Overview

• Market forces: demand and supply

• Complementary vs. substitute products
• Normal vs. inferior goods

• Prescribed reading
Farnham (2014) Economics for Managers chapters 1 and 2.
Chapter 2: Market forces of demand and
supply
• Keywords
• demand • Modern microeconomics
• supply is about supply, demand
• market equilibrium and market equilibrium.
• shortage
• surplus
Demand, supply and markets
• The terms demand and supply
refer to the behaviour of
people as they interact with
one another in markets.
Markets and competition

Buyers
determine Sellers determine
demand supply
Demand
• Quantity demanded is the amount of a good that buyers are
willing and able to purchase.

• Law of demand states that, other things equal, the quantity

demanded of a good falls when the price of the good rises.
Demand schedule and curve

Demand schedule
Demand curve

Table showing Graph showing

relationship between relationship between
the price of a good and the price of a good and
the quantity the quantity
demanded. demanded.
Catherine’s demand schedule
Catherine’s demand curve
Movements along the demand curve

• Change in quantity demanded

• movement along the demand curve
• only generated by a change in the price of the product.

• Example : If price of ice-creams falls, there’s a movement along

its demand curve towards greater demand for them
Shifts in the demand curve
• Change in demand

• a shift in the demand curve, either to the left or right

• caused by any change that alters the quantity demanded at

every price.
Shifts in the demand curve
 What would shift Demand for Auckland houses ?

• Incomes of Aucklanders

• Types of houses

• Number of buyers

• Tastes and preferences, i.e. school zones, public transport etc.

• Expectations of future prices increasing or decreasing

Shifts in the demand curve

Consumer Income

Price of
Expectations related
goods
The most important variables

Number of
Tastes
buyers
Shifts in the demand curve
Suppose income
increases

Demand for Demand for

good rises good falls

Good is Good is
normal inferior
Normal goods

Goods whose market demand rises as income rises

(food, clothings, laptop, mobile phones, cars etc).
Inferior goods

Goods whose market demand falls as income rises (canned meat, Ramen,
secondhand clothing, used cars etc.)
Inferior goods
Shifts in the demand curve
Suppose price of
related good falls

Demand for Demand for

good rises good falls

Goods are Goods are

complements substitutes
Substitutes
Complements
 Quiz Time !!
• Samsung decides to decrease price on its Galaxy S9 phones
by $100. Everything else assumed unchanged, what is likely
to happen to

i) Demand for Samsung Galaxy S9 phones ? (Increase)

ii) Demand for Apple Iphone X ? (Decrease) (Substitute)

• Printers and Ink Cartridges are complements. When the price

of printer falls, the demand curve for cartridges would shift
Right OR Left ? (Increase, right)

• If there’s a discount price on cheeseburgers, the demand

curve for wraps will shift Right OR Left ?(Decrease, Left)
Supply

• Quantity supplied is the amount of a good that sellers

are willing and able to sell.

• Law of supply
• The law of supply states that, other things being equal, the
quantity supplied of a good rises when the price of the
good rises.
Supply schedule and curve

Supply curve
Supply schedule

Table showing Graph showing

relationship between relationship between
the price of a good the price of a good
and the quantity and the quantity
supplied. supplied.
Tony’s supply schedule

Price of ice cream Tony’s Quantity Sold of ice

cream
$0.5 0

$1 1

$1.5 2

$2 3

$2.5 4

$3 5
Tony’s supply curve
What would shift Supply for Petroleum in NZ ?

• Increase in cost of oil refining

• A fuel tax

• An event such as oil pipeline disruption

• Expectations of future prices increasing or decreasing

Shifts in the supply curve

Input prices

Expectations Technology

The most important variables

Number of sellers
Movements along the supply curve
• Change in quantity supplied

• Movement along the supply curve is caused by a

change in anything that alters the quantity supplied at
each price.
Shifts in the supply curve
• Change in supply

• a shift in the supply curve, either to the left or right

• caused by a change in a determinant other than price.
Shifts in the supply curve
 Quiz Time !!

• Which of the following will NOT cause a shift in the

supply of gasoline?

(a) An increase in the wage rate of refinery workers.

(b) A decrease in the price of gasoline.
(c) An improvement in oil refining technology.
(d) A decrease in the price of crude oil.
(e) None of the above. (None of the above)
• If steel prices increase, what would happen to supply curve
of steel crockeries ? (Decrease, shift left)

• If sugar is taxed, what would happen to supply of sugary

drinks ? (Decrease, Shift left)
Market demand versus individual demand
• Market demand is the sum of all individual demands
for a particular good or service.

• Graphically, individual demand curves are summed

horizontally to obtain the market demand curve.
Individual demand
Market demand
Market supply versus individual supply

• Market supply refers to the sum of all individual supplies

for all sellers of a particular good or service.

• Graphically, individual supply curves are summed

horizontally to obtain the market supply curve.
Market supply
Supply and demand together
• Equilibrium – where • Equilibrium quantity
supply and demand are
– Both the quantity
balanced
supplied and the
quantity demanded at
• Equilibrium price the equilibrium price.
• The price that equates
quantity supplied and
quantity demanded. – On a graph it is the
quantity at which the
• On a graph, it is the supply and demand
price at which the curves intersect.
supply and demand
curves intersect.
The equilibrium of supply and demand
Markets not in equilibrium
Equilibrium
• Surplus
• When market price >
equilibrium price, then
quantity supplied >
quantity demanded.
• There is a surplus.
• Suppliers lower price to
increase sales, thereby
moving toward equilibrium.
• Shortage
– When market price <
equilibrium price, then
quantity demanded > the
quantity supplied.
• There is a shortage.
• Suppliers raise price
due to too many
buyers chasing too few
goods, thereby moving
toward equilibrium.
Equilibrium
• Law of supply and demand

• The claim that the price of any good adjusts to bring the
supply and demand for that good into balance.
Three steps to analysing changes in
equilibrium
An increase in demand
A decrease in supply and increase in
demand
Real world Application
The Price of a College Education in US
• The price of a college education rose in US by 55
percent from 1970 to 2002
• Increases in costs of modern classrooms and wages
increased costs of production – decrease in supply
• Due to a larger percentage of high school graduates
attending college, demand increased

47
Market for a College Education
P S2002
(annual cost
in 1970 New
dollars)
equilibrium
was reached at
$3,917 $3,917 and a
S1970 quantity of 13.2
million
students

$2,530

D1970 D2002

Q (millions enrolled))
8.6 13.2 48
Summary
• The demand curve shows
• how the quantity of a good depends upon the price; and
• slopes downward according to the law of demand.

• Other determinants of demand include income, tastes,

expectations and the prices of complements and
substitutes.

• If one of these factors changes, the demand curve shifts.

Summary
The law of supply states that as the price of a good rises, the quantity
supplied rises.
• supply curve slopes upwards according to the law of supply .

• Other determinants of supply include input prices, technology,

expectations.
• If one of these factors changes, the supply curve shifts.
Summary
• The intersection of the supply and demand curves determines the
market equilibrium
• At the equilibrium price, the quantity demanded equals the quantity
supplied.
• The behaviour of buyers and sellers drives markets toward their equilibrium.

• The supply-and-demand diagram can be used to analyse how events

affect the equilibrium price and quantity.

• In market economies, prices are the signals that guide economic

decisions and thereby allocate resources.