The terms supply and demand refer to the behavior of people as they interact in competitive markets. Let’s first discuss the meaning of the terms market and competition. 4-1a What Is a Market? market a group of buyers and sellers of a particular good or service competitive market a market in which there are many buyers and many sellers so each has a negligible impact on the market price A market is a group of buyers and sellers of a good or service. The buyers determine the demand for the product, and the sellers determine the supply of the product. Markets take many forms. Some are highly organized. In the markets for wheat and corn, buyers and sellers meet at a specific time and place, knowing how much of these agricultural commodities they are willing to buy and sell at various prices. An auctioneer keeps the process orderly by arranging sales and (most importantly) finding the prices that bring the buying and selling into balance. More often, markets are less organized than that. For example, consider the market for ice cream in a particular town. Ice-cream buyers do not all meet at any one time or place. The sellers are in several locations and offer somewhat different toppings and flavors. No auctioneer calls out the price of a sundae. Each seller posts a price for an ice-cream cone, and each buyer decides how many to buy at each store. Nonetheless, these consumers and producers of ice cream are closely connected. The buyers are choosing among the various sellers to satisfy their cravings, and the sellers are all trying to attract the same buyers to make their businesses succeed. Even though they do not look as organized, the ice-cream buyers and sellers form a market. 4-1b What Is Competition? The ice-cream market, like many markets in the economy, is highly competitive. Buyers know that there are several sellers from which to choose, and sellers are aware that each of their products is similar to those offered by others. As a result, the price of ice cream and the quantity sold are determined not by any single buyer or seller but by all the buyers and sellers as they interact in the marketplace. Economists use the term competitive market to describe a market in which there are so many buyers and sellers that each has little effect on the market price. Each seller has limited control over the price because many other sellers are offering similar products. A seller has little reason to charge less than the going price, and if the seller charges more, buyers will go elsewhere. Similarly, no single buyer can influence the price because each buyer purchases only a small amount. In this chapter, we keep things simple by assuming that markets are perfectly competitive. In this ideal form of competition, a market has two characteristics: (1) The goods offered for sale are all exactly the same, and (2) the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price. Because buyers and sellers in perfectly competitive markets must accept the price the market determines, they are said to be price takers. At the market price, buyers can buy all they want, and sellers can sell all they want. There are some markets in which the assumption of perfect competition applies perfectly. In the wheat market, for example, there are thousands of farmers who sell wheat and millions of consumers who use wheat and wheat products. Because no single buyer or seller can influence the price of wheat, each takes the market price as given. Chapter 4 The Market Forces of Supply and Demand 63 Not all goods and services are sold in perfectly competitive markets. For example, some markets have only one seller, and this seller sets the price. A seller in such a market is called a monopoly. A local cable television company, for instance, is a monopoly if residents of the town have only one company from which to buy cable service. Many other markets fall between the extremes of perfect competition and monopoly. But perfectly competitive markets are a useful place to start. They are the easiest to analyze because everyone participating in them takes the price as given by mar ket conditions. Moreover, because some degree of competition is present in most markets, many of the lessons learned studying supply and demand under perfect competition apply to more complex markets as well.  QuickQuiz 1. The best definition of a market is a. a store that offers a variety of goods and services. b. a place where buyers meet and an auctioneer calls out prices. c. a group of buyers and sellers of a good or service. d. a venue where the sole supplier of a good offers its product. 2. In a perfectly competitive market, a. each seller tries to distinguish itself by offering a better product than its rivals. b. each seller takes the price of its product as set by market conditions. c. each seller tries to undercut the prices charged by its rivals. d. one seller has successfully outcompeted its rivals, so no other sellers remain. 3. The market for which product best fits the definition of a perfectly competitive market? a. eggs b. tap water c. movies d. computer operating systems 4-2 Demand Answers are at the end of the chapter. Let’s begin our study of markets by examining the behavior of buyers, particularly those who love ice cream. (And who doesn’t?) 4-2a The Demand Curve: The Relationship between Price and Quantity Demanded The quantity demanded of any good is the amount that buyers are willing and able to purchase. Many things determine the quantity demanded of a good, but one determinant plays a central role: its price. If the price of ice cream rose to $20 per scoop, most people would buy less. They might buy frozen yogurt instead. If the price of ice cream fell to $0.50 per scoop, they might buy more. This relationship between price and quantity demanded is true for most goods. In fact, it is so pervasive that economists call it the law of demand: Other things being equal, when the price of a good rises, the quantity demanded falls, and when the price falls, the quantity demanded rises. The table in Figure 1 shows how many ice-cream cones Catherine would buy each month at different prices. If ice-cream cones are free, Catherine buys 12 cones per month. At $1 per cone, she buys 10 per month. As the price rises further, she quantity demanded the amount of a good that buyers are willing and able to purchase law of demand the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises 64 Part II How Markets Work Figure 1 Catherine’s Demand Schedule and Demand Curve Price of Ice-Cream Cone The demand schedule is a table that shows the quantity demanded at each price. The demand curve, which graphs this schedule, illustrates how the quantity demanded changes as the price varies. Because a lower price increases the quantity demanded, the demand curve slopes downward. Quantity of Cones Demanded $0 1 2 3 4 5 6 12 cones 10 8 6 4 2 0 Price of Ice-Cream Cone $6 5 1. A decrease in price ...     