Thai Nguyen University

Thai Nguyen University of Technology

Faculty of International Training

(ECEN 4503)
Engineering Economics
Lecture #4:

The Market Forces of Supply and

Demand
Frid. May 29th 2015
Lecturer: Nguyen Minh Y, Ph.D.

Homework #2
Ex4. American and Japanese workers can each produce 4 cars a year. An American
worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5
tons of grain a year. To keep things simple, assume that each country has 100 million
workers.
a.
b.
c.

d.
e.
f.
2

For this situation, construct a table analogous to the table of Production

opportunities (opportunity cost).
Graph the production possibilities frontier of the American and Japanese economies.
For the U.S., what is the opportunities cost of a car? Of grains? For Japan, what is
the opportunity cost of a car? Of grain? Put this information in a table analogous to
Table 1.
Which country has an absolute advantage in producing cars? In producing grain?
Without trade, half of each countrys workers produce cars and half produce grain.
What quantities of cars and grain does each country produce?
Starting from a position without trade, give an example in which trade makes each
country better off.

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Homework #2
Ex5. Suppose that there are 10 million workers in Canada and that each of
these workers can produce either 2 cars or 30 bushels of wheat in a year.
a.

b.

c.

What is the opportunity cost of producing a car in Canada? What is the

opportunity cost of producing a bushel of wheat in Canada? Explain the
relationship between the opportunity costs of the two goods.
Draw Canadas production possibilities frontier. If Canada chooses to
consume 10 million cars, how much wheat can it consume without trade?
Label this point on the production possibilities frontier.
Now suppose that the U.S. offers to buy 10 million cars from Canada in
exchange for 20 bushels of wheat per car. If Canada continues to
consume 10 million cars, how much wheat does this deal allow Canada
to consume? Label this point on your diagram. Should Canada accept the
deal?

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Reviewing

Ten
principles
of
economics
- How people
make
decision
- How they
interact
- How they
organized

Think like
an
economist
- Scientists
- Policymakers

Interdepend
ence and
the gains
from trade

Supply and
Demand:
How
market
works

- Specialize
and trade
- Absolute
advantage
- Comparative
advantage

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What are supply and demand?

Terminologies
Market a group of buyers and sellers of a particular goods and

services
The buyers as a group determine the demand for the product.
The sellers as a group determine the supply of the product.
The market forces of supply and demand
How the buyers and sellers behave and interact?
How supply and demand determine the price in market?
How price allocate the economys resources?

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1. Market and Competition

Competitive markets
A market in which there are many buyers and sellers so that each

has negligible impact on the market price.

Example:
Market for ice cream in particular town
Buyers: the population of the town
Sellers: the ice cream shops in the town

each buyer knows several ice cream shop to choose, and each seller
is aware that his/her product is somehow similar to what offered by
other sellers.
If sellers sell ice cream at price lower than market price, they loose profit
If higher than market price, buyers will buy ice cream somewhere else.
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1. Market ad Competition
Competition: Perfect and otherwise
Perfectly competitive market has two primary characteristics:
The goods being offered for sale are all the same
The buyers and sellers are so numerous that no single buyer or seller

can influence the market price.

Example:
Wheat markets
Thousands of farmers selling wheat
Millions of consumers using wheat and wheat product
Take the price as given, i.e., price-takers

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1. Market ad Competition
Competition: Perfect and otherwise
Monopoly:
Only one sellers who is able to set the market price

Example:
Electric or water utility in a specific area
Oligopoly
Few sellers they do not compete aggressively

Example:
Airline industry:
Few airlines in the same route do not compete rigorously
To keep the price high
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1. Market ad Competition
Competition: Perfect and otherwise
Monopolistically competitive
Many sellers
Offer slightly different products

Example:
Software industry
Word processing program
MS Word
Latex
Etc.

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2. Demand (behavior of buyers)

Quantity demanded of a good is the amount of the good that

buyers are willing and able to purchase.

What determines the quantity an individual demands?
Determinant #1: Price
If the price of ice cream rose, you may buy less ice crease, instead,

more yogurt.
Law of demand the quantity demanded of a good falls when the price
of the good rises.

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2. Demand
What determines the quantity an individual demand?
Determinant #2: Income
Low income means you have less to spend in total, so you have to

spend less on most goods.

Normal good a good for which an increase in income leads an
increase in demand.
Example:
Clothing, shoes, glass, etc.
Beef, pork, seafood, etc.
Inferior good a good for which an increase in income leads to a
decrease in demand.
Example:
Bus rides vs. car
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2. Demand
What determines the quantity an individual demand?
Determinant #3: Prices of related goods
Suppose the price of frozen yogurt falls, you may consume it more,

and less ice cream.

Substitutes two goods for which an increase in the price of one good
leads to an increase in the demand of the other.
Example,
o Apple and pear; rice and bread, etc.
Complements two goods for which an increase in the price of one
leads to a decrease in the demand of the other.
Example,
o Coffee and cream, sugar (milk)
o Gasoline and car
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2. Demand
What determines the quantity an individual demand?
Determinant #4: Expectation
Your expectation about future may affect your demand for a good or

service today.

