Chapter 4 Notes — The Market Forces of Supply and Demand

Demand

  • Markets and Competition

    • A market is a group of buyers and sellers of a particular product.

    • A competitive market has many buyers and sellers, each with a negligible effect on price.

    • A perfectly competitive market: all goods are identical; buyers & sellers are so numerous that no one can affect the market price – each is a “price taker.” This chapter assumes perfectly competitive markets.

    • Note: There is a lighthearted aside about the words grit, grits, and gritty for engagement.

  • Demand: basic idea

    • Demand comes from the behavior of buyers.

    • Quantity demanded (Qd) is the amount of a good that buyers are willing and able to purchase.

    • Law of demand: the quantity demanded falls when the good’s price rises, holding other things equal.

  • The Demand Schedule (example: Helen’s demand for Starbucks lattes)

    • A demand schedule is a table showing the relationship between price and quantity demanded.

    • Helen’s data (illustrative):

    • Price 0.00 \rightarrow Qd = 16

    • Price 1.00 \rightarrow Qd = 14

    • Price 2.00 \rightarrow Qd = 12

    • Price 3.00 \rightarrow Qd = 10

    • Price 4.00 \rightarrow Qd = 8

    • Price 5.00 \rightarrow Qd = 6

    • Price 6.00 \rightarrow Qd = 4

    • These points illustrate the Law of Demand (as price rises, quantity demanded falls).

  • Market Demand vs Individual Demand

    • The market quantity demanded at each price is the sum of quantities demanded by all buyers.

    • Example setup: Helen and Ken are the two buyers.

    • If we add their individual Qd at each price, we obtain the market Qd. (Illustrative table given in slides shows Market Qd: at price 0 \rightarrow 24;\ \$1 \rightarrow 21;\ \$2 \rightarrow 18;\ \$3 \rightarrow 15;\ \$4 \rightarrow 12;\ \$5 \rightarrow 9;\ \$6 \rightarrow 6.

    • The market demand curve (Qd, Market) is the horizontal sum of individual demand curves.

  • Demand Determinants for Aeropostale Sweatshirts (illustrative example)

    • Price of related goods and other determinants can shift demand:

    • Price of Aero jeans (a related good)

    • Complementary goods (goods used together)

    • Substitutes (goods that can replace each other)

    • Income

    • Preferences

    • Any of these changes causes the demand curve to shift.

    • Visual cue: a shift from D to D’ when a non-price determinant changes.

  • What Shifts the Demand for Aeropostale Sweat Shirts?

    • Change in income

    • Change in price of complementary goods

    • Change in price of substitute goods

    • Change in preferences

    • Any of the above changes will shift the demand curve; otherwise, only movement along the curve occurs when price changes.

  • What Doesn’t Shift the Demand?

    • A change in the price of Aeropostale sweat shirts itself does not shift the demand curve; it changes quantity demanded and moves along the same curve.

    • Explanation: at lower price you buy more; at higher price you buy less.

  • Change in Demand vs Change in Quantity Demanded

    • Change in Demand: a shift of the entire demand curve due to a non-price determinant (D \rightarrow D’).

    • Change in Quantity Demanded: a movement along the demand curve due to a price change.

    • Diagrammatic idea: D and D’ are two positions of the same curve under different determinant values.

  • Real-world micro-demo: “Small Loads in the Dishwasher” and demand shifts after advertising

    • Cascade Pods (advertisement): A. Increase in Demand B. Increase in Quantity Demanded C. Decrease in Demand D. Decrease in Quantity Demanded

    • Dawn (advertisement): same type of question.

  • Active Learning: Demand-focused questions

    • Active Learning 1 (Demand Curve for Apple AirPods):

    • Scenarios:

      • A. Price of iPhone 14 decreases \rightarrow effect on AirPods demand

      • B. Apple Music launches a 3-month free promo \rightarrow effect on AirPods demand

      • C. Your income rises \rightarrow effect on AirPods demand

      • D. Price of AirPods drops \rightarrow effect on AirPods demand

    • Task: Draw the demand curve for Apple AirPods headphones and explain what happens in each scenario.

    • In the AirPods market, which graph reflects a price decrease of iPhone 14? (Choose model A/B/C)

    • In the AirPods market, which graph reflects 3-month free Apple Music? (Choose model A/B/C)

    • In the AirPods market, which graph reflects income rising? (Choose model A/B/C)

    • In the AirPods market, which graph reflects a lower price for AirPods? (Choose model A/B/C)

Supply

  • Supply: basic idea

    • Supply comes from the behavior of sellers.

