ECON 101: INTRODUCTION TO

ECONOMICS I

Lecture 3 – The Market Forces of

Demand and Supply

Dr. Emmanuel Adu-Danso (Group A)

Department of Economics
School of Social Studies
2022/2023
 Lecture Overview
• In this lecture, we introduce the concept of demand and
supply – law of demand; law of supply; shifts in the demand
and supply curves

• We subsequently combine demand and supply to look at the

market equilibrium, where the equilibrium price and
equilibrium quantity is determined.

• We answer the following questions during this lecture

– What factors affect buyers’ demand for goods?
– What factors affect sellers’ supply of goods?

Dr. Emmanuel Adu-Danso, Economics Department Slide 2

 Lecture Overview
• Questions continued:
– How do supply and demand determine the price of a good
and the quantity sold?
– How do changes in the factors that affect demand or
supply affect the market price and quantity of a good?
– How do markets allocate resources?

• This lecture will be based on Mankiw, G. (2012).

Principles of Economics (6th Edition), South Western.
– Chapter 4

Dr. Emmanuel Adu-Danso, Economics Department Slide 3

 Learning Outcomes
• By the end of the lecture, you should be able to:
– Differentiate between a change in demanded and a change
in quantity demanded
– Identify and explain the factors that influence a change in
demand.
– Differentiate between a change in quantity supplied and a
change in supply
– Identify and explain the factors that influence a change in
supply
– Determine the equilibrium price and quantity in a market.

Dr. Emmanuel Adu-Danso, Economics Department

4
 Markets and Competition
• A market - group of buyers and sellers of a particular product.
• A competitive market - many buyers and sellers, each has an
insignificant effect on price.
• In a perfectly competitive market:
– Homogeneous goods
– Many buyers & sellers such that no one can affect market
price—each is a “price taker”
• We assume markets are perfectly competitive.

Dr. Emmanuel Adu-Danso, Economics Department Slide 5

 DEMAND

Dr. Emmanuel Adu-Danso, Economics Department Slide 6

 Demand
• The quantity demanded of any good is the amount
of the good that buyers are willing and able to
purchase.
• Law of demand: quantity demanded of a good falls
when the price of the good rises, other things equal
• Demand may be expressed as a demand schedule,
graph or in a functional form.

Dr. Emmanuel Adu-Danso, Economics Department Slide 7

 The Demand Schedule

• A table that shows the Price

Quantity
of
relationship between the smoothie of smoothie
demanded
price of a good and the (¢)
quantity demanded 0.00 16
1.00 14
• Example:
2.00 12
Helen’s demand for
smoothie. 3.00 10
4.00 8
5.00 6
6.00 4
Dr. Emmanuel Adu-Danso, Economics Department Slide 8
Price of smoothie Quantity
Price
of
of
smoothies
$6.00 smoothie
demanded

$5.00 ¢0.00 16
1.00 14
$4.00
2.00 12
$3.00 3.00 10

$2.00 4.00 8
5.00 6
$1.00
6.00 4
$0.00
Dr. Emmanuel Adu-Danso, Economics Department Quantity
Slide 9 of smoothies
0 5 10 15
 Market Demand versus Individual Demand

• Suppose Helen and Ken are the only two buyers in the
smoothie market. (Qd = quantity demanded)
Price Helen’s Qd Ken’s Qd Market Qd
¢0.00 16 + 8 = 24
1.00 14 + 7 = 21
2.00 12 + 6 = 18
3.00 10 + 5 = 15
4.00 8 + 4 = 12
5.00 6 + 3 = 9
6.00 4 + 2 = 6
Dr. Emmanuel Adu-Danso, Economics Department Slide 10
 The Market Demand Curve for smoothie
P
Qd
P
(Market)
¢0.00 24
1.00 21
2.00 18
3.00 15
4.00 12
5.00 9
Q 6.00 6

Dr. Emmanuel Adu-Danso, Economics Department Slide 11

 Shift 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 (i.e., things that determine buyers’ demand
for a good, other than the good’s price).

• Changes in them shift the D curve…

Dr. Emmanuel Adu-Danso, Economics Department Slide 12

 Demand Curve Shifters: # of Buyers

• Increase in # of buyers
increases quantity demanded at each price,
shifts D curve to the right.

Dr. Emmanuel Adu-Danso, Economics Department Slide 13

 Demand Curve Shifters: # of Buyers

P
Suppose the number
of buyers increases.
Then, at each P,
Qd will increase
(by 5 in this example).