Example,
Higher income next month, we are willing to spend more today.
The price is expected to rise in future, we may decide to buy it now.
A new technology comes soon, waiting to buy the product:
I

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phone 6, etc.

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2. Demand
The demand schedule and the demand curve
How the quantity demanded varies with the price, holding other

factors constant.
Demand schedule a table that shows the relationship between the

price of a good and the quantity demanded.

Example:
The demand schedule of Catherine for ice cream:
Price of Ice-cream Cone
($/unit)
0.00
0.50
1.00
1.50
2.00
2.50
3.00
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Quantity of Cones Demanded

(unit)
12
10
8
6
4
2
0
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2. Demand
The demand schedule and the demand curve
Demand curve a graph of the relationship between the price of a

good and the quantity demanded.

Example:
The quantity of ice cream demanded according to the price of ice

cream.
Horizontal axis:
o The quantity
Vertical axis
o The price

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2. Demand
Market demand versus individual demand
The market demand of a particular good or service is the sum of

all the individual demands for that good or service.

Example:
Market for ice cream consists of two buyers

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Price of Icecream Cone

($/unit)

Catherine

+ Nicholas

= Market

0.00
0.50
1.00
1.50
2.00
2.50
3.00

12
10
8
6
4
2
0

7
6
5
4
3
2
1

19
16
13
10
7
4
1

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2. Demand
Market demand versus individual demand

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2. Demand
Shift of the demand curve
Suppose that
A new discovery of government health center: People who eat ice

cream regularly live longer.

Change peoples taster of ice cream: Increase the demand for ice
cream at any price

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2. Demand
Summary

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Variables that affect quantity demanded

Price

A change in this variable

A movement along the demand curve

Income

Shift the demand curve

Prices of related goods

Shift the demand curve

Tastes

Shift the demand curve

Expectations

Shift the demand curve

Number of buyers

Shift the demand curve

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Case study:
How to reduce the quantity of smoking demand?
Shift the demand curve
Health warning in on the cigarette package
Cigarette advertising is prohibited on TV.

Change the price

10% increase in the price, 4% reduction in the quantity
Teenage:
10%

increase in the price, 12% reduction in the quantity

Argument:
How the price of cigarette affect the demand of illicit drug:

marijuana?
Cigarette and marijuana are substitutes?
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3. Supply (behavior of sellers)

Quantity supplied the amount of a good or service that sellers are

willing and able to sell.

What determines the quantity an individual supplies?
Determinant #1: Price
When the price of ice cream is high,
Selling

ice cream is profitable

Increase the quantity of supply: work longer hours, buy new ice
cream machine, hire more workers, etc.
When the price of ice cream falls down,
Selling ice cream is less profitable
Reduce the quantity of supply
Law of supply the quantity supplied of a good rises when the

price of the good rises.

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3. Supply
What determines the quantity an individual supplies?
Determinant #2: Input price
To produce ice cream, various inputs needed: Ice cream machine,

labor, cream, sugar, flavoring, etc.

If the price of these inputs rises,
Selling ice cream is less profitable
If the price rises substantially, you may choose to shut down your
firm.
The quantity supplied is negatively relative to the price of inputs

to make the good!

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3. Supply
What determines the quantity an individual supplies?
Determinant #3: Technology
Technology can reduce the amount of inputs needed.
For example:
Labor

needed for producing certain amount of ice cream

Reduce the firms cost
Selling ice cream is more profitable, etc.

The advance in technology raises the quantity supplied!

Determinant #4: Expectation
The amount of your supply today may depend on your expectation in

future.
If you expect the price rises in future, you may produce more today
and put them in storage.
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3. Supply
Supply schedule and supply curve
How the quantity supplied varies with the price, holding other

factors constant.
Supply schedule a table that shows the relationship between the price

of a good and the quantity supplied.

Example:
The supply schedule of Ben for ice cream
Price of Ice-cream Cone ($/unit)
0.00
0.50
1.00
1.50
2.00
2.50
3.00
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Quantity of Cones Demanded

(unit)
0
0
1
2
3
4
5
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3. Supply
Supply demand and supply curve
Supply curve a graph of the relationship between the price of a good
and the quantity supplied.
Example:
The quantity that Ben supplies according to the price
Horizontal axis
o Quantity of ice cream
Vertical axis
o Price of ice cream

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3. Supply
Market supply versus individual supply
Market supply is the sum of the supplies of all sellers

Example:
Market for ice cream consists of two sellers
Price of Ice-cream Cone
($/unit)
0.00
0.50
1.00
1.50
2.00
2.50
3.00

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Ben

+ Jerry

= Market

0
0
1
2
3
4
5

0
0
0
2
4
6
8

0
0
1
4
7
10
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3. Supply
Market supply versus individual supply

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3. Supply
Shift in the supply curve
Suppose that
The price of sugar falls
Cost

of producing ice cream decreases

Selling ice cream is more profitable
The quantity supplied increase at any given price

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3. Supply
Summary,
Variables that affect quantity supplied A change in this variable
Price
A movement along the supply curve

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Input prices

Shift the supply curve

Technology

Shift the supply curve

Expectation

Shift the supply curve

Number of buyers

Shift the supply curve

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Reviewing
Market
Types of markets

Demand
Quantity demanded of a good

is the amount of the good that

buyers are willing and able to
purchase.
Determinants of the demand
Price, income, price of related

goods, expectation.
Demand schedule and demand

curve
Individual demand and market
demand
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Supply

Quantity supplied of a good

is the amount of the good

that sellers are willing and
able to sell
Determinants of the supply
Price, price of inputs,

technology, expectation.
Supply schedule and supply

curve
Individual supply and
market supply
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4. Supply and Demand Together

We combine supply and demand to see how they determine the quantity

of a good sold in a market and its price.