    • Quantity supplied is the amount a seller is willing and able to sell.

    • The supply curve shows the relationship between price and quantity supplied.

    • Intuition: as price rises, are suppliers willing to sell more, less, or the same amount? Positive relationship expected.

    • The upward-sloping supply curve reflects the Law of Supply.

  • The Supply Schedule (example: Starbucks’ supply of lattes)

    • Price vs. quantity supplied:

    • 0.00 \rightarrow 0

    • 1.00 \rightarrow 3

    • 2.00 \rightarrow 6

    • 3.00 \rightarrow 9

    • 4.00 \rightarrow 12

    • 5.00 \rightarrow 15

    • 6.00 \rightarrow 18

  • Market Supply vs Individual Supply

    • Market quantity supplied is the sum of quantities supplied by all sellers at each price.

    • Example: Starbucks and Jitters supply different amounts; market Qs is the horizontal sum.

  • Supply Determinants (illustrative: Oranges)

    • Price of oranges (input price for production)

    • Weather

    • Wage costs for workers

    • Tax rates

    • Technology

    • Prices of inputs like fertilizers/pesticides

    • Expectations of future prices

    • Each determinant can shift the supply curve.

  • Supply Curve Shifters: good weather and technology

    • Good weather: orange growers are willing to supply more at each price \rightarrow rightward shift of the S curve.

    • Technology improvement: lowers cost of production; shifts the supply curve right (more supply at every price).

    • Increase in wages: raises production costs; shifts the supply curve left.

  • Important nuance: Does a change in the price of oranges shift the supply curve?

    • No. A change in the price of oranges changes the quantity supplied (movement along the curve).

    • A change in the price of oranges does not shift the supply curve itself.

  • Summary: Variables That Affect Supply

    • Price: movement along the S curve (not a shift).

    • Wages: shift the S curve.

    • Technology: shift the S curve.

    • Weather: shift the S curve.

    • Costs of production: shift the S curve.

  • Active Learning 2: Supply curve exercises

    • Draw a supply curve for Turbo Tax software. Consider scenarios:

    • A. Turbo Tax lowers the price of its software (movement along S).

    • B. A technological advance allows online distribution (lower costs) \rightarrow rightward shift of S.

    • C. Professional tax return preparers raise the price of filing (revenue effect) \rightarrow potential effect on supply depending on cost/producer response.

  • Supply and Demand Together: Equilibrium

    • Equilibrium occurs where the demand and supply curves intersect: Qd = Qs.

    • Equilibrium price P* and equilibrium quantity Q* satisfy: Qd(P^) = Qs(P^)

    • At prices above equilibrium, a surplus exists; at prices below equilibrium, a shortage exists.

    • Surplus: QS > QD. Example: If P = 5, QD = 9 and QS = 25, surplus = 25 - 9 = 16.

    • Shortage: QD > QS. Example: If P = 1, QD = 21 and QS = 5, shortage = 21 - 5 = 16.

    • Market responses: Surpluses push prices down; shortages push prices up, moving the market toward equilibrium.

  • Shifts vs Movements in Equilibrium analysis

    • Change in supply: a shift of the S curve occurs with non-price determinants (technology, input costs, etc.).

    • Change in demand: a shift of the D curve occurs with non-price determinants (income, preferences, prices of related goods).

    • Movement along curves: caused by price changes (P changes while determinants remain constant).

  • Example: The Hybrid Car Market

    • Event: Rising gasoline prices affect demand for hybrids.

    • Step 1: D curve shifts (Pgas affects demand for hybrids; S curve unchanged).

    • Step 2: D shifts right (higher gas price makes hybrids more attractive).

    • Step 3: Result: equilibrium price and quantity of hybrids rise.

    • Key takeaway: Always distinguish between a shift of a curve and a movement along a curve.

  • Terms: Shift vs Movement Along Curve

    • Change in supply: a shift in the S curve due to a non-price determinant.

    • Change in the quantity supplied: a movement along a fixed S curve due to a price change.

    • Change in demand: a shift in the D curve due to a non-price determinant.

    • Change in the quantity demanded: a movement along a fixed D curve due to a price change.

