The Market Forces of Supply and DemandChapter 4Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.

The Market Forces of Supply and Demand Supply

and demand are the two words that economists use most often. Supply and demand are the forces that make market economies work. Modern microeconomics is about supply, demand, and market equilibrium.Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Markets A

market is a group of buyers and sellers of a particular good or service. The terms supply and demand refer to the behavior of people . . . as they interact with one another in markets.

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Markets

Buyers determine demand.

Sellers determine supply.

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Market Type: A Competitive MarketA competitive market is a market. . . with many buyers and sellers. that is not controlled by any one person. in which a narrow range of prices are established that buyers and sellers act upon.Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Competition: Perfect and OtherwisePerfect Competition Products

are the same Numerous buyers and sellers so that each has no influence over price Buyers and Sellers are price takers

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Competition: Perfect and Otherwise Monopoly One

seller, and seller controls price

Oligopoly Few

sellers Not always aggressive competition

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Competition: Perfect and Otherwise Monopolistic Many

Competition

sellers Slightly differentiated products Each seller may set price for its own product

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DemandQuantity demanded is the amount of a good that buyers are willing and able to purchase.

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Law of DemandThe law of demand states that there is an inverse relationship between price and quantity demanded.

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Demand ScheduleThe demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.

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Demand SchedulePrice $0.00 0.50 1.00 1.50 2.00 2.50 3.00 Quantity 12 10 8 6 4 2 0

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Determinants of Demand Market

price Consumer income Prices of related goods Tastes Expectations

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Demand CurveThe demand curve is the downwardsloping line relating price to quantity demanded.

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Demand CurvePrice of Ice-Cream Cone

$3.00 2.50 2.00 1.50

Price $0.00 0.50 1.00 1.50 2.00 2.50 3.00

Quantity 12 10 8 6 4 2 0

1.000.50Quantity of Ice-Cream Cones

0 1

2 3 4 5 6 7 8 9 10 11 12

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Ceteris ParibusCeteris paribus is a Latin phrase thatmeans all variables other than the ones being studied are assumed to be constant. Literally, ceteris paribus means “other things being equal.”The demand curve slopes downward because, ceteris paribus, lower prices imply a greater quantity demanded!Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.