Summery Demand and Supply
1 Economists use the model of supply and demand to analyze competitive markets. In a
competitive market, there are many buyers and sellers, each of whom has little or no
influence on the market price.
2 The demand curve shows how the quantity of a good demanded depends on the price.
According to the law of demand, as the price of a good falls, the quantity demanded rises.
Therefore, the demand curve slopes downward.
3 In addition to price, other determinants of the quantity demanded include income,
tastes, expectations, and the prices of substitutes and complements. If one of these other
determinants changes, the demand curve shifts.
4 The supply curve shows how the quantity of a good supplied depends on the price.
According to the law of supply, as the price of a good rises, the quantity supplied rises.
Therefore, the supply curve slopes upward.
5 In addition to price, other determinants of the quantity supplied include input prices,
technology, and expectations. If one of these other determinants changes, the supply
curve shifts.
6 The intersection of the supply and demand curves determines the market equilibrium.
At the equilibrium price, the quantity demanded equals the quantity supplied.
7 The behavior of buyers and sellers naturally drives markets toward their equilibrium.
When the market price is above the equilibrium price, there is a surplus of the good,
which causes the market price to fall. When the market price is below the equilibrium
price, there is a shortage, which causes the market price to rise.
8 To analyze how any event influences a market, we use the supply-and-demand diagram
to examine how the event affects the equilibrium price and quantity. To do this we follow
three steps. First, we decide whether the event shifts the supply curve or the demand
curve (or both). Second, we decide which direction the curve shifts. Third, we compare
the new equilibrium with the old equilibrium.
9 In market economies, prices are the signals that guide economic decisions and thereby
allocate scarce resources. For every good in the economy, the price ensures that supply
and demand are in balance. The equilibrium price then determines how much of the good
buyers choose to purchase and how much sellers choose to produce.
Skill Development
Questions for Review
What is a competitive market? Briefly describe the types of markets other than perfectly
competitive markets.
2. What determines the quantity of a good that buyers demand?
3. What are the demand schedule and the demand curve, and how are they related? Why
does the demand curve slope downward?
4. Does a change in consumers’ tastes lead to a movement along the demand curve or a
shift in the demand curve? Does a change in price lead to a movement along the demand
curve or a shift in the demand curve?
5.Ali’s income declines and, as a result, he buys more Apple. Is Apple an inferior or a
normal good? What happens to Ali’s demand curve for Apple?
6. What determines the quantity of a good that sellers What are the supply schedule and
the supply curve, and how are they related? Why does the supply curve slope upward?
8. Does a change in producers’ technology lead to a movement along the supply curve or
a shift in the supply curve? Does a change in price lead to a movement along the supply
curve or a shift in the supply curve?
9. Define the equilibrium of a market. Describe the forces that move a market toward its
equilibrium.
10. Coke and pizza are complements because they are often enjoyed together. When the
price of beer rises, what happens to the supply, demand, quantity supplied, quantity
demanded, and the price in the market for pizza?
11. Describe the role of prices in market economies.
Skill Development
QNO1 Suppose we have the following market supply and demand schedules for bicycles:
Price Quantity demanded Quantity supplied
200 60 40
300 50 50
400 40 60
500 30 70
600 20 80
A Plot the supply curve and the demand curve for bicycles
B What is the equilibrium price of bicycles?
c. What is the equilibrium quantity of bicycles?
d. If the price of bicycles were $100, is there a surplus or a shortage? He many units of
surplus or shortage are there? Will this cause the price I rise or fall?
If the price of bicycles were $400, is there a surplus or a shortage? How many units of
surplus or shortage are there? Will this cause the price to rise or fall?
f. Suppose that the bicycle maker's labor union bargains for an increase in its wages.
Further, suppose this event raises the cost of production, makes bicycle manufacturing
less profitable, and reduces the quantity supplied of bicycles by 20 units at each price of
bicycles. Plot the new supply curve and the original supply and demand curves. What is
the new equilibrium price and quantity in the market for bicycles?
QNO2. Each of the events listed below has an impact on the market for bicycles. For
each event, which curve is affected (supply or demand for bicycles), what direction is it
shifted, and what is the resulting impact on the equilibrium price and quantity of
bicycles?
a. An increase in the price of automobiles
b. A decrease in incomes of consumers if bicycles are a normal good
c. An increase in the price of steel used to make bicycle frames
d An environmental movement shifts tastes toward bicycling
e. Consumers expect the price of bicycles to fall in the future
f, A technological advance in the manufacture of bicycles
g. A reduction in the price of bicycle helmets and shoes
h. A decrease in incomes of consumers if bicycles are an inferior good
QNO3 The following questions address a market when both supply and demand shift.
a. What would happen to the equilibrium price and quantity in the bicycle market if there
is an increase in both the supply and the demand for bicycles?
b. What would happen to the equilibrium price and quantity in the bicycle market if the
demand for bicycles increases more than the increase in the supply of bicycles?