Dr. Emmanuel Adu-Danso, Economics Department Slide 14

 Demand Curve Shifters: Income

• Demand for a normal good is positively related to

income.
– Increase in income causes
increase in quantity demanded at each price,
shifts D curve to the right.
(Demand for an inferior good is negatively related to
income. An increase in income shifts D curves for
inferior goods to the left.)

Dr. Emmanuel Adu-Danso, Economics Department Slide 15

 Demand Curve Shifters: Prices of
Related Goods
• Two goods are substitutes if
an increase in the price of one
causes an increase in demand for the other.

• Examples?

Dr. Emmanuel Adu-Danso, Economics Department Slide 16

 Demand Curve Shifters: Prices of
Related Goods
• Two goods are complements if
an increase in the price of one
causes a fall in demand for the other.

• Examples?

Dr. Emmanuel Adu-Danso, Economics Department Slide 17

 Demand Curve Shifters: Tastes

• Anything that causes a shift in tastes toward a good will

increase demand for that good
and shift its D curve to the right.

Dr. Emmanuel Adu-Danso, Economics Department Slide 18

 Demand Curve Shifters: Expectations

• Expectations affect consumers’ buying decisions.

• Examples:
– If people expect their incomes to rise,
their demand for meals at expensive restaurants
may increase now.
– If the economy takes a downturn and people
worry about their future job security, demand for
new cars may fall now.

Dr. Emmanuel Adu-Danso, Economics Department Slide 19

 Summary: Variables That Influence Buyers

Variable A change in this variable…

Price …causes a movement
along the D curve
# of buyers …shifts the D curve
Income …shifts the D curve
Price of
related goods …shifts the D curve
Tastes …shifts the D curve
Expectations …shifts the D curve

Dr. Emmanuel Adu-Danso, Economics Department Slide 20

 SUPPLY

Dr. Emmanuel Adu-Danso, Economics Department Slide 21

 Supply
• The quantity supplied of any good is the amount
that sellers are willing and able to sell.

• Law of supply: the quantity supplied of a good rises

when the price of the good rises, other things equal

Dr. Emmanuel Adu-Danso, Economics Department Slide 22

 The Supply Schedule
Quantity
• A table that shows the Price of
relationship between the price of Smoothie smoothie
supplied
of a good and the quantity
¢0.00 0
supplied.
1.00 3
• Example: 2.00 6
Adzo’s supply of smoothies. 3.00 9
 Notice that Adzo’s supply 4.00 12
schedule obeys the 5.00 15
law of supply. 6.00 18

Dr. Emmanuel Adu-Danso, Economics Department Slide 23

 Adzo’s Supply Schedule & Curve
Quantity
Price of
P of smoothies smoothies
supplied
¢0.00 0
1.00 3
2.00 6
3.00 9
4.00 12
5.00 15
6.00 18
Q
Dr. Emmanuel Adu-Danso, Economics Department Slide 24
 Market Supply versus Individual Supply

• Suppose Adzo and Nourishlab are the only two sellers in

this market. (Qs = quantity supplied)
Price Adzo Nourishlab Market Qs
¢0.00 0 + 0 = 0
1.00 3 + 2 = 5
2.00 6 + 4 = 10
3.00 9 + 6 = 15
4.00 12 + 8 = 20
5.00 15 + 10 = 25
6.00 18 + 12 = 30
Dr. Emmanuel Adu-Danso, Economics Department Slide 25
 The Market Supply Curve
P
QS
P
(Market)
¢0.00 0
1.00 5
2.00 10
3.00 15
4.00 20
5.00 25
Q 6.00 30

Dr. Emmanuel Adu-Danso, Economics Department Slide 26

 Supply Curve Shifters
• The supply curve shows how price affects quantity
supplied, other things being equal.

• These “other things” are non-price determinants of

supply.

• Changes in them shift the S curve…

Dr. Emmanuel Adu-Danso, Economics Department Slide 27

 Supply Curve Shifters: Input Prices

• Examples of input prices:

wages, prices of raw materials.

• A fall in input prices makes production

more profitable at each output price,
so firms supply a larger quantity at each price,
and the S curve shifts to the right.

Dr. Emmanuel Adu-Danso, Economics Department Slide 28

 Supply Curve Shifters: Input Prices
P
Suppose the
price of fruits fall.

At each price,
the quantity of
smoothies
supplied
will increase
(by 5 in this
Qexample).

Dr. Emmanuel Adu-Danso, Economics Department Slide 29

 Supply Curve Shifters: Technology

• Technology determines how much inputs are

required to produce a unit of output.

• A cost-saving technological improvement has

the same effect as a fall in input prices,
shifts S curve to the right.

