CHAPTER

4
The Market Forces of
Supply and Demand
Economics
PRINCIPLES OF

N. Gregory Mankiw

© 2009 South-Western, a part of Cengage Learning, all rights reserved

 Outline

1. The law of demand

2. The determinants of demand
3. The law of supply
4. The determinants of supply
5. Equilibrium and Disequilibrium

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 2

 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”
▪ In this chapter, we assume markets are perfectly
competitive.
THE MARKET FORCES OF SUPPLY AND DEMAND 3
 Demand
▪ Demand comes from the behavior of buyers.
• If you demand something, then you
- Want it,
- Can afford it, and
- Have made a definite plan to buy it.
▪ 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

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 4

Figure 1
Catherine’s demand schedule and demand curve
Price of
Ice-Cream
Cones
1. A decrease
$3.00 in price . . .
Price of Quantity of 2.50
Ice-cream cone Cones demanded
2. . . . increases quantity
$0.00 12 cones 2.00
of cones demanded.
0.50 10 1.50
1.00 8
1.50 6 1.00 Demand curve
2.00 4
2.50 2 0.50
3.00 0
0 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones

The demand schedule is a table that shows the quantity demanded at each price.
The demand curve, which graphs the demand schedule, illustrates how the quantity
demanded of the good changes as its price varies. Because a lower price increases
the quantity demanded, the demand curve slopes downward. 5
Figure 2
Market demand as the sum of individual demands
(demand schedule)

Price of ice-cream cone Catherine Nicholas Market

$0.00 12 + 7 = 19
0.50 10 6 16
1.00 8 5 13
1.50 6 4 10
2.00 4 3 7
2.50 2 2 4
3.00 0 1 1

The quantity demanded in a market is the sum of the quantities demanded by all the
buyers at each price. Thus, the market demand curve is found by adding horizontally
the individual demand curves. At a price of $2.00, Catherine demands 4 ice-cream
cones, and Nicholas demands 3 ice-cream cones. The quantity demanded in the
market at this price is 7 cones.

6
Figure 2
Market demand as the sum of individual demands
Catherine’s Nicholas’s Market
demand + demand = demand
Price of Price of Price of
Ice Ice Ice
Cream Cream Cream
Cones Cones Cones
$3.00 DCatherine $3.00 $3.00
DNicholas
2.50 2.50 2.50

2.00 2.00 2.00

1.50 1.50 1.50

DMarket
1.00 1.00 1.00

0.50 0.50 0.50

0 1 2 3 4 5 6 7 8 9 10 11 12 0 1 2 3 4 5 6 7 0 2 4 6 8 10 12 14 16 18
Quantity of Ice-Cream Cones Quantity of Quantity of Ice-Cream Cones
Ice-Cream Cones
7
 Outline
1. The law of demand
2. The determinants of demand
3. The law of supply
4. The determinants of supply
5. Equilibrium and Disequilibrium

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 8

 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…

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 9

Figure 3
Shifts in the demand curve
Price of
Ice-Cream Increase in
Cones Demand

Decrease in
Demand
Demand
Demand
Demand curve, D1
curve, D2
curve, D3
0
Quantity of Ice-Cream Cones

Any change that raises the quantity that buyers wish to purchase at any given
price shifts the demand curve to the right. Any change that lowers the quantity that
buyers wish to purchase at any given price shifts the demand curve to the left. 10
Figure
Demand
• Variables that can shift the demand curve
– Income
– Prices of related goods
– Tastes
– Expectations
– Number of buyers

11
 Demand Curve Shifters: # of buyers

An increase in the
number of buyers causes
an increase in quantity
demanded at each price,
which shifts the demand
curve to the right.

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 12

 Demand Curve Shifters: # of buyers

P Suppose the number

$6.00 of buyers increases.
Then, at each price,
$5.00
quantity demanded
$4.00 will increase
(by 5 in this example).
$3.00
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25 30
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 13
Demand Curve Shifters: income
▪ Demand for a normal good is
positively related to income.
• An increase in income causes
increase in quantity demanded at
each price, shifting the 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.)