4  demand schedule 3 2 1     Demand curve   1 2 3 4 5 6 7 8 9 1011 12   2. ...increases quantity of cones demanded. Quantity of Ice-Cream Cones buys fewer and fewer cones. When the price reaches $6, Catherine doesn’t buy any ice cream at all. This table is called a demand schedule. It shows the relationship a table that shows the relationship between the price of a good and the quantity demanded demand curve a graph of the relationship between the price of a good and the quantity demanded between the price of a good and the quantity demanded, holding constant everything else that influences how much of the good a consumer wants to buy. The graph in Figure 1 uses the numbers from the table to illustrate the law of demand. By convention, the price of ice cream is on the vertical axis, and the quantity demanded is on the horizontal axis. The line relating price and quantity demanded is the demand curve. It slopes downward because, other things being equal, a lower price increases the quantity demanded. 4-2b Market Demand versus Individual Demand The demand curve in Figure 1 shows an individual’s demand for a product. But to analyze how markets work, it’s important to know the market demand, the sum of all the individual demands for a particular good or service. The table in Figure 2 shows the demand schedules for ice cream for two people— Catherine and Nicholas. At any price, Catherine’s demand schedule shows how many cones she buys, and Nicholas’s shows the same information for him. The market demand at each price is the sum of their individual demands. The graph in Figure 2 shows the demand curves for these demand schedules. To obtain the market demand curve, we add the individual demand curves horizontally. That is, to find the total quantity demanded at any price, we add the individual quantities demanded, which are found on the horizontal axis of Chapter 4 The Market Forces of Supply and Demand 65 Figure 2 Market Demand as the Sum of Individual Demands Catherine’s Demand Price of Ice-Cream Cone $6 5 4 3 2 1  The quantity demanded in a market is the sum of the quantities demanded by all the buyers at each price. Thus, the market demand curve is found by adding the individual demand curves horizontally. At a price of $4, Catherine demands 4 icecream cones, and Nicholas demands 3, so the quantity demanded in the market at this price is 7 cones. Price of Ice-Cream Cone $0 1 2 3 4 5 Catherine 12 10 8 6 Nicholas 1 7 6  5 4 2 6 0 + Price of  Nicholas’s Demand Ice-Cream Cone  $6 5 4 3 DCatherine 1 2 3 4 5 6 7 8 9 1011 12 Quantity of Ice-Cream Cones 2 1  1 2 3 4 5 6 Quantity of Ice-Cream Cones 4 3 2 1 = Price of Ice-Cream DNicholas 8 9 10 11 12 Cone $6 Market 5 5 4 3 2 1 19 cones 16 13 10 7 4 1 Market Demand  DMarket 2 4 6 8 10 12 14 16 18 Quantity of Ice-Cream Cones the individual demand curves. The market demand curve is crucial for analyzing how markets function. It shows how the total quantity demanded of a good varies as its price changes, holding constant all the other factors that affect consumer purchases. 4-2c Shifts in the Demand Curve Because the market demand curve holds other things constant, it need not be stable over time. If something happens to alter the quantity demanded at any given price, the demand curve shifts. For example, suppose the American Medical Association discovers that peo ple who regularly eat ice cream live longer, healthier lives. Such a marvelous discovery would raise the demand for ice cream. At any price, buyers would now want to purchase more ice cream, and the demand curve for ice cream would shift. Figure 3 illustrates shifts in demand. A change that increases the quantity demand ed at every price, such as this wondrous but imaginary discovery, shifts the demand 66 Part II How Markets Work Figure 3 Shifts in the Demand Curve A change that increases the quantity that buyers want to purchase at any price shifts the demand curve to the right. A change that decreases the quantity that buyers want to purchase at any price shifts the demand curve to the left. Price of Ice-Cream Cone  Increase  in demand  Decrease  in demand Demand curve, D3 0 Demand curve, D2 Demand curve, D1 Quantity of Ice-Cream Cones curve to the right and is called an increase in demand. A change that reduces the quantity demanded at every price shifts the demand curve to the left and is called a decrease in demand. Changes in many variables can shift the demand curve, including: 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 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 a decrease in the demand for the other Income What would happen to your demand for ice cream if you lost your job one summer? It would most likely fall because you have less money to spend on things like ice cream. If the demand for something falls when income falls, that good is called a normal good. Normal goods are the norm, but not all goods are normal goods. If the demand for something rises when income falls, that good is called an inferior good. An example of an inferior good might be bus rides. As your income falls, you are less likely to buy a car or take an Uber and more likely to ride a bus. Prices of Related Goods Suppose that the price of frozen yogurt declines. The law of demand says that you will buy more of it. At the same time, you may buy less ice cream. Because ice cream and frozen yogurt are both cold, sweet, creamy desserts, they satisfy similar cravings. When a fall in the price of one good, like frozen yogurt, reduces the demand for another good, like ice cream, the two goods are called substitutes. Substitutes are often pairs of goods that are used in place of each other, such as hot dogs and hamburgers, sweaters and sweatshirts, and movie tickets and video streaming services. Now suppose that the price of hot fudge declines. According to the law of demand, you will buy more hot fudge. Yet in this case, you may be inclined to buy more ice cream as well because ice cream and hot fudge go well together. When a fall in the price of one good, like hot fudge, raises the demand for another good, like ice cream, the two goods are called complements. Complements are often pairs of goods that are used together, such as electricity and air conditioners, computers and software, and peanut butter and jelly. Chapter 4 The Market Forces of Supply and Demand 67 Table 1 Variables That Influence Buyers This table lists the variables that affect how much of any good consumers choose to buy. Notice the special role that the price of the good plays: A change in that price represents a movement along the demand curve, while a change in one of the other variables shifts the curve. Variable Price of the good itself Income A Change in This Variable . . .  