this pdf is a short notes of chapter 4 from book economic by mankiw. pictures are taken from the same book.

1. T H E M A R K E T F O R C E S O F
S U PP L Y A N D D E M A N D
By
RAHUL SINHA
A market is a group of buyers and sellers of a particular good
or service. The buyers as a group determine the demand for the
product, and the sellers as a group determine the supply of the
product.
For example, consider the market for ice cream in a particular
town. Each buyer knows that there are several sellers from
which to choose, and each seller is aware that his product is
similar to that offered by other sellers. The price of ice cream
and the quantity of ice cream sold are not determined by any
single buyer or seller. Rather, price and quantity are
determined
by all buyers and sellers as they interact in the marketplace.
This is called a competitive market.
DEMAND
WHAT DETERMINES THE QUANTITY AN
INDIVIDUAL DEMANDS?
1. PRICE
Law of demand – keeping other factors equal, law claims
that the quantity demanded of a good is decreased if its
price is increased and vice – versa.
2. INCOME

2. Income of buyers also affects the demand of the good. If
buyers have good income then quantity demanded is
increased and vice-versa.
If the demand for a good falls when income falls, the good is
called a normal good. And if demand of a good rises by the
decrease in income then the good is called inferior goods.
An example of an inferior good might be bus rides. As your
income falls, you are less likely to buy a car or take a cab,
and more likely to ride the bus.
3. PRICES OF RELATED GOODS
Sometimes a price of good is also affected by other goods
that can be used in their place.
For example if price of yogurt goes down then according to
law of demand we will buy more yogurts instead of ice-
cream.
Two goods for which an increase in the price of one leads to
an increase in the demand for the other are called
substitute.
Example - hot dogs and hamburgers.
Two goods for which an increase in the price of one leads to
a decrease in the demand for the other are called
complements.
Example - Gasoline and automobiles, computers and
software.
4. TASTE
Demand is also dependent on the taste of a buyer which is
further dependent on historical and psychological factors of
a buyer.

3. Example – if in a place buyers like ice-creams the demand of
ice-cream in that place will increase.
5. EXPECTATIONS
Buyers expectations about the future may affect the
demand
for a good or service today.
If buyers expect that price of a good will fall tomorrow then
they will be unwilling to buy that good at present price.
THE DEMAND SCHEDULE AND THE DEMAND CURVE
A table that shows the relationship between the price of a
good and the quantity demanded is called demand schedule.
For example-
A graph of the relationship between the price of a good and
the quantity demanded is called demand curve.

4. MARKET DEMAND VERSUS INDIVIDUAL DEMAND
The market demand is the sum of the individual demands.
Because market demand is derived from individual demands,
it depends on all those factors that determine the demand of
individual buyers. Thus, market demand depends on buyers’
incomes, tastes, expectations, and the prices of related
goods. It also depends on the number of buyers.

5. SHIFTS IN THE DEMAND CURVE
Any change that increase the quantity demanded at every
price will shift the curve towards right. And any change that
decrease the quantity demanded at every price will shift the
curve towards left.

6. For example-Suppose that the American Medical Association
suddenly announces a new discovery: People who regularly
eat ice cream live longer, healthier lives. Then this discovery
will change people’s tastes and will raise the demand for ice
cream. At any given price, buyers will now want to purchase a
larger quantity of ice cream, and the demand curve for ice
cream shifts to the right.
SUPPLY
WHAT DETERMINES THE QUANTITY
AN INDIVIDUAL SUPPLIES?
1. PRICE

7. Law of supply –It claims that, keeping other things constant,
the quantity of goods supplied is positively related to price of
that good in the market, that is if the price of the good is high
in the market the supply will be more and vice-versa.
2. INPUT PRICES
The supply of a good is negatively related to the price of the
inputs used to make the good.
For example – a ice cream selling shop
The inputs are cream, sugar, flavouring, ice-cream machines
and labours used. When the price of one or more inputs
increase then there will be less profit and as a result the
supply will decrease.
3. TECHNOLOGY
This is also an important determinant for supply.
New technology can decrease the input prices spent on
labours used. Hence supply can be increased.
4. EXPECTATIONS
If a seller expects that the price of the good will in increase in
the future then he will keep some of his production in storage
and this will decrease the supply in the market.
THE SUPPLY SCHEDULE AND THE SUPPLY CURVE
A table that shows the relationship between the price of a
good and the quantity supplied is called supply schedule.