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 14

 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: noodles. An increase in the
price of beef noodles increases demand
for chicken noodles, shifting chicken
noodles demand curve to the right.
▪ Other examples: Coke and Pepsi,
laptops and desktop computers,
compact discs and music downloads

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 15

▪ Which good cannot be substituted?
• [Link]

Notification
Due to the sudden increase
in the price of pork, since 22nd
Dec the price of beef noodles
will increase to 30,000
VND/bowl.
Hope you understand and
sympathize. Thank you!

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 16

 Demand Curve Shifters: prices of
▪ Two goods are complements if related goods
an increase in the price of one causes
a fall in demand for the other.
▪ Example: computers and software.
If price of computers rises, people buy
fewer computers, and therefore less
software. Software demand curve shifts
left.
▪ Other examples: college tuition and
textbooks, bagels and cream cheese,
eggs and bacon
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 17
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.

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 18

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.

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 19

 Summary: Variables That Affect Demand
Variable A change in this variable…

Price …causes a movement

along the D curve
No. of buyers …shifts the D curve
Income …shifts the D curve
Price of
related goods …shifts the D curve
Tastes …shifts the D curve
Expectations …shifts the D curve
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 20
 Rule of thumb
If the variable causing demand to change is measured on one of the
axes, you move along the curve. If the variable that’s causing
demand to change is NOT measured on either axis, then the curve
shifts.

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 21

ACTIVE LEARNING 1:
Demand curve
Draw a demand curve for music downloads.
What happens to it in each of the following
scenarios? Why?
A. The price of iPods
falls
B. The price of music
downloads falls
C. The price of
compact discs falls

22
ACTIVE LEARNING 1:
A. price of iPods falls
Music downloads
Price of
and iPods are
music
down- complements.
loads A fall in price of
iPods shifts the
P1
demand curve for
music downloads
to the right.
D1 D2

Q1 Q2 Quantity of
music downloads
23
ACTIVE LEARNING 1:
B. price of music downloads falls

Price of
music
down- The D curve
loads does not shift.
Move down along
P1
curve to a point with
P2 lower P, higher Q.

D1

Q1 Q2 Quantity of
music downloads
24
ACTIVE LEARNING 1:
C. price of CDs falls

Price of CDs and

music music downloads
down- are substitutes.
loads
A fall in price of CDs
P1 shifts demand for
music downloads
to the left.

D2 D1

Q2 Q1 Quantity of
music downloads
25
 Outline
1. The law of demand
2. The determinants of demand
3. The law of supply
4. The determinants of supply
5. Equilibrium and Disequilibrium

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 26

 Supply
▪ Supply comes from the behavior of sellers.
• If a firm supplies a good or service, then the firm
- Has the resources and the technology to produce it,
- Can profit from producing it, and
- Has made a definite plan to produce and sell it.
▪ 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

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 27

Figure 5
Ben’s supply schedule and supply curve
Price of
Ice-Cream
Cones Supply curve
$3.00
Price of Quantity of 2.50 1. An increase
Ice-cream cone Cones supplied in price . . .
$0.00 0 cones 2.00
0.50 0 1.50
1.00 1 2. . . . increases quantity
1.50 2 1.00 of cones supplied.
2.00 3
2.50 4 0.50
3.00 5
0 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones

The supply schedule is a table that shows the quantity supplied at each price. This
supply curve, which graphs the supply schedule, illustrates how the quantity supplied
Of the good changes as its price varies. Because a higher price increases the
quantity supplied, the supply curve slopes upward. 28
Figure 6
Market supply as the sum of individual supplies
(supply schedule)

Price of ice-cream cone Ben Jerry Market

$0.00 0 + 0 = 0
0.50 0 0 0
1.00 1 0 1
1.50 2 2 4
2.00 3 4 7
2.50 4 6 10
3.00 5 8 13

The quantity supplied in a market is the sum of the quantities supplied by all the
sellers at each price. Thus, the market supply curve is found by adding
horizontally the individual supply curves. At a price of $2.00, Ben supplies 3 ice-
cream cones, and Jerry supplies 4 ice-cream cones. The quantity supplied in
the market at this price is 7 cones
29
Figure 6
Market supply as the sum of individual supplies
Ben’s Jerry’s Market
supply + supply = supply
Price of Price of Price of
Ice Ice Ice
Cream Cream Cream
Cones SBen Cones Cones
$3.00 $3.00 $3.00 SMarket
SJerry
2.50 2.50 2.50