Represents a movement along the demand curve Prices of related goods Tastes Expectations  Number of buyers Shifts the demand curve Shifts the demand curve Shifts the demand curve Shifts the demand curve Shifts the demand curve Tastes If you like pistachio ice cream, you will buy more of it. While individual tastes, like preferences for ice-cream flavors, are critically important for explaining demand, economists typically don’t try to explain them. This is because they are unique to you, though affected by historical and psychological forces. Economists do, however, examine what happens when tastes change. Expectations Your views about the future may affect your demand for something today. If you expect a higher income next month, you may choose to save less now and spend more on ice cream today. If you believe ice cream will be cheaper tomorrow, you may be reluctant to buy a cone at today’s price. Number of Buyers In addition to the factors that influence the behavior of individual buyers, market demand depends on how many of these buyers there are. If Peter were to join Catherine and Nicholas as an ice-cream consumer, the quantity demanded would be higher at every price, and market demand would increase. Summary The demand curve shows what happens to the quantity demanded of a good as its price varies, holding constant all the other variables that influence buyers. When one of these other variables changes, the quantity demanded at each price changes, and the demand curve shifts. Table 1 lists the variables that influence how much of a good consumers choose to buy. If you have trouble remembering whether you need to shift or move along the demand curve, it helps to recall a lesson from the appendix to Chapter 2. A curve shifts when there is a change in a relevant variable that is not measured on either axis. Because the price is on the vertical axis, a change in price represents a move ment along the demand curve. By contrast, income, the prices of related goods, tastes, expectations, and the number of buyers are not measured on either axis, so a change in one of these variables shifts the demand curve. 68 Part II How Markets Work  Two Ways to Reduce Smoking  Case Study PABLO DEL RIO SOTELO/SHUTTERSTOCK.COM Because smoking can harm you and those around you, policymakers often want to reduce the amount that people smoke. Consider two paths for achieving this goal. One way to reduce smoking is to shift the demand curve for cigarettes and other tobacco products. This can be done through public service announcements, mandatory health warnings on cigarette packages, and the prohibition of cigarette advertising on television, all of which are aimed at reducing the quantity of cigarettes demanded at any price. When successful, these policies shift the demand curve for cigarettes to the left, as in panel (a) of Figure 4. Another way to discourage smoking is to raise the price of cigarettes. When the government taxes cigarettes, the companies that make and sell them pass most of the tax on to consumers in the form of higher prices. Because people tend to buy less when the price rises, this policy also reduces smoking. But this approach does not shift the demand curve. Instead, the change appears as a movement along the same curve to a point with a higher price and lower quantity, as in panel (b) of Figure 4. How much does the amount of smoking respond to changes in the price of ciga rettes? Economists have studied what happens when the tax on cigarettes changes. They have found that a ten percent price increase causes a four percent reduction in the quantity demanded. Teenagers are especially sensitive to the price of cigarettes: A ten percent price increase causes a 12 percent drop in teenage smoking. Figure 4 Shifts in the Demand Curve versus Movements along the Demand Curve  When warnings on cigarette packages persuade smokers to smoke less, the demand curve for cigarettes shifts to the left. In panel (a), the curve shifts from D1 to D2 . At a price of $5 per pack, the quantity demanded falls from 20 to 10 cigarettes per day, as reflected by the shift from point A to point B. By contrast, when a tax raises the price of cigarettes, the demand curve does not shift. Instead, there is a movement to a different point on the demand curve. In panel (b), when the price rises from $5 to $10, the quantity demanded falls from 20 to 12 cigarettes per day, as reflected by the movement from point A to point C.   A policy to discourage smoking shifts the demand curve to the left. $5 B A    D2 D1 $10 C 5  A tax that raises the price of cigarettes results in a movement along the demand curve. A  D1 0 10 20    0 12 20  Chapter 4 The Market Forces of Supply and Demand 69 A related question is how the price of cigarettes affects the demand for other products, such as marijuana. Opponents of cigarette taxes sometimes argue that tobacco and marijuana are substitutes, so high cigarette prices encourage marijuana use. By contrast, many experts on substance abuse view tobacco as a “gateway drug,” leading young people to experiment with other harmful substances. Most studies of the data are consistent with this latter view. They find that lower cigarette prices are associated with greater use of marijuana. In other words, tobacco and marijuana appear to be complements rather than substitutes. ●  QuickQuiz 4. A change in which of the following will NOT shift the demand curve for hamburgers? a. the price of hot dogs b. the price of hamburgers c. the price of hamburger buns d. the income of hamburger consumers 5. Which of the following will shift the demand curve for pizza to the right? a. an increase in the price of hamburgers, a substitute for pizza b. an increase in the price of root beer, a complement to pizza c. the departure of college students when they leave for summer vacation d. a decrease in the price of pizza 6. If pasta is an inferior good, then the demand curve shifts to the ________ when ________ rises. a. right; the price of pasta b. right; consumers’ income c. left; the price of pasta d. left; consumers’ income 4-3 Supply Answers are at the end of the chapter. Buyers are only half the story of how markets work. Sellers are the other half. Let’s now consider the sellers of ice cream. 