8. A graph of the relationship between the price of a good and
the quantity supplied is called supply graph.
MARKET SUPPLY VERSUS INDIVIDUAL SUPPLY

9. Market supply is the sum of the supplies of all sellers.
Market supply depends on all those factors that influence the
supply of individual sellers, such as the prices of inputs used
to produce the good, the available technology, and
expectations. In addition, the supply in a market depends on
the number of sellers.
SHIFTS IN THE SUPPLY CURVE
Any change that raises quantity supplied at every price
shifts the supply curve to the right. Similarly, any change
that reduces the quantity supplied at every price shifts the
supply curve to the left.

10. SUPPLY AND DEMAND TOGETHER

11. The price that balances supply and demand is called
equilibrium price. 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.
THREE STEPS TO ANALYZING CHANGES IN EQUILIBRIUM

12. 1. We decide whether the event shifts the supply curve, the
demand curve, or in some cases both curves.
2. We decide whether the curve shifts to the right or to the
left.
3. We use the supply-and-demand diagram to examine how
the shift affects the equilibrium price and quantity.
Example 1: A Change in Demand
Suppose that one summer the weather is very hot. This will
affect the ice cream market in the following ways-
 The supply curve is unchanged because the weather
does not directly affect the firms that sell ice cream.
But due to increased demand the demand curve shifts.
 Because of the hot weather, people will start eating
more ice-creams. Hence the demand of the ice-cream
increased. As a consequence demand curve shifted
from D1 to D2.
 As a result of increase in the demand the equilibrium
price & equilibrium quantity increased.

13. Example 2: A Change in Supply
Suppose that, during another summer, an earthquake
destroys several ice-cream factories. This will affect the
ice-cream industry in the following ways.
 The earthquake affects the supply curve. By reducing
the number of sellers, the earthquake changes the
amount of ice cream that firms produce .So the
supply curve shifts. The demand curve is unchanged
because the earthquake does not directly change the
amount of ice cream households wish to buy.
 The supply curve shifts to the left because, at every
price, the total amount that firms are willing and able
to sell is reduced. So the supply curve shifts from S1
to S2.

14.  As a result of earthquake, the equilibrium price
increase and demand decreased.
Example 3: A Change in Both Supply and Demand
Suppose that the hot weather and the earthquake occur
at the same time. This will affect the ice-cream market in
the following ways.
 Due to the hot weather the demand curve will shift
as people will start eating more ice-creams.
Due to the earthquake, there will be decrease in the
supply. So the supply curve will also shift.

15.  As the demand of ice-cream has increased so its
curve will shift to right. And due to the decrease in
the supply the supply curve will shift to left.
 In both cases, the equilibrium price rises. In panel
(a) Where demand increases substantially while
supply falls just a little, the equilibrium quantity
also rises.
(b) By contrast, 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.

16. THE END
Q - Ketchup is a complement (as well as a condiment) for
hot dogs. If the price of hot dogs rises, what happens to
the market for ketchup? For tomatoes? For tomato juice?
For orange juice?
Ans –

17. 1. According to the law of demand, when the price of
hot dog will increase then the demand of the same
good will decrease.
2. As a result the demand curve will shift to left.
3. So sellers of hot dog will gain less profit.
4. Buyers will see for its substitute for example
hamburger.
5. Demand of the substitute will increase.
6. Ketchup Company will decrease its productivity due
to the decreased profit.
7. Labours of ketchup market will be paid less.
8. More tomatoes will be supplied to juice industry.
9. Supply for tomato juice will increase and according
to the law of supply when the supply will increase
the price of tomato juice will increase.
10. As price of tomato juice is increased so according
to the law of demand its demand will decrease and
demand of orange juice will increase as a substitute.