2.00 2.00 2.00

1.50 1.50 1.50

1.00 1.00 1.00

0.50 0.50 0.50

0 1 2 3 4 5 6 7 8 9 10 11 12 0 1 2 3 4 5 6 7 0 2 4 6 8 10 12 14 16 18
Quantity of Ice-Cream Cones Quantity of Quantity of Ice-Cream Cones
Ice-Cream Cones
30
 Outline
1. The law of demand
2. The determinants of demand
3. The law of supply
4. The determinants of supply
5. Equilibrium and Disequilibrium

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 31

 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…

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 32

Figure 7
Shifts in the supply curve
Price of Supply Supply
Ice-Cream Supply
curve, S3 curve, S1 curve, S2
Cones
Decrease in
supply
Increase in
Supply
`

0
Quantity of Ice-Cream Cones

Any change that raises the quantity that sellers wish to produce at any given price
shifts the supply curve to the right. Any change that lowers the quantity that sellers
wish to produce at any given price shifts the supply curve to the left. 33
 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.

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 34

 Supply Curve Shifters: input prices

P Suppose the
$6.00 price of milk falls.
At each price,
$5.00
the quantity of
$4.00 Lattes supplied
will increase
$3.00
(by 5 in this
$2.00 example).
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 35
Supply Curve Shifters: technology
▪ Technology determines how much
inputs are required to produce a
unit of output.
▪ A cost-saving technological
improvement has same effect as a
fall in input prices, shifts the S
curve to the right.

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 36

 Supply Curve Shifters: # of sellers

▪ An increase in the number of sellers increases

the quantity supplied at each price, A lecturer quits her
job, then sells
shifts the S curve to the right. steamed rice rolls to
earn 500mil/month

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 37

 Supply Curve Shifters: expectations

▪ Suppose a firm expects the

price of the good it sells to
rise in the future.
▪ The firm may reduce supply
now, to save some of its
inventory to sell later at the
higher price.
▪ This would shift the S curve
leftward.

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 38

 Summary: Variables That Affect Supply
Variable A change in this variable…
Price …causes a movement
along the S curve
Input prices …shifts the S curve
Technology …shifts the S curve
No. of sellers …shifts the S curve
Expectations …shifts the S curve

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 39

A C T I V E L E A R N I N G 2:
Supply curve
Draw a supply curve for tax
return preparation software.
What happens to it in each
of the following scenarios?
A. Retailers cut the price of
the software.
B. A technological advance
allows the software to be
produced at lower cost.
C. Professional tax return preparers raise the
price of the services they provide.
40
ACTIVE LEARNING 2:
A. fall in price of tax return software
Price of
tax return The S curve
S1
software does not shift.
P1 Move down
along the curve
P2 to a lower P
and lower Q.

Q2 Q1 Quantity of tax
return software
41
ACTIVE LEARNING 2:
B. fall in cost of producing the software
Price of
tax return The S curve
S1 S2
software shifts to the
right:
P1
at each price,
Q increases.

Q1 Q2 Quantity of tax
return software
42
ACTIVE LEARNING 2:
C. professional preparers raise their price
Price of
tax return
S1 This shifts the
software
demand curve for
tax preparation
software, not the
supply curve.

Quantity of tax
return software
43
 Outline
1. The law of demand
2. The determinants of demand
3. The law of supply
4. The determinants of supply
5. Equilibrium and Disequilibrium