4-3a The Supply Curve: The Relationship between Price and Quantity Supplied The quantity supplied of any good or service is the amount that sellers are willing and able to sell. There are many determinants of the quantity supplied, but again, price plays a special role. When the price of ice cream is high, selling ice cream is very profitable, so the quantity supplied is large. Sellers work long hours, buy many ice-cream machines, and hire many workers. By contrast, when the price is low, the business is less profitable, so sellers produce less. Some sellers may even shut down, reducing their quantity supplied to zero. This relationship between price and the quantity supplied is called the law of supply: Other things being equal, when the price of a good rises, the quantity supplied also rises, and when the price falls, the quantity supplied falls as well. The table in Figure 5 shows the quantity of ice-cream cones supplied each month by Ben, an ice-cream seller, at various prices of ice cream. At a price below $2, Ben does not supply any ice cream at all. As the price rises, he supplies a greater and greater quantity. This table is called the supply schedule. It shows the relationship between the price of a good and the quantity supplied, holding constant everything else that influences how much of the good producers want to sell. The graph in Figure 5 uses numbers from the table to illustrate the law of supply. The curve relating price and the quantity supplied is the supply curve. The supply quantity supplied the amount of a good that sellers are willing and able to sell law of supply the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises supply schedule a table that shows the relationship between the price of a good and the quantity supplied supply curve a graph of the relationship between the price of a good and the quantity supplied 70 Part II How Markets Work Figure 5 Ben’s Supply Schedule and Supply Curve Price of Ice-Cream Cone The supply schedule is a table that shows the quantity supplied at each price. The supply curve, which graphs the supply schedule, illustrates how the quantity supplied changes as a good’s price varies. Because a higher price increases the quantity supplied, the supply curve slopes upward. Quantity of Cones Supplied $0 1 2 3 4 5 6 0 cones 0 1 2 3 4 5 Price of Ice-Cream Cone $6 1. An   increase in price ... 5  Supply curve   4 3 2 1    1 2 3 4 5 6 7 8 9 10 11 12   2. ... increases quantity of cones supplied. Quantity of Ice-Cream Cones curve slopes upward because, other things being equal, a higher price means a greater quantity supplied. 4-3b Market Supply versus Individual Supply Just as market demand is the sum of the demands of all buyers, market supply is the sum of the supplies of all sellers. The table in Figure 6 shows the supply schedules for the market’s two ice-cream producers—Ben and Jerry. At any price, Ben’s supply schedule tells us the quantity that Ben supplies, and Jerry’s supply schedule tells us how much Jerry supplies. The market supply is the sum of the two individual supplies. The graph in Figure 6 shows the supply curves that correspond to the supply schedules. As with demand curves, the market supply curve is obtained by adding the individual supply curves horizontally. That is, to find the total quantity supplied at any price, we add the individual quantities, which are located on the horizontal axis of the individual supply curves. The market supply curve shows how the total quantity supplied varies as the price varies, holding constant all other factors that influence producers’ decisions about how much to sell. 4-3c Shifts in the Supply Curve Because a market supply curve holds constant all the variables other than price that affect quantity supplied, it can move over time. When one of these other variables Chapter 4 The Market Forces of Supply and Demand 71 Figure 6 Market Supply as the Sum of Individual Supplies The quantity supplied in a market is the total quantity supplied by all sellers at each price. You can build the market supply curve by adding the individual supply curves horizontally. At a price of $4, Ben supplies 3 ice-cream cones, and Jerry supplies 4 ice-cream cones, so the total quantity supplied at the price of $4 is 7 cones. Price of Ice-Cream Cone $0 1 2 3 4 5 Ben 0 0 1 2 Jerry 1 0 0 Market 5  0 2 3 4 6 Ben’s Supply Price of Ice-Cream Cone $6 5 4 3 2 1 SBen  5 + Price of 4  6 8 Jerry’s Supply Ice-Cream Cone $6 5 4 3 2 1  0 cones 0 1 4 7 10 13 = SJerry Price of Ice-Cream Cone $6 5 4 3 2 1 Market Supply SMarket   1 2 3 4 5 6 8 9 10 11 12 Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 8 9 1011 12 Quantity of Ice-Cream Cones changes, the quantity that producers want to sell at any price changes, and the supply curve shifts. For example, suppose the price of sugar falls. Because sugar is an input in the production of ice cream, the lower price of sugar makes selling ice cream more profitable. This increases the ice-cream supply: At any price, sellers are willing to produce more. As a result, the supply curve shifts to the right. Figure 7 illustrates shifts in supply. A change that raises the quantity supplied at every price, such as a fall in the price of sugar, shifts the supply curve to the right and is called an increase in supply. A change that reduces the quantity supplied at every price shifts the supply curve to the left and is called a decrease in supply. Many variables can shift the supply curve. The most important ones include: Input Prices Ice-cream sellers use various inputs to make their product: cream, sugar, flavoring, ice-cream machines, the buildings in which the ice cream is made, and the labor of the workers who mix the ingredients and operate the machines. When the price of one or more of these inputs rises, producing ice cream becomes 1 2 3 4 5 6 7 8 9 1011 12 Quantity of Ice-Cream Cones 72 Part II How Markets Work Figure 7 Shifts in the Supply Curve A change that raises the quantity that sellers want to produce at any price shifts the supply curve to the right. A change that lowers the quantity that sellers want to produce at any price shifts the supply curve to the left. Supply curve, S3 Price of Ice-Cream Cone  Decrease  in supply Supply curve, S1  Supply curve, S2 Increase  in supply 0 Quantity of Ice-Cream Cones less profitable, and firms supply less ice cream. If input prices rise substantially, a firm might shut down and supply no ice cream at all. Thus, the supply of a good moves in the opposite direction of the prices of inputs. Technology The technology for turning inputs into output is another determinant of supply. The invention of mechanized ice-cream machines, for example, reduced the labor needed to make ice cream. By reducing producers’ costs, this advance in technology increased the supply. In the long run, such changes in technology are among the most potent forces affecting market outcomes. Expectations The amount that ice-cream makers supply may depend on their expectations about the future. For example, if they expect the price to rise, they may put some of their current production into storage and supply less to the market today. Number of Sellers In addition to the factors that influence the behavior of individual sellers, market supply depends on how many sellers there are in the market. If Ben or Jerry retires from the ice-cream business, the market supply falls. If Edy starts a new ice-cream business, the market supply rises. Summary The supply curve shows what happens to the quantity supplied when a good’s price varies, holding constant all the other variables that influence sellers. When one of these other variables changes, the quantity supplied at each price changes, and the supply curve shifts. Table 2 lists the variables that influence how much producers choose to sell. Once again, to remember whether you need to shift or move along the supply curve, keep this in mind: A curve shifts only when there is a change in a relevant variable that isn’t named on either axis. Price is on the vertical axis, so a change in price is represented by a movement along the supply curve. By contrast, because input prices, technology, expectations, and the number of sellers are not measured on either axis, a change in one of these variables shifts the supply curve. Chapter 4 The Market Forces of Supply and Demand 73 Table 2 Variables That Influence Sellers This table lists the variables that affect how much of any good producers choose to sell. Notice the special role that the price of the good plays: A change in that price represents a movement along the supply curve, while a change in one of the other variables shifts the curve. Variable Price of the good itself Input prices A Change in This Variable . . .  