MOSTAFA NOR-EL DIN Micro-Economic English section (1) 41
Chapter Four
The Market Forces of Supply and Demand
Markets and Competition
A market is a group of buyers and sellers of a particular product.
A competitive market is one with many buyers and sellers, each has a negligible effect
on price.
In a perfectly competitive market:
All goods exactly the same
Buyers & sellers so numerous that no one can affect market price – each is a
“price taker”
Demand
The quantity demanded of any good is the amount of the good that buyers are willing
and able to purchase.
Law of demand: the claim that the quantity demanded of a good falls when the price of
the good rises, other things equal
The Demand Schedule
Demand schedule:
a table that shows the relationship between the price of a good
and the quantity demanded
Example:
Helen’s demand for lattes.
Notice that Helen’s preferences obey the
Law of Demand.
Helen’s Demand Schedule & Curve
Market Demand versus Individual Demand
The quantity demanded in the market is the sum of the quantities demanded by all
buyers at each price.
Suppose Helen and Ken are the only two buyers in the Latte market. (Qd = quantity
demanded)
MOSTAFA NOR-EL DIN Micro-Economic English section (1) 41
The Market Demand Curve for Lattes
Demand Curve Shifters
The demand curve shows how price affects quantity demanded, other things being
equal.
These “other things” are non-price determinants of demand (i.e., things that determine
buyers’ demand for a good, other than the good’s price).
Changes in them shift the D curve…
Increase in number of buyers
increases quantity demanded at each price, shifts D curve to the right.
Demand Curve Shifters: Income
Demand for a normal good is positively related to income.
Increase in income causes increase in quantity demanded at each price, shifts D
curve to the right.
(Demand for an inferior good is negatively related to income. An increase in income
shifts D curves for inferior goods to the left.)
Demand Curve Shifters: Prices of Related Goods
Two goods are substitutes if an increase in the price of one causes an increase in
demand for the other.
Example: pizza and hamburgers. An increase in the price of pizza
increases demand for hamburgers, shifting hamburger demand curve to the right.
Other examples: Coke and Pepsi, laptops and desktop computers, CDs and music
downloads
Demand Curve Shifters: Tastes
Anything that causes a shift in tastes toward a good will increase demand for that good
and shift its D curve to the right.
Example:
The Atkins diet became popular in the ’90s, caused an increase in demand for eggs,
shifted the egg demand curve to the right.
MOSTAFA NOR-EL DIN Micro-Economic English section (1) 41
Demand Curve Shifters: Expectations
Expectations affect consumers’ buying decisions.
Examples:
If people expect their incomes to rise, their demand for meals at expensive
restaurants may increase now.
If the economy sours and people worry about their future job security, demand
for new autos may fall now.
Summary: Variables That Influence Buyers
Supply
The quantity supplied of any good is the amount that sellers are willing and able to
sell.
Law of supply: the claim that the quantity supplied of a good rises when the price of
the good rises, other things equal
The Supply Schedule
Supply schedule:
A table that shows the relationship between the price of a good and
the quantity supplied.
Example:
Starbucks’ supply of lattes.
Notice that Starbucks’ supply schedule obeys the
Law of Supply.
Starbucks’ Supply Schedule & Curve
MOSTAFA NOR-EL DIN Micro-Economic English section (1) 41
Market Supply versus Individual Supply
The quantity supplied in the market is the sum of
the quantities supplied by all sellers at each price.
Suppose Starbucks and Jitters are the only two sellers in this market. (Qs = quantity
supplied)
The Market Supply Curve
Supply Curve Shifters
The supply curve shows how price affects quantity supplied, other things being equal.
These “other things” are non-price determinants of supply.
Changes in them shift the S curve…
Supply Curve Shifters: Input Prices
Examples of input prices:
wages, prices of raw materials.
A fall in input prices makes production more
profitable at each output price,
so firms supply a larger quantity at each
price, and the S curve shifts to the right.
Supply Curve Shifters: Technology
Technology determines how much inputs are required to produce a unit of output.
A cost-saving technological improvement has the same effect as a fall in input prices,
shifts S curve to the right.
Supply Curve Shifters: # of Sellers
An increase in the number of sellers increases the quantity supplied at each price,
shifts S curve to the right.
Supply Curve Shifters: Expectations
Example:
Events in the Middle East lead to expectations of higher oil prices.
In response, owners of Texas oilfields reduce supply now, save some inventory to
sell later at the higher price.
S curve shifts left.
In general, sellers may adjust supply* when their expectations of future prices change.
(*If good not perishable)