Dr. Emmanuel Adu-Danso, Economics Department Slide 30

 Supply Curve Shifters: # of Sellers

• An increase in the number of sellers increases the

quantity supplied at each price,
shifts S curve to the right.

Dr. Emmanuel Adu-Danso, Economics Department Slide 31

 Supply Curve Shifters: Expectations

• Suppose a firm expects the price of the good it sells

to rise in the future.

• The firm may reduce supply now, to save some of its

inventory to sell later at the higher price.

• This would shift the S curve leftward

Dr. Emmanuel Adu-Danso, Economics Department Slide 32

 Summary: Variables that Influence Sellers

Variable A change in this variable…

Price …causes a movement
along the S curve
Input Prices …shifts the S curve
Technology …shifts the S curve
# of Sellers …shifts the S curve
Expectations …shifts the S curve

Dr. Emmanuel Adu-Danso, Economics Department Slide 33

 MARKET EQUILIBRIUM

Dr. Emmanuel Adu-Danso, Economics Department Slide 34

 Supply and Demand

P
D S Equilibrium:
P has reached
the level where
quantity supplied
equals
quantity demanded

Dr. Emmanuel Adu-Danso, Economics Department Slide 35

 Equilibrium price:
the price that equates quantity supplied
with quantity demanded
P
D S P QD QS
$0 24 0
1 21 5
2 18 10
3 15 15
4 12 20
5 9 25
Q 6 6 30
Dr. Emmanuel Adu-Danso, Economics Department Slide 36
 Equilibrium quantity:
the quantity supplied and demanded at
the equilibrium price
P
D S P QD QS
$0 24 0
1 21 5
2 18 10
3 15 15
4 12 20
5 9 25
Q 6 6 30

Dr. Emmanuel Adu-Danso, Economics Department Slide 37

 Surplus / excess supply:
when quantity supplied is greater than
quantity demanded
P
D Surplus S Example:
If P = $5,
then
QD = 9 smoothies
and
QS = 25 smoothies
resulting in a
Q surplus of 16 smoothies
Dr. Emmanuel Adu-Danso, Economics Department Slide 38
 Surplus /excess supply:
when quantity supplied is greater than
quantity demanded
P
D Surplus S Facing a surplus,
sellers try to increase
sales by cutting price.
This causes
QD to rise and QS to fall…
…which reduces the
surplus.
Q
Dr. Emmanuel Adu-Danso, Economics Department Slide 39
 Surplus /excess supply:
when quantity supplied is greater than
P quantity demanded
D Surplus S Facing a surplus,
sellers try to increase sales
by cutting price.

This causes
QD to rise and QS to fall.
Prices continue to fall until
market reaches
equilibrium.
Q
Dr. Emmanuel Adu-Danso, Economics Department Slide 40
 Shortage /excess demand:

when quantity demanded is greater than

P quantity supplied
D S
Example:
If P = $1,
then
QD = 21 smoothies
and
QS = 5 smoothies
resulting in a
shortage of 16 smoothies
Shortage Q
Dr. Emmanuel Adu-Danso, Economics Department Slide 41
 Shortage /excess demand:

when quantity demanded is greater than

P quantity supplied
D S
Facing a shortage,
sellers raise the price,
causing QD to fall
and QS to rise,
…which reduces the
shortage.

Shortage
Q
Dr. Emmanuel Adu-Danso, Economics Department Slide 42
 Shortage /excess demand:

when quantity demanded is greater than

P quantity supplied
D S
Facing a shortage,
sellers raise the price,
causing QD to fall
and QS to rise.
Prices continue to rise
until market reaches
equilibrium.
Shortage
Q
Dr. Emmanuel Adu-Danso, Economics Department Slide 43
 Three Steps to Analyzing Changes in Equilibrium

To determine the effects of any event,

1. Decide whether the event shifts S curve,

D curve, or both.
2. Decide in which direction curve shifts.

3. Use supply—demand diagram to see

how the shift changes equilibrium P and Q.