Technology Expectations Number of sellers  Represents a movement along the supply curve Shifts the supply curve Shifts the supply curve Shifts the supply curve Shifts the supply curve  QuickQuiz 7. What event moves pizza suppliers up along a given supply curve? a. an increase in the price of pizza b. an increase in the price of root beer, a complement to pizza c. a decrease in the price of cheese, an input to pizza d. a kitchen fire that destroys a popular pizza joint c. a decrease in the price of cheese, an input to pizza d. a kitchen fire that destroys a popular pizza joint 9. Movie tickets and video streaming services are substitutes. If the price of video streaming increases, what happens in the market for movie tickets? 8. What event shifts the supply curve for pizza to the right? a. an increase in the price of pizza b. an increase in the price of root beer, a complement to pizza a. The supply curve shifts to the left. b. The supply curve shifts to the right. c. The demand curve shifts to the left. d. The demand curve shifts to the right. 4-4 Supply and Demand Together Answers are at the end of the chapter. Let’s now combine supply and demand to see how they determine the price and quantity of a good sold in a market. 4-4a Equilibrium Figure 8 shows the market supply curve and market demand curve together. Notice that there is one point at which the supply and demand curves intersect. This point is the market’s equilibrium. The price at this intersection is the equilibrium price, and the quantity is the equilibrium quantity. Here, the equilibrium price is $4.00 per cone, and the equilibrium quantity is 7 cones. The dictionary defines equilibrium as a situation in which forces are in bal ance. This sense of balance is key to the concept of a market equilibrium. At the equilibrium price, the quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell. The equilibrium price is sometimes called the market-clearing price because, at this price, everyone in the market has been satisfied: Buyers have bought all they want to buy, and sellers have sold all they want to sell. equilibrium a situation in which the market price has reached the level at which the quantity supplied equals the quantity demanded equilibrium price the price that balances the quantity supplied and the quantity demanded equilibrium quantity the quantity supplied and the quantity demanded at the equilibrium price 74 Part II How Markets Work Figure 8 The Equilibrium of Supply and Demand The market’s equilibrium is where the supply and demand curves intersect. At the equilibrium price, the quantity supplied equals the quantity demanded. Here, the equilibrium price is $4. At this price, 7 ice-cream cones are supplied, and 7 are demanded. Price of Ice-Cream Cone Equilibrium price  $4  0 1 2 Supply  Equilibrium  Demand  3 4 5 6 7 8 9 10 11 12 Quantity of Ice-Cream Cones 13 Equilibrium quantity The actions of buyers and sellers move markets toward the equilibrium of supply and demand. To see why, consider what happens when the market price does not equal the equilibrium price. Suppose first that the market price is above the equilibrium price, as in panel (a) of Figure 9. At a price of $5 per cone, the quantity supplied (10 cones) exceeds the quantity surplus a situation in which the quantity supplied is greater than the quantity demanded shortage a situation in which the quantity demanded is greater than the quantity supplied demanded (4 cones). There is a surplus of the good: Producers are unable to sell all they want at the going price. A surplus is sometimes called a situation of excess supply. When there is a surplus in the ice-cream market, sellers find their freezers increasingly full of ice cream they would like to sell but cannot. They respond by cutting prices. Falling prices, in turn, increase the quantity demanded and decrease the quantity sup plied. These changes represent movements along the supply and demand curves, not shifts in the curves. Prices continue to fall until the market reaches the equilibrium. Suppose now that the market price is below the equilibrium price, as in panel (b) of Figure 9. In this case, the price is $3 per cone, and the quantity demanded exceeds the quantity supplied. There is a shortage of the good: Consumers are unable to buy all they want at the going price. A shortage is sometimes called a situation of excess demand. When a shortage occurs in the ice-cream market, buyers must wait in long lines for a chance to buy one of the few cones available. With too many buy ers chasing too few goods, sellers can raise prices without losing sales. These price increases cause the quantity demanded to fall and the quantity supplied to rise. Again, these changes are depicted as movements along the supply and demand curves, and they move the market closer to equilibrium. Regardless of where the price starts, the activities of buyers and sellers push the market price toward equilibrium. Once the market reaches equilibrium, all buyers and sellers are satisfied in the sense that they can buy and sell the amount they want at the going price. At that point, there is no further upward or downward Chapter 4 The Market Forces of Supply and Demand 75 Figure 9 Markets Not in Equilibrium    In panel (a), there is a surplus. Because the market price of $5 is above the equilibrium price, the quantity supplied (10 cones) exceeds the quantity demanded (4 cones). Producers try to increase sales by cutting the price, moving it toward its equilibrium level. In panel (b), there is a shortage. Because the market price of $3 is below the equilibrium price, the quantity demanded (10 cones) exceeds the quantity supplied (4 cones). With too many buyers chasing too few goods, producers raise the price. In both cases, the price adjustment moves the market toward the equilibrium of supply and demand.   Surplus $5 4    Supply    $4 3 Demand   Shortage Supply  Demand 0 4 7 10  Quantity demanded  Quantity supplied 0 4 7 10   Quantity supplied pressure on the price. How quickly equilibrium is reached varies from market to market depending on how quickly prices adjust. In most well-functioning markets, surpluses and shortages are only temporary because prices quickly move toward their equilibrium levels. This phenomenon is so pervasive that it is called the law of supply and demand: The price of any good adjusts to bring the quantity supplied and the quantity demanded into balance. 