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 44

 Supply and Demand Together

P Equilibrium:
$6.00 D S
P has reached
$5.00 the level where
$4.00 quantity supplied
$3.00
equals
quantity demanded
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 45
 Equilibrium price:
The price that equates quantity supplied
with quantity demanded
P
$6.00 D S
P QD QS
$5.00 $0 24 0
$4.00 1 21 5
2 18 10
$3.00
3 15 15
$2.00 4 12 20
$1.00 5 9 25
$0.00 6 6 30
Q
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 46
 Equilibrium quantity:
The quantity supplied and quantity demanded
at the equilibrium price
P
$6.00 D S
P QD QS
$5.00 $0 24 0
$4.00 1 21 5
2 18 10
$3.00
3 15 15
$2.00 4 12 20
$1.00 5 9 25
$0.00 6 6 30
Q
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 47
 Surplus:
when quantity supplied is greater than
quantity demanded
P
$6.00 D Surplus S Example:
If P = $5,
$5.00
then
$4.00 QD = 9 lattes
$3.00 and
$2.00 QS = 25 lattes

$1.00
resulting in a surplus
of 16 lattes
$0.00 Q
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 48
 Surplus:
when quantity supplied is greater than
quantity demanded
P
$6.00 D Surplus S Facing a surplus,
sellers try to increase
$5.00 sales by cutting the price.
$4.00 This causes
$3.00 QD to rise and QS to fall…

$2.00 …which reduces the

surplus.
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 49
 Surplus:
when quantity supplied is greater than
quantity demanded
P
$6.00 D Surplus S Facing a surplus,
sellers try to increase
$5.00 sales by cutting the price.
$4.00 Falling prices cause
$3.00 QD to rise and QS to fall.

$2.00 Prices continue to fall until

market reaches equilibrium.
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 50
 Shortage:
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Example:
If P = $1,
$5.00
then
$4.00 QD = 21 lattes
$3.00 and
QS = 5 lattes
$2.00
resulting in a
$1.00 shortage of 16 lattes
$0.00 Shortage Q
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 51
 Shortage:
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Facing a shortage,
sellers raise the price,
$5.00
causing QD to fall
$4.00 and QS to rise,
$3.00 …which reduces the
shortage.
$2.00
$1.00
Shortage
$0.00 Q
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 52
 Shortage:
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Facing a shortage,
sellers raise the price,
$5.00
causing QD to fall
$4.00 and QS to rise.
$3.00 Prices continue to rise
$2.00
until market reaches
equilibrium.
$1.00
Shortage
$0.00 Q
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 53
 Three Steps to Analyzing Changes in Eq’m

To determine the effects of any event,

1. Decide whether event shifts S curve,
D curve, or both.
2. Decide in which direction curve shifts (left or
right).
3. Use supply-demand diagram to see
how the shift changes eq’m P and Q.

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 54

 Supply and Demand Together
• Example: A change in market equilibrium due to a shift in
demand
– One summer - very hot weather
– Effect on the market for ice cream?
1. Hot weather - demand curve (tastes )
2. Demand curve shifts to the right
3. Higher equilibrium price; higher equilibrium quantity

55
Figure 10
How an increase in demand affects the equilibrium
Price of
Ice-Cream Supply 1. Hot weather
Cones increases the demand
for ice cream . . .
2. …resulting in
a higher price . . .
$2.50 New equilibrium

2.00
Initial equilibrium

D2
D1
3. …and a higher quantity sold.

0 7 10
Quantity of Ice-Cream Cones
An event that raises quantity demanded at any given price shifts the demand curve to the
right. The equilibrium price and the equilibrium quantity both rise. Here an abnormally hot
summer causes buyers to demand more ice cream. The demand curve shifts from D1 to D2,
which causes the equilibrium price to rise from $2.00 to $2.50 and the equilibrium quantity
to rise from 7 to 10 cones 56
Terms for Shift vs. Movement Along Curve
▪ Change in supply: a shift in the S curve
• occurs when a non-price determinant of supply
changes (like technology or costs)
▪ Change in the quantity supplied:
a movement along a fixed S curve
• occurs when P changes
▪ Change in demand: a shift in the D curve
• occurs when a non-price determinant of
demand changes (like income or # of buyers)
▪ Change in the quantity demanded:
a movement along a fixed D curve
• occurs when P changes
 Supply and Demand Together
• Example: A change in market equilibrium due to a shift in
supply
– One summer - a hurricane destroys part of the sugarcane crop
• Price of sugar - increases
– Effect on the market for ice cream?
1. Change in price of sugar - supply curve
2. Supply curve - shifts to the left
3. Higher equilibrium price; lower equilibrium quantity

58
Figure 11
How a decrease in supply affects the equilibrium
Price of
1. An increase in the
Ice-Cream price of sugar reduces
Cones the supply of ice cream . . . S2
2. …resulting in
a higher price . . .
S1
$2.50
New equilibrium
2.00
Initial equilibrium
Demand

3. …and a smaller quantity sold.

