Supply and demand are the key forces that determine price and quantity in a market. Supply refers to the amount of a good or service that sellers are willing and able to provide at a given price. Demand refers to how much of a good or service purchasers are willing and able to buy at a given price. The intersection of the supply and demand curves results in an equilibrium price and quantity where the amounts suppliers are willing to sell and buyers are willing to purchase are equal.

2. 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.

3. 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.

4. Buyers determine demand.
Sellers determine supply.

5. A 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.

6. Products are the same
Numerous buyers and sellers so that each
has no influence over price
Buyers and Sellers are price takers
Perfect Competition

7. Monopoly
One seller, and seller controls price
Oligopoly
Few sellers
Not always aggressive competition

8. Monopolistic Competition
Many sellers
Slightly differentiated products
Each seller may set price for its own
product

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

10. Price demand:
Refers to the various quantities of goods and
services that a consumer would purchase at a given
time in a market at various hypothetical prices.

11. Income demand:
Refers to the various quantities of goods and
services which would be purchased by the
consumers at various levels of income.

12. Cross demand:
Means the quantities of goods and services which
will be purchased with reference to change in price
not of this good but of other inter-related goods.

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

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

15. Price Quantity
Rs0.00 12
0.50 10
1.00 8
1.50 6
2.00 4
2.50 2
3.00 0

16. Average income
Size of the market
Prices of related goods
Tastes or preferences
Expectations
Distinction

17. The demand curve is the downward-
sloping line relating price to quantity
demanded.

18. Rs3.0
0
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
Price Quantity
Rs0.00 12
0.50 10
1.00 8
1.50 6
2.00 4
2.50 2
3.00 0

19. Substitution effect: when the price of
good rises, we substitute other
similar goods for it.
Income effect: when prices price
goes up we find ourselves poorer
than we were before.

20. Ceteris paribus is a Latin phrase that
means 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!

21. Market demand refers to 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.

22. Change in Quantity Demanded
Movement along the demand curve.
Caused by a change in the price of
the product.

23. 0
D1
Price of
Cigarettes
per Pack
Number of Cigarettes
Smoked per Day
A tax that raises the
price of cigarettes
results in a movement
along the demand
curve.
A
C
20
2.00
Rs4.0
0
12

24. Change in Demand
A shift in the demand curve, either to the
left or right.
Caused by a change in a
determinant other than the price.

25. 0
D1
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
D3
D2
Increase in
demand
Decrease in
demand

26. As income increases the demand
for a normal good will increase.
As income increases the demand
for an inferior good will decrease.

27. Rs3.0
0
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
Increase
in demand
An
increase in
income...
D1
D2

28. Rs3.00
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
Decrease
in demand
An
increase in
income...
D1D2

29. When a fall in the price of one good
reduces the demand for another good,
the two goods are called substitutes.
When a fall in the price of one good
increases the demand for another
good, the two goods are called
complements.

30. Quantity supplied is the amount of a
good that sellers are willing and able
to sell.

31. The law of supply states that there is a
direct (positive) relationship between
price and quantity supplied.

32. Market price
Cost of production(inputs)
Technology
Expectations
Government policies
Special influences
Number of producers

33. The supply schedule is a table that
shows the relationship between the
price of the good and the quantity
supplied.

34. Price Quantity
Rs0.00 0
0.50 0
1.00 1
1.50 2
2.00 3
2.50 4
3.00 5

35. The supply curve is the upward-sloping
line relating price to quantity
supplied.

36. Rs3.0
0
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
Price Quantity
Rs0.00 0
0.50 0
1.00 1
1.50 2
2.00 3
2.50 4
3.00 5

37. 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.

38. Change in Quantity Supplied
Movement along the supply curve.
Caused by a change in the market price of
the product.

39. 1 5
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
S
1.00
A
C
Rs3.00 A rise in the price
of ice cream cones
results in a
movement along
the supply curve.

40. 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.

41. Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
S1 S2
S3
Increase in
Supply
Decrease
in Supply

42. Market Equilibrium
 Market Equilibrium comes at that price and
quantity where the forces of supply and
demand are in balance.
 The equilibrium price is also called the
market-clearing price.

43. Equilibrium Price
The price that balances supply and demand.
On a graph, it is the price at which the supply
and demand curves intersect.
Equilibrium Quantity
The quantity that balances supply and demand.
On a graph it is the quantity at which the supply
and demand curves intersect.

44. Price Quantity
Rs0.00 0
0.50 0
1.00 1
1.50 4
2.00 7
2.50 10
3.00 13
Price Quantity
Rs0.00 19
0.50 16
1.00 13
1.50 10
2.00 7
2.50 4
3.00 1
Demand
Schedule
Supply Schedule
At Rs.2.00, the quantity demanded is
equal to the quantity supplied!

45. Supply
Demand
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
21 3 4 5 6 7 8 9 10 12110
Rs3.0
0
2.50
2.00
1.50
1.00
0.50
Equilibrium

46. Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
21 3 4 5 6 7 8 9 10 12110
Rs3.0
0
2.50
2.00
1.50
1.00
0.50
Supply
Demand
Surplus

47. When the price is above the equilibrium price, the
quantity supplied exceeds the quantity demanded.
There is excess supply or a surplus. Suppliers will
lower the price to increase sales, thereby moving
toward equilibrium.

48. Quantity of
Ice-Cream Cones
Price of
Ice-Cream
Cone
Rs2.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Supply
Demand
Rs1.50
Shortage

49. When the price is below the equilibrium price, the
quantity demanded exceeds the quantity supplied.
There is excess demand or a shortage. Suppliers
will raise the price due to too many buyers chasing
too few goods, thereby moving toward equilibrium.

50. Price of
Ice-Cream
Cone
2.00
0 7 Quantity of
Ice-Cream Cones
Supply
Initial
equilibrium
D1
1. Hot weather increases
the demand for ice cream...
D2
2. ...resulting
in a higher
price...
Rs2.50
10
3. ...and a higher
quantity sold.
New equilibrium

51. A shift in the supply curve is called a change
in supply.
A movement along a fixed supply curve is
called a change in quantity supplied.
A shift in the demand curve is called a
change in demand.
A movement along a fixed demand curve is
called a change in quantity demanded.

52. S2
Price of
Ice-Cream
Cone
2.00
0 1 2 3 4 7 8 9 11 12 Quantity of
Ice-Cream Cones
13
Demand
Initial equilibrium
S1
10
1. Increase in the price of
inputs reduces the supply
of ice cream...
New
equilibrium
2. ...resulting
in a higher
price...
Rs2.50
3. ...and a lower
quantity sold.