Equilibrium
Equilibrium a situation in which supply and demand has been brought

into balance.
Equilibrium price the price that

balances supply and demand.

Equilibrium quantity the quantity
supplied and the quantity
demanded when the price has
adjusted to balance supply and
demand.

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4. Supply and Demand Together

What happen when the price

above or below equilibrium?

Suppose the price is above the

equilibrium price
Supply is unable to sell all they

want
Applying law of demand, sellers
need to reduce the price
If the price is below the

equilibrium price
Demand is unable to buy all they

Invisible hand!!!

want
Applying law of supply, buyers
offer to buy at higher price
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4. Supply and Demand Together

Equilibrium
Interactions of the many buyers and sellers automatically push the

market price toward the equilibrium price.

Once the market reaches its equilibrium, all buyers and sellers are
satisfied.
Law of supply and demand the price of any good adjusted to bring the

supply and demand for that good into balance.

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4. Supply and Demand Together

How to determine the market equilibrium?
Equilibrium point changes when demand and/or supply changes.

Three steps to analyze changes in equilibrium

When some events, other than price change, occur, the demand and

supply curve shift; consequently, the market equilibrium change

A three-step program for analyzing changes in equilibrium
1. Decide whether the even shifts the supply curve or demand curve (or perhaps
both).
2. Decide which direction the curve shifts.
3. Use the supply-and-demand diagram to see how the shift changes the
equilibrium.
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Case study
A change in demand
Suppose that one summer is very hot, how does this event affect

the market for ice cream?

Three steps:
How the event affect the

demand/supply?
How the demand/supply curve
shifts?
The new market equilibrium?

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Case study
A change in supply
Suppose that an earthquake that destroy several ice cream

factories, how does this event affect the market for ice cream?
Three steps:
How the event affect the

demand/supply?
How the demand/supply curve
shifts?
The new market equilibrium?

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Case Study
Changes in both supply and demand
Suppose that two events occur at the same time
Three steps:
How the event affect the

demand/supply?
How the demand/supply curve
shifts?
The new market equilibrium?

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Change of Equilibrium Points

No change in
demand
An increase in
demand
An decrease in
demand

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No change in
supply
P same

An increase in
supply
P down

A decrease in
supply
P up

Q same
P up

Q up
P ambiguous

Q down
P up

Q up
P down

Q up
P down

Q ambiguous
P ambiguous

Q down

Q ambiguous

Q down

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Summary
Market
Demand
Supply
Determinants
Market vs. individual

Equilibrium
Equilibrium price
Equilibrium quantity
Shortage
Surplus
Determine the new equilibrium with changes

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Quiz #1
Ex1. What are the demand schedule and

the demand curve and how are they

related? Why does the demand curve
slope downward?
Ex2. Does a change in producers

technology lead to a movement along the

supply curve or a shift in the supply
curve? Does a change in price lead to a
movement along the supply curve or a
shift in the supply curve?
Ex3. Beer and pizza are complements

because they are often enjoyed together.

When the price of beer rise, what
happens to the supply, demand, quantity
supplies, quantity demanded, and the
price in the market for pizza?

Ex4. Consider the market for minivans. For each of

the events listed here, identify which of the

determinants of demand or supply are affected. Also
indicate whether demand or supply increases or
decreases. Then draw a diagram to show the effect on
the price and quantity of minivans.
a. People decide to have more children.
b. A strike by steelworkers raises steel prices.
c. Engineers develop new automated machinery for the
production of minivans.
d. The price of sports utility vehicles rises.
e. A stock market crash lowers peoples wealth.
Ex5. Using supply and demand diagrams show the

effect of the following events on the market for

sweatshirts.
a. A hurricane in South Carolina damages the cotton
crop.
b. The price of leather jackets falls.
c. All colleges require morning exercise in appropriate.
d. New knitting machines are invented.

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Quiz #1
Ex6. The market for pizza has the

following demand and supply

schedules:
a.

b.

c.

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Graph the demand and supply

curves. What is the equilibrium
price and quantity in this market?
If the actual price in this market
were above the equilibrium price,
what would drive the market
toward the equilibrium?
If the actual price in this market
were below the equilibrium
price, what would drive the
market toward the equilibrium?

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Price

Quantity

Quantity

demanded

supplied

$4

135 pizzas

26 pizzas

104

53

81

81

68

98

53

110

39

121

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