TheMarketForcesofSupplyanddemandAcompetitivemarketisamarketinwhichtherearemanybuyersandsellerssothateachhasanegligibleimpactonthemarketprice.WhatIsCompetition?Competition:PerfectandOtherwisePerfectCompetitionProductsarethesameNumerousbuyersandsellerssothateachhasnoinfluenceoverpriceBuyersandSellersarepricetakersMonopolyOneseller,andsellercontrolspriceWhatIsCompetition?Competition:PerfectandOtherwiseOligopolyFewsellersNotalwaysaggressivecompetitionMonopolisticCompetitionManysellersSlightlydifferentiatedproductsEachsellermaysetpriceforitsownproductDEMANDQuantity

demandedistheamountofagoodthatbuyersarewillingandabletopurchase.LawofDemandThelawofdemandstatesthat,otherthingsequal,thequantitydemandedofagoodfallswhenthepriceofthegoodrises.TheDemandCurve:TheRelationshipbetweenPriceandQuantityDemandedDemandScheduleThedemandscheduleisatablethatshowstherelationshipbetweenthepriceofthegoodandthequantitydemanded.Catherine’sDemandScheduleTheDemandCurve:TheRelationshipbetweenPriceandQuantityDemandedDemandCurveThedemandcurveisagraphoftherelationshipbetweenthepriceofagoodandthequantitydemanded.Figure1Catherine’sDemandScheduleandDemandCurvePriceofIce-CreamCone02.502.001.501.000.501234567891011QuantityofIce-CreamCones$3.00121.Adecreaseinprice...2....increasesquantityofconesdemanded.MarketDemandversusIndividualDemandMarketdemandreferstothesumofallindividualdemandsforaparticulargoodorservice.Graphically,individualdemandcurvesaresummedhorizontallytoobtainthemarketdemandcurve.TheMarketDemandCurvePriceofIce-CreamConePriceofIce-CreamConePriceofIce-CreamCone2.002.002.004371.001.001.008513QuantityofIce-CreamConesQuantityofIce-CreamConesQuantityofIce-CreamConesCatherine’sDemandNicholas’sDemandMarketDemand+=Themarketdemandcurveisthehorizontalsumoftheindividualdemandcurves!0DPriceofIce-Cream

ConesQuantityofIce-CreamConesAB81.00$2.004ChangesinQuantityDemandedShiftsintheDemandCurveConsumerincomePricesofrelatedgoodsTastesExpectationsNumberofbuyersFigure3ShiftsintheDemandCurvePriceofIce-CreamConeQuantityofIce-CreamConesIncreaseindemandDecreaseindemandDemandcurve,D3Demandcurve,D1Demandcurve,D20ShiftsintheDemandCurveConsumerIncomeAsincomeincreasesthedemandforanormalgoodwillincrease.Asincomeincreasesthedemandforaninferiorgoodwilldecrease.$3.002.502.001.501.000.50213456789101211PriceofIce-CreamConeQuantityofIce-CreamCones0IncreaseindemandAnincreaseinincome...D1D2ConsumerIncomeNormalGood$3.002.502.001.501.000.50213456789101211PriceofIce-CreamConeQuantityofIce-CreamCones0DecreaseindemandAnincreaseinincome...D1D2ConsumerIncomeInferiorGoodShiftsintheDemandCurvePricesofRelatedGoodsWhenafallinthepriceofonegoodreducesthedemandforanothergood,thetwogoodsarecalledsubstitutes.Whenafallinthepriceofonegoodincreasesthedemandforanothergood,thetwogoodsarecalledcomplements.SUPPLYQuantitysupplied

istheamountofagoodthatsellersarewillingandabletosell.LawofSupplyThelawofsupplystatesthat,otherthingsequal,thequantitysuppliedofagoodriseswhenthepriceofthegoodrises.TheSupplyCurve:TheRelationshipbetweenPriceandQuantitySuppliedSupplyScheduleThesupplyscheduleisatablethatshowstherelationshipbetweenthepriceofthegoodandthequantitysupplied.Ben’sSupplyScheduleTheSupplyCurve:TheRelationshipbetweenPriceandQuantitySuppliedSupplyCurveThesupplycurveisthegraphoftherelationshipbetweenthepriceofagoodandthequantitysupplied.Figure5Ben’sSupplyScheduleandSupplyCurvePriceofIce-CreamCone02.502.001.501.001234567891011QuantityofIce-CreamCones$3.00120.501.Anincreaseinprice...2....increasesquantityofconessupplied.MarketSupplyversusIndividualSupplyMarketsupplyreferstothesumofallindividualsuppliesforallsellersofaparticulargoodorservice.Graphically,individualsupplycurvesaresummedhorizontallytoobtainthemarketsupplycurve.0ShiftsintheSupplyCurveInputpricesTechnologyExpectationsNumberofsellers015PriceofIce-CreamConeQuantityofIce-CreamCones0S1.00AC$3.00Ariseinthepriceoficecreamconesresultsinamovementalongthesupplycurve.ChangeinQuantitySupplied0Figure7ShiftsintheSupplyCurvePriceofIce-CreamConeQuantityofIce-CreamCones0IncreaseinsupplyDecreaseinsupplySupplycurve,S3curve,SupplyS1Supplycurve,S20SUPPLYANDDEMANDTOGETHEREquilibriumreferstoasituationinwhichthepricehasreachedthelevelwherequantitysuppliedequalsquantitydemanded. SUPPLYANDDEMANDTOGETHEREquilibriumPriceThepricethatbalancesquantitysuppliedandquantitydemanded.Onagraph,itisthepriceatwhichthesupplyanddemandcurvesintersect.EquilibriumQuantityThequantitysuppliedandthequantitydemandedattheequilibriumprice.Onagraphitisthequantityatwhichthesupplyanddemandcurvesintersect. At$2.00,thequantitydemandedisequaltothequantitysupplied!SUPPLYANDDEMANDTOGETHERDemandScheduleSupplyScheduleFigure8TheEquilibriumofSupplyandDemandPriceofIce-CreamCone0123456789101112QuantityofIce-CreamCones13EquilibriumquantityEquilibriumpriceEquilibriumSupplyDemand$2.00EquilibriumSurplusWhenprice>equilibriumprice,thenquantitysupplied>quantitydemanded.Thereisexcesssupplyorasurplus.Supplierswilllowerthepricetoincreasesales,therebymovingtowardequilibrium.Figure9MarketsNotinEquilibriumPriceofIce-CreamCone0SupplyDemand(a)ExcessSupplyQuantitydemandedQuantitysuppliedSurplusQuantityofIce-CreamCones4$2.50102.007EquilibriumShortageWhenprice<equilibriumprice,thenquantitydemanded>thequantitysupplied.Thereisexcessdemandorashortage.Supplierswillraisethepriceduetotoomanybuyerschasingtoofewgoods,therebymovingtowardequilibrium.Figure9MarketsNotinEquilibriumPriceofIce-CreamCone0QuantityofIce-CreamConesSupplyDemand(b)ExcessDemandQuantitysuppliedQuantitydemanded1.5010$2.0074ShortageEquilibriumLawofsupplyanddemandTheclaimthatthepriceofanygoodadjuststobringthequantitysuppliedandthequantitydemandedforthatgoodintobalance.Table3:ThreeStepsforAnalyzingChangesinEquilibriumFigure10HowanIncreaseinDemandAffectstheEquilibriumPriceofIce-CreamCone0QuantityofIce-CreamConesSupplyInitialequilibriumDD3....andahigherquantitysold.2....resultinginahigherprice...1.Hotweatherincreasesthedemandforicecream...2.007Newequilibrium