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Masaryk University
Microeconomics 1
Dali Laxton
Lecture
2
The Market Forces of Supply and Demand

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The principles of decision making are:
•People face tradeoffs.
•The cost of any action is measured in terms of foregone opportunities.
•Rational people make decisions by comparing marginal costs and marginal benefits.
•People respond to incentives.
•Markets are usually a good way of coordinating trade.
•Govt can potentially improve market outcomes if there is a market failure or if the market outcome
is inequitable.
•
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•Why model is important for economists? What are implications of effective assumptions?
•What is the difference between positive and normative?
§Positive statements
§Attempt to describe the world as it is; Descriptive Confirm or refute by examining evidence
§Normative statements
§Attempt to prescribe how the world should be; Prescriptive
•
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Lecture Today

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•What factors affect buyers’ demand for goods?
•What factors affect sellers’ supply of goods?
•How do supply and demand determine the price of a good and the quantity sold?
•How do changes in the factors that affect demand or supply affect the market price and quantity of
a good?
•How do markets allocate resources?
Lecture Today

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Markets and Competition
§A market is a group of buyers and sellers of a particular product.
⎮A market is the process of buyers and sellers exchanging goods and services.
⎮Supermarkets, the New York Stock Exchange, drug stores, roadside stands, garage sales, Internet
stores, and restaurants are all markets.
§
§
[USEMAP]
0

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6
§eBay is an Internet auction company that brings together millions of buyers and sellers from all
over the world. The gains from these mutually beneficial exchanges are large.

.

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or in part, except for use as permitted in a license distributed with a certain product or service
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Markets and Competition
§Competitive market
§Many buyers and many sellers, each has a negligible impact on market price
§Perfectly competitive market
§All goods are exactly the same
§Buyers and sellers are so numerous that no one can affect the market price, “Price takers”
7
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accessible website, in whole or in part, except for use as permitted in a license distributed with
a certain product or service or otherwise on a password-protected website or school-approved
learning management system for classroom use.

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Markets and Competition
8
Think of a real life example that can be considered as a Perfectly Competitive Market (3 minutes).

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‹#›
Demand
§The quantity demanded of any good is the amount of the good that buyers are willing and able to
purchase.
§Law of demand refers to a relationship between price and quantity demanded, holding all other
factors fixed.
§Law of demand:  the claim that the quantity demanded of a good falls when the price of the good
rises, all other things being the same, so-called ceteris paribus (!!!).
§Example: firms improve quality of their product and the price on the product raised. Consumers
enjoy a higher-quality product more and increase their demand on the product.
§!! Price change is associated with the quality improvement!!
[USEMAP]
0

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‹#›
The Demand Schedule
§Demand schedule:
a table that shows the relationship between the price of a good and the quantity demanded
§Example:
Marketa’s demand for trdelnik.
§Notice that Marketa’s preferences obey the
law of demand.
Price
of trdelnik CZK
Quantity
of trdelnik demanded
0
16
20
14
40
12
60
10
80
8
100
6
120
4
[USEMAP]
0

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or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
‹#›
Price of Trdelnik
Quantity of Trdelnik
Marketa’s Demand Schedule & Curve
Price
of trdelnik CZK
Quantity
of trdelnik demanded
0
16
20
14
40
12
60
10
80
8
100
6
120
4
[USEMAP]
0

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or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
‹#›
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 Marketa and Ondra are the only two buyers in the trdelnik market.   (Qd = quantity
demanded)
4
6
8
10
12
14
16
Marketa’s Qd
2
3
4
5
6
7
8
Ondra’s Qd
+
+
+
+
=
=
=
=
6
9
12
15
+
=
18
+
=
21
+
=
24
Market Qd
0
120
100
80
60
40
20
Price
[USEMAP]
0
Which assumption does our scenario of only two buyers violate?

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‹#›
P
Q
The Market Demand Curve for Trdelnik
P (CZK)
Qd (Market)
0
24
20
21
40
18
60
15
80
12
100
9
120
6
[USEMAP]
0

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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…
[USEMAP]
0

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Demand Curve Shifters: # of Buyers
§Increase in # of buyers
increases quantity demanded at each price, shifts D curve to the right.
[USEMAP]
0

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or in part, except for use as permitted in a license distributed with a certain product or service
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‹#›
P
Q
Suppose the number of buyers increases.
Then, at each P,
Qd will increase
(by 5 in this example).
[USEMAP]
0
Demand Curve Shifters: # of Buyers
Note: shift can be non-parallel as well!

