Principles of

Microeconomics,
10e
Chapter 4: The Market Forces
of Supply and Demand

Mankiw, Principles of Microeconomics,

Macroeconomics, Tenth
Tenth Edition.
Edition. ©
© 2024
2024 Cengage.
Cengage. All
All Rights
Rights Reserved.
Reserved.May
May not
not be
be scanned,
scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1
 Chapter Objectives (1 of 3)

By the end of this chapter, you should be able to:

• Given a scenario, determine if a market is competitive.
• Construct a demand curve using a given demand schedule.
• Describe the relationship between price and quantity demanded using
the law of demand.
• Determine if a given scenario will cause a movement along or a shift of
a good's demand curve.
• Explain how a change in a demand determinant impacts a good's
demand curve.

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 Chapter Objectives (2 of 3)
• Determine market demand using information about individuals'
demand.
• Explain how the price of a good impacts the demand for its
complements and substitutes.
• Construct a supply curve using a given supply schedule.
• Describe the relationship between price and quantity supplied using
the law of supply.
• Determine if a given scenario will cause a movement along or a shift of
a good's supply curve.
• Explain how a change in a supply determinant impacts a good's supply
curve.
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 Chapter Objectives (3 of 3)

• Determine market supply using information about individual firms'

supply.
• Determine the equilibrium price and quantity using the supply and
demand model.
• Explain how simultaneous changes in demand and supply impact market
equilibrium.
• Explain how changes in demand impact market equilibrium.
• Explain how changes in supply impact market equilibrium.
• Explain how price changes eliminate a surplus or shortage.

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 What Is a Market?

• Market*
• A group of buyers and sellers of a particular good or service

• Buyers as a group determine Demand

• Sellers as a group determine Supply

*Words accompanied by an asterisk are key terms from the chapter.

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 What Is Competition?

• Competitive market*
• Many buyers and many sellers
• Each has a negligible impact on market price
• Price & quantity sold: determined by all buyers and sellers as they
interact in the marketplace

*Words accompanied by an asterisk are key terms from the chapter.

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 Perfectly Competitive Market

• Identical goods sold

• Many buyers and sellers
• No single buyer or seller has any influence over the market price
• Must accept the price the market determines (price takers)
• At the market price:
• Buyers can buy all they want
• Sellers can sell all they want

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 Other Markets

• Monopoly
• The only seller in the market
• Sets the price
• Other Markets
• Between perfect competition and monopoly
• Oligopoly and Monopolistic Competition

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 Law of Demand

• Law of demand*
• Other things being equal, when the price of a good rises, the
quantity demanded falls, and when the price falls, the quantity
demanded rises
• Quantity demanded*
• Amount of a good that buyers are willing and able to purchase

*Words accompanied by an asterisk are key terms from the chapter.

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 Individual Demand

• Individual demand
• An individual’s demand for a product
• Demand schedule*
• Table showing the relationship between the price of a good and the
quantity demanded
• Demand curve*
• Graph of the relationship between the price of a good and the
quantity demanded
*Words accompanied by an asterisk are key terms from the chapter.

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 Fig 1 C’s Demand Schedule and Curve

• iClicker Q1: Identify the quantity demanded if Price = $5/unit?

• Answer: 2 ice-cream cones
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 Market Demand

• Market demand: The sum of all the individual demands for a particular
good or service
• Market demand curve: depicts market quantities demanded, holding
constant all the other factors that affect consumer purchases

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 Figure 2 Market Demand as the Sum of
Individual Demands (1 of 2)
The quantity demanded in a market is the sum of the quantities
demanded by all the buyers at each price.

• iClicker Q2: Identify the market quantity demanded if P = $4/unit?

• Answer: 7 ice-cream cones
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Figure 2 Market Demand as the Sum of
Individual Demands (2 of 2)

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 Shifts in the Demand Curve

• Market demand curve

• Holds other things constant
• Does not need to be stable over time
• Demand curve shifts:
• Shift to the Right: Increase in Demand
• Shift to the Left: Decrease in Demand

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Figure 3 Shifts in the Demand Curve

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 Variables That Influence Buyers (1 of 3)

• Income
• Normal good*
• An increase in income leads to an increase in demand
• Inferior good*
• An increase in income leads to a decrease in demand

*Words accompanied by an asterisk are key terms from the chapter.