4-4b Three Steps to Analyzing Changes in Equilibrium Supply and demand together determine a market’s equilibrium, which in turn determines the price and quantity of the good that buyers purchase and sellers  Quantity demanded law of supply and demand  the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded of that good into balance NON SEQUITUR © WILEY MILLER. DIST. BY UNIVERSAL PRESS SYNDICATE. REPRINTED WITH PERMISSION. ALL RIGHTS RESERVED. 76 Part II How Markets Work produce. The equilibrium price and quantity depend on the positions of the supply and demand curves. When an event shifts one of these curves, the equilibrium changes, resulting in a new price and a new quantity exchanged between buyers and sellers. When analyzing how an event affects the market’s equilibrium, we proceed in three steps. First, we decide if the event shifts the supply curve, the demand curve, or both. Second, we decide whether the curve shifts to the right or to the left. Third, we use a supply-and-demand diagram to compare the initial equilibrium with the new one, which shows how the shift affects the equilibrium price and quantity. Table 3 summarizes these three steps. To see how this works, let’s consider a few events that might affect the market for ice cream. Example: A Shift in Demand Changes the Market Equilibrium Suppose that this summer’s weather is exceptionally hot. How does this affect the ice-cream market? To answer this question, let’s follow our three steps. 1. The weather affects the demand curve by changing consumers’ taste for ice cream. That is, it alters the amount that people want to buy at any price. The supply curve remains the same because the weather does not directly affect the firms that sell ice cream. 2. Because hot weather makes a cool treat more appealing, people want more ice cream. Figure 10 shows this increase in demand as a rightward shift in the demand curve from D1 to D2 . This shift indicates that the quantity demanded is higher at every price. 3. At the old price of $4, there is now an excess demand for ice cream, and this shortage induces firms to raise the price. As Figure 10 shows, the increase in demand raises the equilibrium price from $4 to $5 and the equilibrium quantity from 7 to 10 cones. In other words, the hot weather increases both the price of ice cream and the quantity sold. Shifts in Curves versus Movements along Them When hot weather increases the demand for ice cream and drives up the price, the quantity that ice-cream makers supply rises, even though the supply curve remains the same. In this case, economists say there has been an increase in the quantity supplied but no change in supply. Supply refers to the position of the supply curve, while the quantity supplied refers to the amount producers want to sell. In the summer heat, supply does not change because the weather does not affect how much producers want to sell at any price. Instead, the sultry weather makes consumers more eager to buy at any price, Table 3 Three Steps for Analyzing Changes in Equilibrium  1. Decide if the event shifts the supply or demand curve (or perhaps both). 2. Decide in which direction the curve shifts. 3. Use a supply-and-demand diagram to see how the shift changes the equilibrium price and quantity.  Chapter 4 The Market Forces of Supply and Demand 77 Figure 10 How an Increase in Demand Affects the Equilibrium An event that raises the quantity demanded at any price shifts the demand curve to the right. The equilibrium price and quantity both rise. Here, an abnormally hot summer causes buyers to demand more ice cream. The demand curve shifts from D1 to D2 , causing the equilibrium price to increase from $4 to $5 and the equilibrium quantity to increase from 7 to 10 cones. Price of Ice-Cream Cone $5  2. . . . resulting in a higher 4  price . . . 1. Hot weather increases the  demand for ice cream . . .    Supply New equilibrium Initial equilibrium D1  D2 0 7 10 Quantity of Ice-Cream Cones 3. . . . and a higher  quantity sold. shifting the demand curve to the right. The increase in demand causes the equilib rium price to rise. When the price rises, the quantity supplied rises. This increase in quantity supplied is represented by the movement along the supply curve. To summarize, a shift in the supply curve is called a “change in supply,” and a shift in the demand curve is called a “change in demand.” A movement along a fixed supply curve is called a “change in the quantity supplied,” and a movement along a fixed demand curve is called a “change in the quantity demanded.” Example: A Shift in Supply Changes the Market Equilibrium One August, a hurricane destroys part of the sugarcane crop and drives up the price of sugar. How does this affect the market for ice cream? Again, we follow our three steps. 1. The increase in the price of sugar, an input for ice cream, raises the cost of producing ice cream. It therefore affects the supply curve. The demand curve does not change because the higher cost of inputs does not directly affect the amount of ice cream consumers want to buy. 2. Higher costs reduce the amount of ice cream that producers are willing and able to sell at every price. Figure 11 depicts this decrease in supply as a left ward shift in the supply curve from S1 to S2 . 3. At the old price of $4, there is now an excess demand for ice cream, and this shortage causes firms to raise the price. As Figure 11 shows, the shift in the supply curve raises the equilibrium price from $4 to $5 and lowers the equilibrium quantity from 7 to 4 cones. Because of the sugar price increase, the price of ice cream rises, and the quantity sold falls. 78 Part II How Markets Work Figure 11 How a Decrease in Supply Affects the Equilibrium An event that reduces the quantity supplied at any price shifts the supply curve to the left. The equilibrium price rises, and the equilibrium quantity falls. Here, an increase in the price of sugar (an input) causes sellers to supply less ice cream. The supply curve shifts from S1 to S2 , causing the equilibrium price of ice cream to rise from $4 to $5 and the equilibrium quantity to fall from 7 to 4 cones. Price of Ice-Cream Cone $5  2. . . . resulting in a higher price of ice  cream . . . 4 1. An increase in the price of sugar reduces the supply of ice cream . . . S2  S1  New equilibrium   Initial equilibrium 0  Demand 4 7 Quantity of Ice-Cream Cones 3. . . . and a lower  quantity sold. Example: Both Supply and Demand Shift In a series of unfortunate events, a heat wave and a hurricane strike in the same summer. To analyze this nasty combination, we turn again to our three steps. 