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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.)
§Examples? Different from so called “bads”
[USEMAP]
0

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‹#›
§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,
Which other examples do you know?
Demand Curve Shifters: Prices of Related Goods
[USEMAP]
0

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§Two goods are complements if
   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
Demand Curve Shifters: Prices of Related Goods
[USEMAP]
0

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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 in the U.S., caused an increase in demand for eggs,
shifted the egg demand curve to the right.
[USEMAP]
0

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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 recesses and people worry about their future job security, demand for new autos may
fall now.
[USEMAP]
0

ACTIVE LEARNING   1
Demand curve
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or in part, except for use as permitted in a license distributed with a certain product or service
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A. The price of iPods falls
B. The price of music downloads falls
C. The price of CDs falls
Draw a demand curve for music downloads.  What happens to it in each of
the following scenarios?  Why?
©Enyezdi/Shutterstock.com

ACTIVE LEARNING   1
A.  Price of iPods falls
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Q2
Price of music down-loads
Quantity of
music downloads
D1
D2
P1
Q1
Music downloads and iPods are complements.
A fall in price of iPods shifts the demand curve for music downloads
to the right.

ACTIVE LEARNING   1
B.  Price of music downloads falls
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The D curve
does not shift.
Move down along curve to a point with lower P, higher Q.
Price of music down-loads
Quantity of
music downloads
D1
P1
Q1
Q2
P2

ACTIVE LEARNING   1
C. Price of CDs falls
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P1
Q1
CDs and
music downloads are substitutes.
A fall in price of CDs shifts demand for music downloads
to the left.
Price of music down-loads
Quantity of
music downloads
D1
D2
Q2

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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
[USEMAP]
0

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‹#›
§Supply schedule:
A table that shows the relationship between the price of a good and the quantity supplied.
§Example:
Jakub’s Supply of trdelnik.
The Supply Schedule
§Notice that the supply schedule obeys the
law of supply.
Price
of trdelnik
Quantity
of trdelnik supplied
0
0
20
3
40
6
60
9
80
12
100
15
120
18
[USEMAP]
0

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or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
‹#›
Jakub’s Supply Schedule & Curve
Price
of trdelnik
Quantity
of trdelnik supplied
0
0
20
3
40
6
60
9
80
12
100
15
120
18
P
Q
[USEMAP]
0

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 Jakub and Tereza are the only two sellers in this market.     (Qs = quantity supplied)
18
15
12
9
6
3
0
Jakub
12
10
8
6
4
2
0
Tereza
+
+
+
+
=
=
=
=
30
25
20
15
+
=
10
+
=
5
+
=
0
Market Qs
0
120
100
80
60
40
20
Price
[USEMAP]
0

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or in part, except for use as permitted in a license distributed with a certain product or service
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‹#›
P
Q
P
QS (Market)
0
0
20
5
40
10
60
15
80
20
100
25
120
30
[USEMAP]
0
The Market Supply Curve

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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…
[USEMAP]
0

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or in part, except for use as permitted in a license distributed with a certain product or service
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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.
[USEMAP]
0

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or in part, except for use as permitted in a license distributed with a certain product or service
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‹#›
P
Q
Suppose the price of sugar falls.
At each price, the quantity of
trdelnik supplied
will increase
(by 5 in this example).
[USEMAP]
0
Supply Curve Shifters:  Input Prices

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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.
[USEMAP]
0

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or in part, except for use as permitted in a license distributed with a certain product or service
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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.
[USEMAP]
0

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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)
[USEMAP]
0

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or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
‹#›
Summary:  Variables That Influence Buyers
§Variable A change in this variable…
Price …causes a movement
    along the D curve
# 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
[USEMAP]
0

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or in part, except for use as permitted in a license distributed with a certain product or service
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‹#›
§Variable A change in this variable…
Summary:  Variables that Influence Sellers
Price …causes a movement
    along the S curve
Input Prices …shifts the S curve
Technology …shifts the S curve
# of Sellers …shifts the S curve
Expectations …shifts the S curve
[USEMAP]
0

ACTIVE LEARNING   2
Supply curve
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Draw a supply curve for ice-cream.
What happens to it in each
of the following scenarios?
A. Retailers cut the price of
the ice-cream.
B. A technological advance
allows to produce milk by low cost.
C. Large scale advertising campaign emphasizes the health benefits of ice-cream.