0 4 7
Quantity of Ice-Cream Cones
An event that reduces quantity supplied at any given price shifts the supply curve to the left.
The equilibrium price rises, and the equilibrium quantity falls. Here an increase in the price
of sugar (an input) causes sellers to supply less ice cream. The supply curve shifts from S 1
to S2, which causes the equilibrium price of ice cream to rise from $2.00 to $2.50 and the
equilibrium quantity to fall from 7 to 4 cones 59
 Supply and Demand Together
• Example: shifts in both supply and demand
– One summer: hurricane and heat wave
1. Heat wave – shift demand curve; hurricane – shift supply curve
2. Demand curve shifts to the right; Supply curve shifts to the left
3. Equilibrium price raises
– If demand increases substantially while supply falls just a little: equilibrium
quantity –rises
– If supply falls substantially while demand rises just a little: equilibrium
quantity falls

60
Figure 12
A shift in both supply and demand
Price of (a) Price Rises, Quantity Rises Price of (b) Price Rises, Quantity Falls
Ice Ice
Cream New Cream Small S2
Cones Large equilibrium S2 S Cones increase S1
1 in demand
increase New
in demand equilibrium
P2 P2
Large
decrease
P1
Small D2 P1 in supply
decrease
in supply D2
Initial Initial
equilibrium equilibrium D1
D1

0 Q1 Q2 0 Q2 Q1
Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones

Here we observe a simultaneous increase in demand and decrease in supply. Two outcomes are
possible. In panel (a), the equilibrium price rises from P1 to P2, and the equilibrium quantity rises
from Q1 to Q2. In panel (b), the equilibrium price again rises from P1 to P2, but the equilibrium
quantity falls from Q1 to Q2. 61
Table 4
What happens to price and quantity when supply or demand shifts?

No change An increase A decrease

In Supply In Supply In supply
No change P same P down P up
In demand Q same Q up Q down

An increase P up P ambiguous P up
In demand Q up Q up Q ambiguous

A decrease P down P Down P ambiguous

In demand Q down Q ambiguous Q down

62
ACTIVE LEARNING 3:
Changes in supply and demand
Use the three-step method to analyze the effects of
each event on the equilibrium price and quantity of
music downloads.
Event A: A fall in the price of compact discs
Event B: Sellers of music downloads negotiate a
reduction in the royalties they must pay
for each song they sell.
*royalties: the sellers must pay the artists each time the
artists’ songs is downloaded

Event C: Events A and B both occur.

63
ACTIVE LEARNING 3:
A. fall in price of CDs
The market for
P music downloads
S1
STEPS
1. D curve shifts P1

2. D shifts left P2

3. P and Q both
fall.
D2 D1
Q
Q2 Q1

64
ACTIVE LEARNING 3:
B. fall in cost of
The market for
royalties music downloads
P
S1 S2
STEPS
1. S curve shifts P1
(royalties are part P2
2. S shifts right
of sellers’ costs)
3. P falls,
Q rises.
D1
Q
Q1 Q2

65
ACTIVE LEARNING 3:
C. fall in price of CDs
AND fall in cost of royalties

STEPS
1. Both curves shift (see parts A & B).
2. D shifts left, S shifts right.
3. P unambiguously falls.
Effect on Q is ambiguous:
The fall in demand reduces Q,
the increase in supply increases Q.

66
 What we did?
✓Learn what a competitive market is
✓Examine what determines the demand for a good in a competitive market
✓Examine what determines the supply of a good in a competitive market
✓See how supply and demand together set the price of a good and the
quantity sold
✓Draw a graph of supply and demand in a market and find the equilibrium
price and quantity
✓Shift supply and demand in response to an economic event and find the
new equilibrium price and quantity

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 67

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 68