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 Variables That Influence Buyers (2 of 3)

• Prices of related goods

• Substitutes*
• Pairs of goods that are used in place of each other
• Increase in the price of one leads to an increase in the demand
for the other
• Complements*
• Pairs of goods that are used together
• Increase in the price of one leads to a decrease in the demand
for the other
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*Words accompanied by an asterisk are key terms from the chapter.
 Variables That Influence Buyers (3 of 3)

• Tastes
• Unique, affected by historical and psychological forces
• Expectations
• Future changes in income
• Future changes in prices
• Number of buyers
• Market demand depends on how many buyers there are in the market

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Table 1 Variables That Influence Buyers

Variable A Change in This Variable . . .

Price of the good itself Represents a movement along the demand curve

Income Shifts the demand curve

Prices of related goods Shifts the demand curve

Tastes Shifts the demand curve

Expectations Shifts the demand curve
Number of buyers Shifts the demand curve

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 Figure 4 Shifts in the Demand Curve versus
Movements along the Demand Curve
a) Warnings on cigarette packages persuade smokers to smoke less – Decrease in
Demand

b) Tax imposed on cigarettes – Decrease in quantity demanded

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 iClicker Q3: The Demand Curve, D
Draw the demand curve for orange juice, D1, and choose a point A (Q1, P1)
on the demand curve. What happens if:
The price of apple juice (a substitute for orange juice) rises:
A. Demand for orange juice increases and the demand curve shifts to
the right.
B. Demand for orange juice decreases and the demand curve shifts to
the left
C. The quantity demanded of orange juice decreases.
D. The quantity demanded of orange juice increases.
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 iClicker Q3: Answer
Draw the demand curve for orange juice, D1, and choose a point A (Q1, P1)
on the demand curve. What happens if:
The price of apple juice (substitute) rises:
A. Demand for orange juice increases and the demand curve shifts to the
right.
B. Demand for orange juice decreases and the demand curve shifts to
the left
C. The quantity demanded of orange juice decreases.
D. The quantity demanded of orange juice increases.
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 iClicker Q4: The Demand Curve, D
Draw the demand curve for orange juice, D1, and choose a point A (Q1, P1)
on the demand curve. What happens if:
The price of orange juice falls:
A. Demand for orange juice increases and the demand curve shifts to
the right.
B. Demand for orange juice decreases and the demand curve shifts to
the left
C. The quantity demanded of orange juice decreases.
D. The quantity demanded of orange juice increases.
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 iClicker Q4: Answer
Draw the demand curve for orange juice, D1, and choose a point A (Q1, P1)
on the demand curve. What happens if:
The price of orange juice falls:
A. Demand for orange juice increases and the demand curve shifts to
the right.
B. Demand for orange juice decreases and the demand curve shifts to
the left
C. The quantity demanded of orange juice decreases.
D. The quantity demanded of orange juice increases.
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 iClicker Q3/4: Answers

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 Law of Supply

• Law of supply*
• Other things being equal, when the price of a good rises, the
quantity supplied also rises, and when the price falls, the quantity
supplied falls as well
• Quantity supplied*
• Amount of a good that sellers are willing and able to sell

*Words accompanied by an asterisk are key terms from the chapter.

Mankiw, Principles of Macroeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27
 Individual Supply

• Individual supply
• A seller’s supply for a product
• Supply schedule*
• Table showing the relationship between the price of a good and the
quantity supplied
• Supply curve*
• Graph of the relationship between the price of a good and the
quantity supplied
*Words accompanied by an asterisk are key terms from the chapter.

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copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28
Figure 5 Ben’s Supply Schedule and Supply
Curve

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copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29
 Market Supply

• Market supply
• The sum of the supplies of all sellers
• Market supply curve
• Shows how the total quantity supplied varies as the price varies,
holding constant all other factors that influence producers’
decisions about how much to sell

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 Figure 6 Market Supply as the Sum of
Individual Supplies (1 of 2)

• iClicker Q5: Identify the market quantity supplied if Price = $1/unit?

• Answer: 0 ice-cream cones
• iClicker Q6: Identify the market quantity supplied if Price = $4/unit?
• Answer: 7 ice-cream cones
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Figure 6 Market Supply as the Sum of
Individual Supplies (2 of 2)

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 Shifts in the Supply Curve

• Market supply curve

• Holds other things constant
• Does not need to be stable over time
• Supply curve shifts
• Shift to the Right: Increase in Supply
• Shift to the Left: Decrease in Supply

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Figure 7 Shifts in the Supply Curve

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 Variables That Influence Sellers (1 of 2)

• Input prices
• The supply of a good moves in the opposite direction of the prices
of inputs
• Technology
• Technology - turning inputs into output
• Advances in technology increase the supply

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 Variables That Influence Sellers (2 of 2)

• Expectations
• Future changes in prices
• Number of sellers
• Market supply depends on how many sellers there are in the market

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 Table 2 Variables That Influence Sellers

Variable A Change in This Variable . . .