Dr. Emmanuel Adu-Danso, Economics Department Slide 44

 EXAMPLE: The Market for Hybrid Cars

P
price of
S1
hybrid cars

P1

D1
Q
Q1
quantity of
hybrid cars
Dr. Emmanuel Adu-Danso, Economics Department Slide 45
 EXAMPLE 1: A Shift in Demand

EVENT TO BE ANALYZED:
Increase in price of fuel. P
STEP 1: S1
D curve shifts because price of fuel
affects demand for hybrids. P2
S curve does not shift, because price
of fuel does not affect cost of
producing hybrids cars. P1
STEP 2:
D shifts right because high fuel price
makes hybrids more attractive
relative to other D1 D2
STEP 3:
Q
The shift causes an increase in price Q1 Q2
and quantity of hybrid cars.
Dr. Emmanuel Adu-Danso, Economics Department Slide 46
 EXAMPLE 1: A Shift in Demand

Notice:
P
When P rises,
producers supply S1
a larger quantity P2
of hybrids, even
though the S curve
has not shifted. P1

Always be careful to
distinguish b/w a D1 D2
shift in a curve and a
Q
movement along the Q1 Q 2
curve.
Dr. Emmanuel Adu-Danso, Economics Department Slide 47
 Terms for Shift vs. Movement Along Curve

• Change in supply: a shift in the S curve

occurs when a non-price determinant of supply
changes (like technology or costs)

• Change in the quantity supplied:

a movement along a fixed S curve
occurs when P changes

Dr. Emmanuel Adu-Danso, Economics Department Slide 48

 Terms for Shift vs. Movement Along Curve

• Change in demand: a shift in the D curve

occurs when a non-price determinant of demand
changes (like income or # of buyers)

• Change in the quantity demanded:

a movement along a fixed D curve
occurs when P changes

Dr. Emmanuel Adu-Danso, Economics Department Slide 49

 EXAMPLE 2: A Shift in Supply

EVENT: New technology reduces cost

of producing hybrid cars. P
STEP 1:
S1 S2
S curve shifts because event affects
cost of production.
D curve does not shift, because
production technology is not one
of the factors that affect demand. P1
STEP 2:
P2
S shifts right because event reduces
cost, makes production more
profitable at any given price. D1
STEP 3: Q
The shift causes price to fall and Q1 Q 2
quantity to rise.
Dr. Emmanuel Adu-Danso, Economics Department Slide 50
 EXAMPLE 3: A Shift in Both Supply
and Demand
EVENTS: P
Price of fuel rises AND new
technology reduces production S1 S2
costs
STEP 1: P2
Both curves shift.
STEP 2: P1
Both shift to the right.
STEP 3:
Q rises, but effect on P is D1 D2
ambiguous:
Q
If demand increases more than Q1 Q2
supply, P rises.
Dr. Emmanuel Adu-Danso, Economics Department Slide 51
 EXAMPLE 3: A Shift in Both Supply
and Demand
EVENTS:
price of fuel rises AND P
new technology reduces S1 S2
production costs

STEP 3, cont.
P1
But if supply
increases more P2
than demand,
P falls. D1 D2
Q
Q1 Q2
Dr. Emmanuel Adu-Danso, Economics Department Slide 52
 CONCLUSION:
How Prices Allocate Resources

• One of the Ten Principles from Lecture 1:

Markets are usually a good way
to organize economic activity.

• In market economies, prices adjust to balance supply and

demand.

• These equilibrium prices are the signals that guide economic

decisions and thereby allocate scarce resources.

Dr. Emmanuel Adu-Danso, Economics Department Slide 53

 Summary
• A competitive market has many buyers and sellers, each of
whom has little or no influence
on the market price.

• Economists use the supply and demand model to analyze

competitive markets.

• The downward-sloping demand curve reflects the law of

demand, which states that the quantity buyers demand of a
good depends negatively on the good’s price.

Dr. Emmanuel Adu-Danso, Economics Department Slide 54

 Summary
• Besides price, demand depends on buyers’ incomes, tastes,
expectations, the prices of substitutes and complements, and
number of buyers.
– If one of these factors changes, the D curve shifts.

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

which states that the quantity sellers supply depends positively
on the good’s price.
– Other determinants of supply include input prices, technology,
expectations, and the # of sellers. Changes in these factors shift the S
curve.

Dr. Emmanuel Adu-Danso, Economics Department Slide 55

 Summary
• The intersection of S and D curves determines the market
equilibrium.
– At the equilibrium price, quantity supplied equals quantity demanded.

• If the market price is above equilibrium, a surplus results,

which causes the price to fall.
– If the market price is below equilibrium, a shortage results, causing
the price to rise.

Dr. Emmanuel Adu-Danso, Economics Department Slide 56

 Summary
• We can use the supply-demand diagram to analyze the effects
of any event on a market:
– First, determine whether the event shifts one or both
curves.
– Second, determine the direction of the shifts.
– Third, compare the new equilibrium to the initial one.

• In market economies, prices are the signals that guide

economic decisions and allocate scarce resources.

Dr. Emmanuel Adu-Danso, Economics Department Slide 57