3.

Understanding individual markets: Demand and Supply

Introduction
Today we are going to talk about some subject of microeconomics such as:

Demand
Supply
Equilibrium
elasticity

3.1 Demand
The amount of a particular economic good or service that a consumer or group
of consumers will want to purchase at a given price.
The Law of Demand
The amount of a good that buyers purchase at a higher price is less because as
the price of a good goes up. In other words, the higher the price, the lower the
quantity demanded. The law of demand shows a downward slope.

In the graphic A, B and C are points on the demand curve. Each point on the curve
reflects a direct correlation between quantity demanded (Q) and price (P). So, at
point A, the quantity demanded will be Q1 and the price will be P1, and so on. The
higher the price of a good the lower the quantity demanded (A), and the lower the
price, the more the good will be in demand (C).

Some of the factors that can cause a demand curve to shift include:
1.

Change in preferences/tastes

2.

Change in prices of goods that are complementary

3.

Changes in prices of goods that are substitutes

3.2. Supply
The total amount of a good or service available for purchase.
The Law of Supply
Producers supply more at a higher price because selling a higher quantity at a
higher price increases revenue. In other words, that the higher the price, the higher
the quantity supplied. The supply relationship shows an upward slope.

In the graphic A, B and C are points on the supply curve. Each point on the curve
reflects a direct correlation between quantities supplied (Q) and price (P). At point
B, the quantity supplied will be Q2 and the price will be P2, and so on.
Some of the factors that would cause a shift in the supply curve include:
1.

Government tax policy

2.

Weather/climate

3.

Prices of substitute products

4.

Number of producers

3.3. Equilibrium
The equilibrium occurs at the point intersection of the demand and supply curve,
where the quantity demanded by consumers will equal the quantity supplied by
producers.

In the graph the equilibrium point is where intersect of the demand curve and the
supply curve.

Excess demand is created when price is set below the equilibrium price.
Excess supply is created when price is set above the equilibrium price.

3.4 Elasticity of Demand

In economics, the demand elasticity refers to how sensitive the demand for a good
is to changes in other economic variables. Demand can be classified as elastic,
inelastic or unitary.
The formula for computing elasticity of demand is:
E D=

Q Q 2Q1
=
P P2P1

The elasticity is equal to the percentage change in quantity demanded divided

by the percentage change in price.
The percentage change in the quantity demanded equals "q" two less "q" one.
The percentage change in price is equal to "p" two less "p" one.

E D >1 , the demand is elastic, quantity changes faster than price.

E D <1 , the demand is inelastic, quantity changes slower than price.

E D=1 , elasticity of demand is unitary. In other words, quantity changes at

the same rate as price.

Conclusion
Lets recap what weve learned in this presentation.
Demand and the Law of Demand
Good or service that a consumer or group of consumers. Will want to purchase at a
given price. About the Law of Demand, in other words, the higher price, the lower
lower the quantity demanded.