Price of the good itself Represents a movement along the supply

curve
Input prices Shifts the supply curve
Prices of related goods Shifts the supply curve
Technology Shifts the supply curve
Expectations Shifts the supply curve
Number of sellers Shifts the supply curve

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 iClicker Q7: The Supply Curve, S

Draw a supply curve for apple juice, S1, and choose a point A (Q1, P1) on
the supply curve. What happens to it if:
Grocery stores cut the price of apple juice:
A. The quantity supplied of apple juice increases
B. The quantity supplied of apple juice decreases
C. The supply of apple juice increases; the supply curve shifts to the
right
D. The supply of apple juice decreases; the supply curve shifts to the
left
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copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38
 iClicker Q7: Answer

Draw a supply curve for apple juice, S1, and choose a point A (Q1, P1) on
the supply curve. What happens to it if:
Grocery stores cut the price of apple juice:
A. The quantity supplied of apple juice increases
B. The quantity supplied of apple juice decreases
C. The supply of apple juice increases; the supply curve shifts to the
right
D. The supply of apple juice decreases; the supply curve shifts to the
left
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 iClicker Q8: The Supply Curve, S

Draw a supply curve for apple juice, S1, and choose a point A (Q1, P1) on
the supply curve. What happens to it if:
A technological advance allows apple juice to be produced at lower cost:
A. The quantity supplied of apple juice increases
B. The quantity supplied of apple juice decreases
C. The supply of apple juice increases; the supply curve shifts to the
right
D. The supply of apple juice decreases; the supply curve shifts to the
left
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 iClicker Q8: Answer

Draw a supply curve for apple juice, S1, and choose a point A (Q1, P1) on
the supply curve. What happens to it if:
A technological advance allows apple juice to be produced at lower cost:
A. The quantity supplied of apple juice increases
B. The quantity supplied of apple juice decreases
C. The supply of apple juice increases; the supply curve shifts to the
right
D. The supply of apple juice decreases; the supply curve shifts to the
left
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copied or duplicated, or posted to a publicly accessible website, in whole or in part. 41
 iClicker Q7/8: Answers

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 Equilibrium

• Equilibrium*
• Quantity of the good that buyers are willing and able to buy exactly
balances quantity that sellers are willing and able to sell
• Equilibrium price*
• Balances the quantity supplied and quantity demanded
• Equilibrium quantity*
• Quantity supplied and quantity demanded at the equilibrium price
*Words accompanied by an asterisk are key terms from the chapter.

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 Figure 8 The Equilibrium of Supply and
Demand
• Market Equilibrium:
Qs = Qd
• Equilibrium Price (P*)
= $4/cone
• Equilibrium Quantity
(Q*) = 7 ice-cream
cones

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 Surplus

• Surplus*
• Quantity supplied is greater than quantity demanded
• Sellers respond by cutting prices
• Increase quantity demanded and decrease quantity supplied
• Changes represent movements along the supply and demand curves
• Prices continue to fall until the market reaches equilibrium

*Words accompanied by an asterisk are key terms from the chapter.

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 Shortage

• Shortage*
• Quantity demanded is greater than quantity supplied
• Sellers can raise prices without losing sales
• Decrease quantity demanded and increase quantity supplied
• Changes represent movements along the supply and demand curves
• Prices continue to rise until the market reaches equilibrium

*Words accompanied by an asterisk are key terms from the chapter.

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 Figure 9 Markets Not in Equilibrium
a) Surplus (or Excess Supply)
b) Shortage (or Excess Demand)

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 Law of Supply and Demand

• Law of supply and demand*

• Claim that the price of any good adjusts to bring the quantity
supplied and the quantity demanded of that good into balance
• In well-functioning markets:
• Surpluses and shortages are only temporary because
• Prices quickly move toward their equilibrium levels

*Words accompanied by an asterisk are key terms from the chapter.

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 Ask the Experts: Price Gouging
“Laws to prevent high prices for essential goods in short supply in a
crisis would raise social welfare.”

Source: IGM Economic Experts Panel, May 26, 2020.

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 Three Steps for Analyzing Changes in
Equilibrium
1. Decide if the event shifts the supply or demand curve (or perhaps
both).
2. Decide in which direction the curve shifts.
3. Use a supply-and-demand diagram to see how the shift changes the
equilibrium price and quantity.