1. Both curves must shift. The heat affects the demand curve because it alters the amount of ice cream that consumers want to buy at any price. At the same time, the hurricane alters the supply curve for ice cream: By driving up sugar prices, it changes the amount of ice cream that producers want to sell at any price. 2. The curves shift in the same directions as they did earlier: The demand curve shifts to the right, and the supply curve shifts to the left, as Figure 12 shows. 3. Two outcomes are possible, depending on the relative size of the demand and supply shifts. In both cases, the equilibrium price rises. In panel (a), where demand increases substantially while supply falls just a little, the equilibrium quantity also increases. But in panel (b), where supply falls substantially while demand rises just a little, the equilibrium quantity falls. Thus, these events certainly raise the price of ice cream, but their impact on the amount of ice cream sold is ambiguous (that is, it could go either way). Chapter 4 The Market Forces of Supply and Demand 79 Figure 12 A Shift in Both Supply and Demand Price of Ice-Cream Cone Large increase in demand A simultaneous increase in demand and decrease in supply yields two possible outcomes. In panel (a), the equilibrium price rises from P1 to P2 , and the equilibrium quantity rises from Q1 to Q2 . In panel (b), the equilibrium price again rises from P1 to P2 , but the equilibrium quantity falls from Q1 to Q2 . (a) Price Rises, Quantity Rises New equilibrium   P2  P1  S2  S1 0 Price of Ice-Cream Cone Small  (b) Price Rises, Quantity Falls  increase in demand   Small decrease D2 in supply Initial equilibrium  P2 P1 S2  New  D1 equilibrium Large S1 decrease  in supply Initial equilibrium  Quantity of 0 Q1 Q2 Q2 Q1 Ice-Cream Cones Summary Supply and demand curves help to analyze a change in equilibrium. When an event shifts the supply curve, the demand curve, or perhaps both curves, these tools can predict how the event will alter the price and quantity sold in equilibrium. Table 4 shows the predicted outcome for any combination of shifts in the two curves. To ensure that you understand how to use the tools of supply and demand, pick a few of the table’s entries and make sure you can explain to yourself the stated predictions. Table 4 What Happens to Price and Quantity When Supply or Demand Shifts? As a quick quiz, make sure you can explain at least a few of the entries in this table using a supply-and-demand diagram. No Change in Supply No Change in Demand P same Q same D2 D1  Quantity of Ice-Cream Cones An Increase in Supply  P down Q up An Increase in Demand A Decrease in Demand P up Q up  P ambiguous Q up P down Q down P down Q ambiguous A Decrease in Supply P up Q down P up Q ambiguous P ambiguous Q down 80 Part II How Markets Work In the News Price Increases after Disasters   standard supply-and-demand models: fairness. Basically, it just isn’t socially acceptable to When a disaster strikes, many goods experience an increase in demand or a decrease in supply, putting upward pressure on prices. Not everyone thinks that’s fair. The Law of Supply and Demand Isn’t Fair By Richard Thaler For an economist, one of the most jarring sights during the early weeks of the coronavirus crisis in the United States was the spectacle of bare shelves in sections of the supermarket. There was no toilet paper or hand sanitizer. Pasta, flour and even yeast could be hard to find in the early weeks of social distancing as many people decided to take up baking. Of far greater concern, hospitals could not buy enough of the masks, gowns and ventilators required to safely treat Covid-19 patients. What happened to the laws of supply and demand? Why didn’t prices rise enough to clear the market, as economic models predict? A paper that I wrote with my friends Daniel Kahneman, a psychologist, and Jack Knetsch, an economist, explored this problem. We found that the answer may be summed up with a single word, one you won’t find in the raise prices in an emergency. We asked people questions about the actions of hypothetical firms. For example: “A hardware store has been selling snow shovels for $15. The morning after a blizzard, the store raises the price of snow shovels to $20.” Fully 82 percent of our respondents judged this to be unfair. The respondents were Canadians, known for their politeness, but the general findings have now been replicated and confirmed in studies around the world. Most companies implicitly understand that abiding by the social norms of fairness should be part of their business model. In the current crisis, large retail chains have responded to the shortages of toilet paper not by raising the price but by limiting the amount each customer can buy. And Amazon and eBay prohibited what was viewed as price gouging on their sites. We have seen similar behavior after hur ricanes. As soon as a storm ends, there is typically enormous demand for goods like bottled water and plywood. Big retailers like Home Depot and Walmart anticipate this, sending trucks loaded with supplies to regions just outside the danger zone, ready to be deployed. Then, when it is safe, the stores provide water for free and sell the plywood at the list price or lower. At the same time, some “entrepreneurs” are likely to behave differently. They see a disaster as an opportunity and so will fill up trucks with plywood near their homes, drive to the storm site and sell their goods for whatever price they can get. It is not that large retailers are intrinsically more ethical than the entrepreneurs; it is simply that they have different time horizons. The large companies are playing a long game, and by behaving “fairly,” they are hoping to retain customer loyalty after the emergency. The entre preneurs are just interested in a quick buck. Fairness norms help explain the breakdown of supply chains of medical equipment in the coronavirus crisis. Hospitals normally use buy ing associations that make long-term deals with wholesalers to provide essential supplies. The wholesalers generally want to preserve these relationships and realize that now would not be a good time to raise prices. Often, they are contractually obligated to supply items at prices negotiated before a spike in demand. One current example is the N95 face mask. At the onset of the pandemic, hospitals had long-term contracts to buy them for about 35 cents each, an executive at a New York hos pital told me. When the need for the masks surged, these suppliers were not allowed to raise the price, even if inclined to do so.  QuickQuiz 10. The discovery of a large new reserve of crude oil will shift the ________ curve for gasoline, leading to a ________ equilibrium price. a. supply; higher b. supply; lower c. demand; higher d. demand; lower 11. If the economy goes into a recession and incomes fall, what happens in the markets for inferior goods? a. Prices and quantities both rise. b. Prices and quantities both fall. c. Prices rise, and quantities fall. d. Prices fall, and quantities rise.  