyers and sellers of a particular
good or service.
Competitive market: a market in which there are
many buyers and many sellers so that each has a
negligible impact on the market price.
Characteristics of a Perfectly Competitive Market:
1.Many sellers and buyers
2.Goods are identical.
Copyright 2014 by Nelson Education Ltd.

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DEMAND
Quantity demanded: the amount of a good that
buyers are willing and able to purchase
Law of demand: the claim that, other things equal,
the quantity demanded of a good falls when the price
of the good rises
Demand schedule: a table that shows the relationship
between the price of a good and the quantity
demanded
Demand curve: a graph of the relationship between
the price of a good and the quantity demanded
Copyright 2014 by Nelson Education Ltd.

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FIGURE 4.1:

Catherines Demand Schedule and Demand Curve

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FIGURE 4.2:
Market Demand
Market demand: The sum of all the individual demands
for a particular good or service

Copyright 2014 by Nelson Education Ltd.

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FIGURE 4.2

(continued)

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Shifts in the Demand Curve

1.Income:
Normal Good
Inferior Good
2. Prices of related goods:
Substitutes
Complements
3. Tastes
4. Expectations
5. Number of buyers
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TABLE 4.1:

Variables That Influence Buyers

Copyright 2014 by Nelson Education Ltd.

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FIGURE 4.4:

Shifts in Demand Vs. Movement Along the Curve

Copyright 2014 by Nelson Education Ltd.

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Active Learning
Demand Curve

A. The price of iPods

falls
B. The price of music
downloads falls
C. The price of CDs falls

Copyright 2014 by Nelson Education Ltd.

Burlingham/Shutterstoc
k

Draw a demand curve for music

downloads. What happens to it
in each of the following scenarios?
Why?

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SUPPLY
Quantity supplied: the amount of a good that
sellers are willing and able to sell
Law of supply: the claim that, other things equal,
the quantity supplied of a good rises when the price of
the good rises
Supply schedule: a table that shows the relationship
between the price of a good and the quantity supplied
Supply curve: a graph of the relationship between
the price of a good and the quantity supplied
Copyright 2014 by Nelson Education Ltd.

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FIGURE 4.5:

Bens Supply Schedule and Supply Curve

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FIGURE 4.6:

Market Supply as the Sum of Individual Supplies

Market supply: the sum of supplies of all sellers

Copyright 2014 by Nelson Education Ltd.

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FIGURE 4.6

(continued)

Copyright 2014 by Nelson Education Ltd.

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Shifts in the Supply Curve

Factors that shift the supply
curve:
1. Input prices
2. Technology
3. Expectations
4. Number of sellers
5. Taxes and subsidies (We will consider this later)

Copyright 2014 by Nelson Education Ltd.

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TABLE 4.2:

Variables That Influence Sellers

Copyright 2014 by Nelson Education Ltd.

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QuickQuiz
Make up an example of a monthly supply schedule for
pizza, and graph the implied supply curve.
Give an example of something that would shift this
supply curve.
Would a change in the price of pizza shift this supply
curve?

Copyright 2014 by Nelson Education Ltd.

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Equilibrium of Supply and Demand

Equilibrium: A situation in which the price has
reached the level where quantity supplied EQUALS
quantity demanded
Equilibrium price: the price that balances quantity
supplied and quantity demanded
Equilibrium quantity: the quantity supplied and the
quantity demanded at the equilibrium price

Copyright 2014 by Nelson Education Ltd.

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FIGURE 4.8:

The Equilibrium of Supply and Demand

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Markets Not in Equilibrium-Surplus

Surplus: quantity
supplied is greater
than quantity
demanded

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Markets Not in Equilibrium-Shortage

Shortage: quantity
demanded is
greater than
quantity supplied

Copyright 2014 by Nelson Education Ltd.

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Equilibrium

Copyright 2014 by Nelson Education Ltd.

Thinkstock

Law of supply and

demand: the claim that
the price of any good
adjusts to bring the
quantity supplied and the
quantity demanded for
that good into balance

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TABLE 4.3:

3 Steps to Analyze Changes in Equilibrium

Copyright 2014 by Nelson Education Ltd.

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Changes in Demand
Example: a change in market equilibrium due to a
shift in demand
Suppose that one summer the weather is very hot.
How does this event affect the market for ice cream?
To answer this question, lets follow the three steps.

Copyright 2014 by Nelson Education Ltd.

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FIGURE 4.10:

Increase in Demand

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Changes in Supply
Example: A change in market equilibrium due to a
shift in supply
Suppose that, during another summer, a hurricane
destroys part of the sugar cane crop and drives up the
price of sugar.
How does this event affect the market for ice cream?
Once again, to answer this question, we follow our
three steps.
Copyright 2014 by Nelson Education Ltd.

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FIGURE 4.11:

Decrease in Supply

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Shifts in Both Supply and Demand

Example: Shifts in both supply and demand
Now suppose that the heat wave and the hurricane
occur during the same summer.
To analyze this combination of events, we again follow
our three steps.

Copyright 2014 by Nelson Education Ltd.

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FIGURE 4.12:

A Shift in Both Supply and Demand

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TABLE 4.4

Copyright 2014 by Nelson Education Ltd.

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QuickQuiz
On the appropriate diagram, show what happens to the
market for pizza if the price of tomatoes rises.
On a separate diagram, show what happens
to the market for pizza if the price of hamburgers falls.

Copyright 2014 by Nelson Education Ltd.

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