DEMAND,

SUPPLY AND THE MARKET

McGraw-Hill Educa0on, 2014

Key concepts in the study of

markets
Market: a set of arrangements by which
buyers and sellers are in contact to
exchange goods or services
Demand: the quantity of a good buyers
wish to purchase at each conceivable
price
Supply: the quantity of a good sellers wish
to sell at each conceivable price
Equilibrium price: price at which quantity
supplied = quantity demanded.
McGraw-Hill Educa0on, 2014

The supply curve shows the relation between

price and quantity demanded holding other
things constant

Other things include:

Price

Technology
Input costs
Government
regulations
Business expectations

Quantity
McGraw-Hill Educa0on, 2014

Market equilibrium

Market equilibrium is at E0
where quantity
demanded equals
quantity supplied . The
equilibrium price is P0
and quantity Q0

Price

P0

E0

D
Q0

Quantity

McGraw-Hill Educa0on, 2014

Behind the demand curve

It is important to distinguish between
movements (or shifts) in the demand curve
and movements along the demand curve.
Movements along the demand curve result
from changes in the price of the good itself.

McGraw-Hill Educa0on, 2014

Price

Movements along the demand

curve

P0
P1

A
B
D

A movement along the

demand curve from A to B
occurs when price falls
Here all other
determinants of demand
remain constant.

Q0 Q1 Quantity
McGraw-Hill Educa0on, 2014

Behind the demand curve

Movements (or shifts) in the demand curves
are caused by
Changes in the price of related goods
either substitutes or complements
Changes in consumer incomes
Changes in tastes
Expectations over future price changes.

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Income changes and demand

The influence of changes in income on
demand depends on whether the good is
a normal good or
an inferior good.

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Price

Movements of or shifts in the

demand curve

P0
P1

A
B

Q0 Q1 Q2 Q3

A movement (or shift) of the

demand curve from D0 to
D1leads to an increase in
demand at each and every
price
e.g., at P0 quantity
demanded increases from
Q0 to Q2: at P1 quantity
demanded increases from
Quantity Q1 to Q3

McGraw-Hill Educa0on, 2014

Price

A shift in demand
D1

If the price of a substitute

good decreases, then
less will be demanded at
each price.

D0

P0
P1

E0
E1

Q1 Q0

The demand curve shifts

from D0D0 to D1D1.
If price stayed at P0 the
D0 resultant glut would put
D1
downward pressure on the
price.
Quantity
Demand would rise and
supply fall until equilibrium is
restored at E1.
McGraw-Hill Educa0on, 2014

Behind the supply curve (1)

It is important to distinguish between
movements (or shifts) in the supply curve
and movements along the supply curve.
Movements along the supply curve result
from changes in the price of the good itself.

McGraw-Hill Educa0on, 2014

Behind the supply curve (2)

Movements (or shifts) in the supply curves
are caused by
Changes in technology
Changes in input costs
Changes in government regulations
Business expectations

McGraw-Hill Educa0on, 2014

A shift in supply
Price

S1
D

S0

E2

P1
P0

The supply curve

shifts to S1S1

E0
S0

If price stayed at P0, then there

would be excess demand and
upward pressure on price.

D
Q1 Q0

Suppose safety
regulations are tightened,
increasing producers costs

Quantity

Demand would fall and

supply increase until market
equilibrium is restored.

McGraw-Hill Educa0on, 2014