ACTIVE LEARNING   2
A.  Fall in price of ice-cream
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S curve does
not shift.
Move down
along the curve
to a lower P
and lower Q.
Price of ice-cream
Quantity of ice-cream
S1
P1
Q1
Q2
P2

ACTIVE LEARNING   2
B.  Fall in cost of producing milk
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or in part, except for use as permitted in a license distributed with a certain product or service
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S curve shifts to the right:
at each price,
Q increases.
Price of ice-cream
Quantity of ice-cream
S1
P1
Q1
S2
Q2

ACTIVE LEARNING   2
C.  Advertising Campaign
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or in part, except for use as permitted in a license distributed with a certain product or service
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This shifts the demand curve for ice-cream, not the supply curve.
Price of ice-cream
Quantity of ice-cream
S1

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‹#›
P
Q
Supply and Demand Together
D
S
Equilibrium:
P  has reached
the level where
quantity supplied equals
quantity demanded
[USEMAP]
0

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or in part, except for use as permitted in a license distributed with a certain product or service
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‹#›
D
S
P
Q
Equilibrium price:
P
QD
QS
0
24
0
20
21
5
40
18
10
60
15
15
80
12
20
100
9
25
120
6
30
the price that equates quantity supplied with quantity demanded
[USEMAP]
0

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or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
‹#›
D
S
P
Q
Equilibrium quantity:
P
QD
QS
0
24
0
20
21
5
40
18
10
60
15
15
80
12
20
100
9
25
120
6
30
the quantity supplied and demanded at the equilibrium price
[USEMAP]
0

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or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
‹#›
P
Q
D
S
Surplus (a.k.a. excess supply):
when quantity supplied is greater than quantity demanded
Surplus
Example:
If  P  =  100CZK,
then
   QD  =  9 trdelnik
and
   QS  =  25 trdelnik
resulting in a
surplus of 16 trdelnik
[USEMAP]
0

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or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
‹#›
P
Q
D
S
Surplus (a.k.a. excess supply):
when quantity supplied is greater than quantity demanded
Facing a surplus,
sellers try to increase sales by cutting price.
This causes
QD to rise
Surplus
…which reduces the surplus.
and QS to fall…
[USEMAP]
0

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or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
‹#›
P
Q
D
S
Surplus (a.k.a. excess supply):
when quantity supplied is greater than quantity demanded
Facing a surplus,
sellers try to increase sales by cutting price.
This causes
QD to rise and QS to fall.
Surplus
Prices continue to fall until market reaches equilibrium.
[USEMAP]
0

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or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
‹#›
P
Q
D
S
Shortage (a.k.a. excess demand):
when quantity demanded is greater than quantity supplied
Example:
If  P  =  20 CZK,
then
   QD  =  21 trdelnik
and
   QS  =  5 trdelnik
resulting in a
shortage of 16 trdelniks
Shortage
[USEMAP]
0

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or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
‹#›
P
Q
D
S
Shortage (a.k.a. excess demand):
when quantity demanded is greater than quantity supplied
Facing a shortage,
sellers raise the price,
causing QD to fall
…which reduces the shortage.
and QS to rise,
Shortage
[USEMAP]
0

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or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
‹#›
P
Q
D
S
Shortage (a.k.a. excess demand):
when quantity demanded is greater than quantity supplied
Facing a shortage,
sellers raise the price,
causing QD to fall
and QS to rise.
Shortage
Prices continue to rise until market reaches equilibrium.
[USEMAP]
0

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or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
‹#›
Three Steps to Analyzing Changes in Eq’m
§To determine the effects of any event,
§1. Decide whether the event shifts S curve,
D curve, or both.
§2. Decide in which direction curve shifts.
§3. Use supply—demand diagram to see
how the shift changes eq’m P and Q.

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‹#›
EXAMPLE:  The Market for Hybrid Cars
P
Q
D1
S1
P1
Q1
price of hybrid cars
quantity of
hybrid cars

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STEP 1:
D curve shifts
because price of gas affects demand for hybrids.
S curve does not shift, because price of gas does not affect cost of producing hybrids.
STEP 2:
D shifts right
because high gas price makes hybrids more attractive relative to other cars.
EXAMPLE 1:  A Shift in Demand
§EVENT TO BE
ANALYZED:
Increase in price of gas.
P
Q
D1
S1
P1
Q1
D2
P2
Q2
STEP 3:
The shift causes an increase in price
and quantity of hybrid cars.

