The market forces of supply and demand

Market

A group of buyers and sellers of a particular good or service

The buyers: determine the demand for the product

The sellers: determine the supply of the product

Competitive market

Many buyers and sellers, each has a negligible impact on market price

Perfectly competitive market

The goods are all exactly the same

Price takers: so many buyers and sellers that no one can affect the market price 

At the market price, buyers can buy all they want, and sellers can sell all they want

Demand

Quantity demanded: the amount of a good that buyers are willing and able to purchase 

Law of demand: other things being equal, the quantity demanded of a good falls when the price of the good rises; the quanity demanded of a good rises when the price of the good falls

Demand schedule

A table that shows the relationship between the price of a good and the quanity demanded

Demand curve

A graph of the relationship between the price of a good and the quanity demanded

D schedule and D curve 

Market demand

The sum of all individual demands for a good or service

Market demand curve

Sum the individual demand curve horizontally

• To find the total quantity demanded at any price, we add the individual quantities demanded (on the horizontal axis)

Market demand curve for muffins

Shifts in the demand curve

The demand curve shows how price affects quantity demanded, other things being equal

These “other things: are non-price determinants of demand

• Things that determine buyers’ demand for a good, other than the good’s price

• Changes in them shift the D curve

Shifts in the demand curve (determinants)

• Number of buyers

• Income

• Prices of related goods

• Tastes

• Expectations

Changes in number of buyers 

Increase in the number of buyers 

• Increases the quantity demanded at each price 

• Shifts the demand curve to the right 

Decrease in the number of buyers 

• Decreases the quantity demanded at each price 

• Shifts the demand curve to the left 

Changes in income

Normal goods, other things being equal

• An increase in income leads to an increase in demand

• Shifts the demand curve to the right

Inferior good, other things being equal

• An increase in income leads to a decrease in demand

• Shifts the demand curve to the left

Changes in prices of related goods (Substitutes)

Two goods are substitutes if

• An increase in the price of one leads to an increase in the demand for the other

Example: An increase in the price of pizza increases demand for hamburgers, shifting the hamburger demand curve to the right

Changes in prices of related goods (complements)

Two goods are complements if 

• An increase in the price of one leads to a decrease in the demand for the other 

Example: If the price of a smartphone rises, people buy fewer smartphones; app demand curve shifts to the left 

Changes in tastes

Advertising convinces consumers that drinking 3 glasseses of orange juice a day will help lower cholesterol; demand for oramge juice increases

Expectations about the future

People expect an increase in income - the current demand increases

People expect higher prices - the current demand increases

Shift vs. Movement along curve 

Change in demand