Chapter 4 The Market Forces of Supply and Demand 81 But others along the supply chain could make big profits by diverting masks to anyone willing to pay top dollar. That left hospitals in a bind. As the coronavirus spread in New York, the executive’s hospital searched franti cally for masks, eventually paying an overseas supplier $6 each, for hundreds of thousands of them, when the regular stock was desperately short. When anyone tries to reap big profits in an emergency like this, it can look ugly. Consider the case of two brothers who began buying hand sanitizer, masks and other scarce commodities on March 1, the day of the first announcement of a Covid-19 death in the United States. After they sold some of their merchandise at big markups on Amazon and eBay, these outlets cut them off. Eventually, after considerable adverse publicity, the broth ers decided to donate their supplies. Notice that the brothers were making mar kets more “efficient,” by buying low and selling high. If instead of arbitraging coronavirus sup plies they had sold shares of airline and hotel companies and bought shares of Netflix and Zoom, they would simply have been considered smart traders. But while smart trading may be fine for investments, it is not considered fair when it involves essential goods during a pandemic. One can argue that this social norm is harmful in that it prevents markets from doing their magic. For example, Tyler Cowen, the Source: New York Times, March 24, 2020. processing plants? Supply and demand would tell us that the masks should simply go to the buyer who was willing and able to pay the most for them. But fairness tells us this can’t be the only consideration. As a practical matter for businesses, big and small, that want to keep operating for the long haul, it makes good sense to obey the law of fairness. If the next shortage is meat and a store owner realizes that there is only one package of pork chops left, it would be unwise to sell it at auction to the highest bidder. ■ Questions to Discuss 1.  How much would you pay for this in an emergency? TAB62/SHUTTERSTOCK.COM George Mason University economist, has said he wishes it were OK to raise prices for coro navirus essentials. “Higher prices discourage panic buying and increase the chance that the people who truly need particular goods and services have a greater chance of getting them,” he wrote. But which people “truly need” N95 masks? What is the right allocation of masks among 2. After the onset of a pandemic, do you think you would be more or less likely to find hand sanitizer for sale if the sellers were allowed to increase prices? Why? If the sellers of scarce resources are not allowed to increase prices to equilibrate supply and demand after a disaster, how do you think these resources should be allocated among the population? What are the benefits of your proposal? What problems might arise with your proposal in practice? Richard Thaler is a professor of economics at the University of Chicago. He won the Nobel prize in economics in 2017. well-endowed research hospitals, poorly funded municipal facilities, nursing homes and food 12. What event might lead to an increase in the equilibrium price of jelly and a decrease in the equilibrium quantity of jelly sold? a. an increase in the price of peanut butter, a complement to jelly b. an increase in the price of Marshmallow Fluff, a substitute for jelly c. an increase in the price of grapes, an input into jelly d. an increase in consumers’ incomes, as long as jelly is a normal good 13. An increase in ________ will cause a movement along a given supply curve, which is called a change in ________. a. supply; demand b. supply; quantity demanded c. demand; supply d. demand; quantity supplied Answers are at the end of the chapter. 82 Part II How Markets Work 4-5 Conclusion: How Prices Allocate Resources This chapter analyzed supply and demand in a single market. The discussion centered on the market for ice cream, but the lessons apply to most other markets as well. When you go to a store to buy something, you are contributing to the demand for that item. When you look for a job, you are contributing to the supply of labor services. Because supply and demand are such pervasive forces in market economies, the model of supply and demand is a powerful analytical tool.  “Two dollars” “—and seventy-five cents.” One of the Ten Principles of Economics in Chapter 1 is that markets are usually a good way to organize economic activity. It is still too early to judge whether market outcomes are good or bad, but this chapter has begun to show how markets work. In any economic system, scarce resources must be allocated among compet ing uses. Market economies harness the forces of supply and demand to serve that end. Supply and demand together determine the prices of the economy’s many different goods and services. Prices, in turn, are the signals that guide the allocation of resources.    Ask the Experts Price Gouging “Laws to prevent high prices for essential goods in short supply in a crisis would raise social welfare.” What do economists say?  29% are uncertain    36% disagree Source: IGM Economic Experts Panel, May 26, 2020. 35% agree For example, consider the allocation of beachfront land. Because the amount of this land is limited, not everyone can enjoy the luxury of living by the beach. Who gets this resource? The answer is whoever is willing and able to pay the price. The price of beach front land adjusts until the quantity of land demanded balances the quantity supplied. In market economies, prices are the mecha nism for rationing scarce resources. Similarly, prices determine who produces each good and how much is produced. For instance, consider farming. Because every one needs food to survive, it is crucial that some people work on farms. What determines who is a farmer and who is not? In a free society, no government planning agency makes this decision to ensure an adequate food supply. Instead, the allocation of labor to farms is based on the job decisions of millions of workers. This decentralized system performs well because these decisions depend on prices. The prices of food and the wages of farmwork ers (the price of their labor) adjust to ensure that enough people choose to be farmers. ROBERT J. DAY/THE NEW YORKER COLLECTION/THE CARTOON BANK   Chapter 4 The Market Forces of Supply and Demand 83 If a person had never seen a market economy in action, the whole idea might seem preposterous. Economies are enormous groups of people engaged in a multitude of interdependent activities. What prevents decentralized decision making from degenerating into chaos? What coordinates the actions of the millions of people with their varying abilities and desires? What ensures that what needs to be done is, in fact, done? The answer, in a word, is prices. If an invisible hand guides market economies, as Adam Smith famously suggested, the price system is the baton with which the invisible hand conducts the economic orchestra. Chapter in a Nutshell 视频要中文字幕