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or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
‹#›
EXAMPLE 1:  A Shift in Demand
P
Q
D1
S1
P1
Q1
D2
P2
Q2
Notice:
When P rises, producers supply
a larger quantity
of hybrids, even though the S curve has not shifted.
Always be careful to distinguish b/w a shift in a curve and a movement along the curve.

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‹#›
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

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STEP 1:
S curve shifts
because event affects cost of production.
D curve does not shift, because production technology is not one of the factors that affect demand.
STEP 2:
S shifts right
because event reduces cost,
makes production more profitable at any given price.
EXAMPLE 2:  A Shift in Supply
P
Q
D1
S1
P1
Q1
S2
P2
Q2
§EVENT:  New technology reduces cost of producing hybrid cars.
STEP 3:
The shift causes price to fall
and quantity to rise.

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or in part, except for use as permitted in a license distributed with a certain product or service
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EXAMPLE 3:  A Shift in Both Supply
and Demand
P
Q
D1
S1
P1
Q1
S2
D2
P2
Q2
§EVENTS:
Price of gas rises AND
new technology reduces production costs
STEP 1:
Both curves shift.
STEP 2:
Both shift to the right.
STEP 3:
Q rises, but effect
on P is ambiguous:
If demand increases more than supply, P rises.

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‹#›
EXAMPLE 3:  A Shift in Both Supply
and Demand
§STEP 3, cont.
P
Q
D1
S1
P1
Q1
S2
D2
P2
Q2
EVENTS:
price of gas rises AND
new technology reduces production costs
But if supply increases more than demand,
P  falls.

ACTIVE LEARNING   3
Shifts in supply and demand
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or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
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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 CDs
Event B:  Sellers of music downloads negotiate a reduction in the royalties they must pay for each
song they sell.
Event C:  Events A and B both occur.

ACTIVE LEARNING   3
A.  Fall in price of CDs
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2. D shifts left
P
Q
D1
S1
P1
Q1
D2
The market for music downloads
P2
Q2
1. D curve shifts
3. P and Q both fall.
STEPS

ACTIVE LEARNING   3
B.  Fall in cost of royalties
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or in part, except for use as permitted in a license distributed with a certain product or service
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P
Q
D1
S1
P1
Q1
S2
The market for music downloads
Q2
P2
1. S curve shifts
2. S shifts right
3. P falls,
Q rises.
STEPS
(Royalties are part of sellers’ costs)

ACTIVE LEARNING   3
C.  Fall in price of CDs and
      fall in cost of royalties
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STEPS
1. Both curves shift (see parts A & B).
2. D shifts left, S shifts right.
3. P  falls.
Effect on Q is ambiguous:
   the fall in demand reduces Q,
   the increase in supply increases Q.

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or in part, except for use as permitted in a license distributed with a certain product or service
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or in part, except for use as permitted in a license distributed with a certain product or service
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CONCLUSION:
How Prices Allocate Resources
§One of the Ten Principles from Chapter 1:
     Markets are usually a good way
     to organize economic activity.
§In market economies, prices adjust to balance supply and demand.  These equilibrium prices are the
signals that guide economic decisions and thereby allocate scarce resources.

Summary
•A competitive market has many buyers and sellers, each of whom has little or no influence
on the market price.
•Economists use the supply and demand model to analyze competitive markets.
•The downward-sloping demand curve reflects the law of demand, which states that the quantity
buyers demand of a good depends negatively on the good’s price.
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or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
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Summary
•Besides price, demand depends on buyers’ incomes, tastes, expectations, the prices of substitutes
and complements, and number of buyers.
If one of these factors changes, the D curve shifts.
•The upward-sloping supply curve reflects the Law of Supply, which states that the quantity sellers
supply depends positively on the good’s price.
•Other determinants of supply include input prices, technology, expectations, and the # of
sellers.  Changes in these factors shift the S curve.
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or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
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Summary
•The intersection of S and D curves determines the market equilibrium.  At the equilibrium price,
quantity supplied equals quantity demanded.
•If the market price is above equilibrium,
a surplus results, which causes the price to fall.
If the market price is below equilibrium,
a shortage results, causing the price to rise.
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or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
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Summary
•We can use the supply-demand diagram to analyze the effects of any event on a market:
First, determine whether the event shifts one or both curves.  Second, determine the direction of
the shifts.  Third, compare the new equilibrium to the initial one.
•In market economies, prices are the signals that guide economic decisions and allocate scarce
resources.
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or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
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