SUPPLY AND DEMAND: HOW MARKETS WORK

• A market is a group of buyers and sellers of a particular good or service.

MARKETS AND COMPETITION

MARKETS AND COMPETITION

• Buyers determine demand.

• Sellers determine supply

DEMAND

• Quantity demanded : the amount of a good that buyers are willing and able to purchase.

• Law of Demand• The quantity demanded of a good falls

when the price of the good rises.

# Demanded$

Cat’s Demand Schedule

Cat’s Demand Curve

Price ofIce-Cream Cone

0

2.50

2.00

1.50

1.00

0.50

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

$3.00

12

1. A decrease in price ...

2. ... increases quantity of cones demanded.

Change in Quantity Demanded

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

product.

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

$2.00

4

Change in Quantity Demanded

SUPPLY

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

• Law of Supply• The quantity supplied of a good rises

when the price of the good rises.

$#

supplied

Ben’s Supply Schedule

Price of Ice cream cone

Qty. of Cones supplied

Ben’s Supply Curve

Price ofIce-Cream

Cone

0

2.50

2.00

1.50

1.00

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

$3.00

12

0.50

1. Anincrease in price ...

2. ... increases quantity of cones.

Change in Quantity Supplied

• Change in Quantity Supplied• Movement along the supply curve.• Caused by a change in the price of the

product.

1 5

Price

Quantity of Ice-Cream Cones

0

S

1.00A

C$3.00 A rise in the

price of ice cream cones results in a movement along the

supply curve.

Change in Quantity Supplied

Airline Tickets

$ QD QS

200

24 1

300

16 10

400

10 16

500

4 22

600

0 25

600

500

400

300

200

100

0

Pri

ce

$

0 2 4 6 8 10 12 14 16 18 22 24 26 28Quantity #

D

S

350

13

SUPPLY AND DEMAND TOGETHER

Equilibrium

Qs= Qd 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.

At $2.00, the quantity demanded is equal to the

quantity supplied!

SUPPLY AND DEMAND TOGETHER

Demand Schedule

Supply Schedule

The Equilibrium of Supply and Demand

Price ofIce-Cream

Cone

0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones

13

Equilibriumquantity

Equilibrium price Equilibrium

Supply

Demand

$2.00

If the price is too high (Qs > Qd)…

Price ofIce-Cream

Cone

0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones

13

Supply

Demand

$3.00

QuantitySupplied

QuantityDemanded

$2.00

The Price Will Drop!

If the price is too low (Qd > Qs)…

Price ofIce-Cream

Cone

0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones

13

Supply

Demand

$1.00

QuantityDemanded

QuantitySupplied

$2.00

The Price Will Rise!