  • US Corn Market example

    • Step 1: S curve shifts due to a cost-affecting event (e.g., weather).

    • Step 2: S shifts right (cost reductions) \rightarrow price falls and quantity rises.

  • Sometimes events cause shocks

    • Cruise ship virus outbreak (Royal Caribbean): Likely effect is a decrease in demand (D shifts in/left) with supply unchanged \rightarrow price and quantity adjust downward.

    • Pepsi bottling technology improvement: cost reduction \rightarrow supply shifts right; price falls and quantity rises in equilibrium.

    • Ketchup market after hot dog price rise: Ketchup is a complement to hot dogs; higher hot dog price reduces demand for ketchup (D shifts left).

  • The Ketchup Market (illustrative diagram)

    • Initial: D and S intersect at equilibrium P and Q.

    • After a fall in ketchup demand (D shifts left), the new equilibrium has a lower price and lower quantity (all else equal).

  • Conclusion: How Prices Allocate Resources

    • One of the Ten Principles: Markets are usually a good way to organize economic activity.

    • In market economies, prices adjust to balance supply and demand; equilibrium prices act as signals guiding decisions and resource allocation.

  • Chapter Summary (Key takeaways)

    • A competitive market has many buyers and sellers; no single actor can influence price.

    • The demand model analyzes how price and non-price determinants determine the quantity demanded.

    • The downward-sloping demand curve reflects the Law of Demand: Qd depends negatively on price.

    • Demand depends on: income, tastes/preferences, expectations, prices of substitutes and complements, and number of buyers. Changes in these factors shift the D curve.

    • The upward-sloping supply curve reflects the Law of Supply: quantity supplied depends positively on price.

    • Other determinants of supply include input costs, technology, weather, and number of sellers; changes shift the S curve.

    • The intersection of S and D determines the market equilibrium; price above equilibrium yields a surplus, price below yields a shortage.

    • The supply-demand diagram is a tool to analyze the effects of events on a market: identify shifts, determine their direction, and compare new equilibrium to the initial one.

    • Prices act as signals that guide economic decisions and allocate scarce resources.

  • Active Learning and Problems (recap)

    • Demand-focused tasks: identify how income, prices of related goods, and preferences shift demand; distinguish shifts vs movements; interpret scenarios with iPhone, AirPods, etc.

    • Supply-focused tasks: identify how technology, wages, weather, and input costs shift supply; distinguish shifts vs movements; apply to software and consumer goods.

  • Mathematical anchors (LaTeX-ready formulas)

    • Demand relationship: Qd = f(P) \text{ with } \frac{\text{d}Qd}{\text{d}P} < 0

    • Supply relationship: Qs = g(P) \text{ with } \frac{\text{d}Qs}{\text{d}P} > 0

    • Equilibrium: Qd(P^) = Qs(P^)

    • Surplus: if Qs > Qd at a given price, surplus amount = Qs - Qd

    • Shortage: if Qd > Qs at a given price, shortage amount = Qd - Qs

  • Quick reference of terms

    • Demand curve shift: caused by non-price determinants (income, preferences, related goods, etc.).

    • Movement along demand curve: caused by a change in price (P).

    • Supply curve shift: caused by non-price determinants (input costs, technology, weather, wages, etc.).

    • Movement along supply curve: caused by a change in price (P).

    • Normal good: demand rises with income (D shifts right when income rises).

    • Inferior good: demand falls as income rises (D may shift left when income rises).

  • Quick links to key diagrams and experiments

    • Demand vs D’: shift due to income, substitutes, complements, preferences.

    • Supply vs S’: shift due to costs, technology, weather, wages.

    • Equilibrium diagrams with Surplus and Shortage annotations.

  • Quick numerical recap from the slides (selected anchors)

    • Individual demand (Helen): at prices from 0 to 6, Qd = 16,14,12,10,8,6,4 respectively.

    • Market demand (two buyers example): at prices from 0 to 6, Qd = 24,21,18,15,12,9,6 respectively.

    • Supply schedule (Starbucks): at prices from 0 to 6, Qs = 0,3,6,9,12,15,18 respectively.

    • Market equilibrium (approximate intersection): at P* = 3, Q* = 15 (where Qd = Qs).

  • Note on sources of uncertainty in the slides

    • Several slides include prompts, fill-in-the-blank questions, and multiple-choice prompts meant for classroom discussion and study practice.