1. Market 2. Demand 3. Supply 4. Equilibrium

1. Nguyễn Hoàng Mỹ Phương
phuong.hm.nguyen@gmail.com
The Market Forces of
Supply and Demand

2. Summary
1. Market
2. Demand
3. Supply
4. Equilibrium

3. 1. Market

4. Market
 A market(place) is a place where buyers and
sellers meet and arrange sales. [Place-ness, i.e.
how culture, social relation, and history have
shaped the specific forms and meanings of
economic activity that occur there -- economic
anthropology; economic sociology]
 A market is an exchange mechanism that allows
buyers to trade with sellers.
 A market is the collection of buyers and sellers
that, through their actual or potential interactions,
determine the price of a product or set of
products.

5. Forms of Markets
 Markets take many forms:
 Some markets are highly organized, such as the
markets for many agricultural commodities.
 More often, markets are less organized, such as
the market for ice cream in a particular town

6. Market Definition
 Market definition: Determination of the buyers,
sellers, and range of products that should be included
in a particular market.
 Extent of a market: boundaries of a market, both
geographical and in terms of range of products
produced and sold within it.
 Two reasons of its importance:
 Market definition can be important for public policy
decisions.
 A company must understand who its actual and potential
competitors are for the various products that it sells or
might sell in the future; must also know the product
boundaries and geographical boundaries of its market to
set price, determine advertising budgets, and make
capital investment decisions.

7. Market Structure
 Market structure: the number of firms in the market,
the ease with which firms can enter and leave the
market, and the ability of firms to differentiate their
products from those of their rivals.
 Market power: the ability to affect price, either by a
seller or a buyer.
 Types of market structures:
 Competitive market
 Monopoly
 Monopolistic competition
 Oligopoly

8. Competitive Market
 Competitive market (sometimes called perfectly
competitive market): a market with many buyers and
sellers trading identical products so that each buyer
and seller is a price taker.
 Characteristics:
 There are many buyers and sellers in the market
 The goods offered by the various sellers are largely the
same
 Firms can freely enter or exit the market
 We use the term competition to refer to all markets in
which no buyer or seller can significantly affect the
market price.

9. Monopoly
 Monopoly: a firm that is the sole seller of a
product without close substitutes (price maker).
 The fundamental cause of monopoly is barriers to
entry which have 3 main sources:
 Monopoly resources: a key source required for
production is owned by a single firm.
 Government regulation: the government gives a
single firm the exclusive right to produce some good
or service.
 The production process (natural monopoly): a
single firm can produce output at a lower cost than
can a larger number of firms.

10. Monopolistic Competition
 Monopolistic competition: a market structure in
which many firms sell products that are similar but
not identical.
 Characteristics:
 Many sellers: there are many firms competing for
the same group of customers.
 Product differentiation: each firm produces a
product that is at least slightly different from those
of other firms. Thus, rather than being a price taker,
each firm faces a downward-sloping demand curve.
 Free entry and exit: Firms can enter or exit the
market without restriction.

11. Oligopoly
 Oligopoly: a market structure in which only a few
sellers offer similar or identical products.
 Concentration ratio: the percentage of total
output in the market supplied by the four largest
firms.
 Ex.: In US economy, electric lamp bulbs (75%),
breakfast cereal (80%), aircraft manufacturing
(81%), cigarettes (98%), etc.

12. Source: Mankiw, N.G. Principles of Microeconomics, 7th edition. US: Cengage Learning, 2015.

13. 2. Demand

14. Demand vs. Quantity Demanded
 Demand: the quantities of a good that buyers are
willing and able to purchase at each possible
price during a given period of time, holding
constant the other factors that influence
purchases (ceteris paribus).
 The quantity demanded is a specific amount of
a good that buyers are willing and able to
purchase at one price.

15. Demand Schedule
Demand schedule: a table that shows the
relationship between the price of a good and the
quantity demanded.
Price of
Ice-Cream Cone
Quantity of
Cones Demanded
$0,00 12 cones
0,50 10
1,00 8
1,50 6
2,00 4
2,50 2
3,00 0

16. Demand Curve
Demand curve: a graph of the relationship
between the price of good and the quantity
demanded
Because a
lower price
increases
the quantity
demanded,
the demand
curve slopes
downward.

17. Market Demand vs. Individual Demand
Market demand:
the sum of all the
individual
demands for a
particular good or
service.

18. One of the most important things to know about a
graph of a demand curve is what is not shown. All
relevant economic variables that are not explicitly
shown on the demand curve graph – income of
customers, price of related goods, tastes,
expectations, number of buyers, etc. – are held
constant.
Thus the demand curve shows how quantity varies
with price but not how quantity varies with income
of customers, price of related goods, tastes,
expectations, number of buyers, or other variables.
Determinants of Demand

19. Law of Demand
 Law of demand: other things being equal (ceteris
paribus), when the price of good rises, the
quantity demanded of a good falls, and when the
price falls, the quantity demanded rises.
P↑ → QD↓
P↓ → QD↑

20. Shift in the Demand Curve
vs. Movement along the Demand Curve

21. Shifts in the Demand Curve
 Income:
 Normal good: a good for which, other things being
equal, an increase in income leads to an increase in
demand.
 Inferior good: a good for which, other things being
equal, an increase in income leads to a decrease in
demand.
 Prices of related goods:
 Substitutes: two goods for which an increase in the
price of one leads to an increase in the demand for the
other
 Complements: two goods for which an increase in the
price of one leads to an decrease in the demand for the
other

22. Shifts in the demand curve
 Tastes
 Expectations: expectations about the future may
affect the demand for a good or service today.
 Numbers of buyers: if there are more buyers,
the quantity demanded in the market will be
higher at every price, and market demand will
increase.