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 Shifts in Curves versus Movements along
Them
Change in supply • A shift in the supply curve

Change in demand • A shift in the demand curve

Change in the • A movement along a fixed supply curve

quantity supplied

Change in the • A movement along a fixed demand curve

quantity demanded

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 Figure 10 How an Increase in Demand
Affects the Equilibrium
• An abnormally hot
summer causes
buyers to demand
more ice cream

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 Figure 11 How a Decrease in Supply
Affects the Equilibrium
• An increase in the
price of sugar (an
input) causes
sellers to supply
less ice cream

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 Figure 12 A Shift in Both Supply & Demand
A simultaneous increase in demand and decrease in supply:
a) P* rises from P1 to P2, and Q* rises from Q1 to Q2
b) P* again rises from P1 to P2, but Q* falls from Q1 to Q2

Overall Conclusion:
• P* rises
• Q* Ambiguous

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 iClicker Q9: Shifts in Supply and Demand

Use the three-step method to analyze the effects of the following event
on the market for orange juice
• There is a fall in the price of apple juice (substitute for orange juice)
iClicker Q9: What is the impact on the equilibrium price (P*) and
equilibrium quantity (Q*) of oranges?
A. P* and Q* both decrease
B. P* and Q* both increase
C. P* increases, whereas Q* decreases
D. P* decreases, whereas Q* increases
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copied or duplicated, or posted to a publicly accessible website, in whole or in part. 55
 iClicker Q9: Answer

Use the three-step method to analyze the effects of the following event
on the market for orange juice
• There is a fall in the price of apple juice (substitute for orange juice)
iClicker Q9: What is the impact on the equilibrium price (P*) and
equilibrium quantity (Q*) of oranges?
A. P* and Q* both decrease
B. P* and Q* both increase
C. P* increases, whereas Q* decreases
D. P* decreases, whereas Q* increases
Mankiw, Principles of Macroeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part. 56
 iClicker Q9: Answer – Graph
The market for orange juice
P
S1
D curve shifts left
P1
P* and Q* both fall
P2

D2 D1
Q
Q2 Q1
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 iClicker Q10: Shifts in Supply and Demand

Use the three-step method to analyze the effects of the following event
on the market for orange juice
• There is an abundant (excess or glut) orange crop:
iClicker Q10: What is the impact on the equilibrium price (P*) and
equilibrium quantity (Q*) of oranges?
A. P* and Q* both decrease
B. P* and Q* both increase
C. P* increases, whereas Q* decreases
D. P* decreases, whereas Q* increases
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 iClicker Q10: Answer

Use the three-step method to analyze the effects of the following event
on the market for orange juice
• There is an abundant (excess or glut) orange crop:
iClicker Q10: What is the impact on the equilibrium price (P*) and
equilibrium quantity (Q*) of oranges?
A. P* and Q* both decrease
B. P* and Q* both increase
C. P* increases, whereas Q* decreases
D. P* decreases, whereas Q* increases
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copied or duplicated, or posted to a publicly accessible website, in whole or in part. 59
 iClicker Q10: Answer – Graph
The market for orange juice
P
S1 S2
S curve shifts right P1
P falls, Q rises P2

D1
Q
Q1 Q2

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 Question 11: Shifts in Supply and Demand

Use the three-step method to analyze the effects of these events on the
equilibrium price and quantity of orange juice
• There is a fall in the price of apple juice (substitute)
• There is an abundant orange crop
• Both events occur simultaneously

Question: What is the impact on the equilibrium price (P*) and

equilibrium quantity (Q*) of oranges?

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 Question 11: Answer
The market for orange juice
D shifts left, S shifts right P
S1 S3
P falls. Effect on Q is
S2
ambiguous
P1
• the fall in demand reduces Q,
• the increase in supply P3
increases Q
P2
• New supply curve could be
either S2 or S3 D2 D1
Q3 Q1 Q2 Q
Mankiw, Principles of Macroeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part. 62
 Table 4 What Happens to Price and
Quantity When Supply or Demand Shifts?

No Change in Supply An Increase in Supply A Decrease 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

Mankiw, Principles of Macroeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part. 63
 Conclusion

• In market economies, prices are signals that guide decisions and

allocate scarce resources
• For every good in the economy, the price ensures that supply and
demand are in balance
• The equilibrium price determines how much buyers choose to consume
and how much sellers choose to produce

Mankiw, Principles of Macroeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part. 64
 Discussion Question

You are watching a national news broadcast. It is reported that a

typhoon is heading for the Washington coast and that it will likely
destroy much of this year’s apple crop. Your roommate says, “This is not
going to affect me, I don’t eat apples, I only drink pineapple smoothies.”
A. As an eager economics student, what’s your response going to be?
Explain.
B. What other markets will be impacted by the destroyed apple crop?
How?

Mankiw, Principles of Macroeconomics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part. 65