23. Shifts in the Demand Curve
vs. Movements along the Demand Curve

24. 3. Supply

25. Supply vs. Quantity Supplied
 Supply: the quantities of a good that sellers are
willing and able to supply at each possible price
during a given period of time, holding constant
the other factors that influence purchases (ceteris
paribus).
 The quantity supplied is a specific amount of a
good that sellers are willing and able to supply at
one price.

26. Supply Schedule
Supply schedule: a table that shows the
relationship between the price of a good and the
quantity supplied.
Price of
Ice-Cream Cone
Quantity of
Cones Supplied
$0,00 0 cones
0,50 0
1,00 1
1,50 2
2,00 3
2,50 4
3,00 5

27. Supply Curve
 Supply curve: a graph of the relationship between
the price of good and the quantity supplied.
Because a
higher price
increases
the quantity
supplied,
the supply
curve
slopes
upward.

28. Market Supply vs. Individual Supply
Market
supply is the
sum of the
supplies of all
sellers.

29. Law of Supply
 Law of supply: Other things being equal, when
the price of the good rises, the quantity supplied
of the good also rises, when the price falls, the
quantity supplied falls as well.
P↑ → QS↑
P↓ → QS↓

30. Shifts in the Supply Curve
Any change that raises the quantity that sellers wish to produce at
any given price shifts the supply curve to the right. Any change that
lowers the quantity that sellers wish to produce at any given price
shifts the supply curve to the left.

31. Shifts in the Supply Curve
 Input prices: the supply of a good is negatively
related to the price of the inputs used to make the
good.
 Technology: the advance in technology raised
the supply by reducing firms’ costs.
 Expectations: expectations about the future may
affect the supply for a good or service today.
 Numbers of sellers: If there are less suppliers,
the supply in the market will fall.

32. Shifts in the Supply Curve
vs. Movements along the Supply Curve

33. 4. Equilibrium

34. Equilibrium
 Equilibrium: a situation in which the market price
has reached the level at which quantity supplied
equals quantity demanded.
 Equilibrium price (market-clearing price): the
price that balances quantity supplied and quantity
demanded.
 Equilibrium quantity: the quantity supplied and
the quantity demanded at the equilibrium price.

35. P
PE = $2,00
0 QE = 7 Q
D
S
Equilibrium
Equilibrium price
Equilibrium
quantity
E
Equilibrium

36. Equilibrium
At equilibrium:
 QD = QS
 No surplus (excess supply)
 No shortage (excess demand)
 No upward or downward pressure on the price.
-> What happens when the market price is not
equal to the equilibrium price?

37. P
PE
o QE Q
D
SSurplus
QD QS
P1
• Market price > Equilibrium price
• QS > QD (excess supply)
• Sellers reduce their prices until QS = QD
Surplus (excess supply)

38. 38
P
PE
o QE Q
D
S
Shortage
QS QD
P1
• Market price < Equilibrium price
• QS < QD (excess demand)
• Sellers raise their prices until QS = QD
Shortage (excess demand)

39. Law of Supply and Demand
 Law of supply and demand: the price of any
good adjusts to bring the quantity supplied and
the quantity demanded for that good into balance.

40. Changes in Equilibrium
 Changes in demand (shifts in the demand curve)
 Changes in supply (shifts in the supply curve)
 Changes in both demand and supply (shifts in
both the demand and supply curves)

41. Analysis of Changes in Equilibrium
1. Decide whether the event shifts the supply or
demand curve (or perhaps both).
2. Decide in which direction the curve shifts.
3. Use the supply-and-demand diagram to see
how the shift changes the equilibrium price and
quantity.

42. Change in Demand
P
P1
o Q1 Q
D1
S
Initial equilibrium
Q2
P2
D2
New equilibrium
Changes in Equilibrium

43. Change in Supply
P
P1
o Q1 Q
S1
D
Initial equilibrium
Q2
P2
S2
New equilibrium
Changes in Equilibrium

44. Change in Demand and Supply
S2
Q2
P2
New equilibrium
D2
P
P1
o Q
S1
Initial equilibrium
Q1
D1
Changes in Equilibrium

45. 45
Change in Demand and Supply
S2
New equilibrium
Q2
P2
D2
P
P1
o Q1 Q
S1
Initial equilibrium
D1
Changes in Equilibrium

46. References
 Mankiw N.G. Principles of Microeconomics, 7th
edition. US: Cengage Learning, 2015.
 Perloff J.M. Microeconomics, 6th edition. Boston:
Addison-Wesley, 2012.
 Pindyck R.S. and Rubinfeld D.L. Microeconomics,
8th edition. US: Prentice Hall, 2013.
 Jain, T.R. and Sandhu A.S. Microeconomics.
Delhi: Prince Print Process 2010.
 Leshkowich, Ann M. Essential Trade: Vietnamese
Women in a Changing Marketplace. Honolulu:
University of Hawai’i Press, 2014.