Demand, Supply and

Market Equilibrium
Demand

Demand is the amount of a product that
people are willing and able to purchase at
each possible price during a given period of
time.

The quantity demand is the amount of a
product that people are willing and able to
purchase at one, specific price.
The Law of Demand

Law of demand there is an inverse
relationship between price and
quantity demanded (ceteris paribus).

Quantity demanded rises as price falls,
other things constant.
Quantity demanded falls as prices rise,
other things constant.
Why?

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A Demand Curve
Quantity of DVDs demanded (per week)
1 2 3 4 5 6 7 8 9 10 11 12

13
$6.00
5.00
4.00
3.00
2.00
1.00
.50
0
3.50
E
D
C
B F
A
From a Demand Table to a
Demand Curve
Price per
cassette
A
B
C
D
E
A Demand Table
DVD rentals
demanded per
week
$0.50
1.00
2.00
3.00
4.00
9
8
6
4
2
Demand for
DVDs
G
Change in Quantity Demanded
D
1
Change in quantity demanded
(a movement along the curve)
B
0
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Quantity demanded (per unit of time)
100
$2
$1
200
A
D
0

D
1
Change in Demand
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Quantity demanded (per unit of time)
100
$2
$1
200
B A
Change in demand
(a shift of the curve)
250
Shift Factors of Demand

Income
The prices of other goods
Tastes
Expectations
Number of Buyers
Consumer Income
Normal Good
$3.00
2.50
2.00
1.50
1.00
0.50
2 1 3 4 5 6 7 8 9 10 12 11
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
Increase
in demand
An increase
in income...
D
1

D
2

Consumer Income
Inferior Good
$3.00
2.50
2.00
1.50
1.00
0.50
2 1 3 4 5 6 7 8 9 10 12 11
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
Decrease
in demand
An increase
in income...
D
1
D
2

Prices of Related Goods
Substitutes & Complements
When a fall in the price of one
good reduces the demand for
another good, the two goods are
called substitutes.
When a fall in the price of one
good increases the demand for
another good, the two goods are
called complements.
Consumer Taste
If there is a change in taste in favor of a
commodity, the demand for that
commodity will increase and demand
curve will shift to the right, and vice versa.

A taste can be affected by advertisement
Expectation and Population
If consumer expect that prices will rise in
future, the current demand will increase .

The market demand for a product is also
influenced by changes in the size and
composition of the population.

Other Factors
- Weather
- Health Scares

Individual and Market Demand Curves
A market demand curve is the
horizontal sum of all individual
demand curves.
This is determined by adding the
individual demand curves of all the
demanders.
From Individual Demands
to a Market Demand Curve
(1)
Price per
cassette
$0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
(2)
Alices
demand
(3)
Bruces
demand
(2)
Cathys
demand
(3)
Market
demand
9
8
7
6
5
4
3
2
6
5
4
3
2
1
0
0
1
1
0
0
0
0
0
0
16
14
11
9
7
5
3
2
A
B
C
D
E
F
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H
Cathy Bruce Alice
D
A
C
E
F
G
Quantity of cassettes demanded per week
2
$4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0
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4 6 8 10 12 14 16
B
Market demand
Supply
Quantity supplied is the amount of
a good that sellers are willing
and able to sell.
The Law of Supply
There is a direct relationship between
price and quantity supplied (ceteris
paribus).

Quantity supplied rises as price rises,
other things constant.

Quantity supplied falls as price falls,
other things constant.

Why?
Supply Curve
$3.00
2.50
2.00
1.50
1.00
0.50
2 1 3 4 5 6 7 8 9 10 12 11
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
Quantity supplied refers to a specific
amount that will be supplied at a
specific price.
Changes in price causes changes in
quantity supplied represented by a
movement along a supply curve.
A movement along a supply curve the
graphic representation of the effect of
a change in price on the quantity
supplied.


Shifts in Supply Versus Movements
Along a Supply Curve
Change in Quantity Supplied
1 5
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
S
1.00
A
C
$3.00
A rise in the price
of ice cream cones
results in a
movement along
the supply curve.
If the amount supplied is affected by
anything other than a change in
price, there will be a shift in supply.
Shift in supply the graphic
representation of the effect of a
change in a factor other than price on
supply
Shifts in Supply Versus Movements
Along a Supply Curve
Change in Supply
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
S
1

S
2

S
3

Increase in
Supply
Decrease in
Supply
Shift Factors of Supply
Other factors besides price affect
how much will be supplied:

Prices of Resources
Prices of Other Goods
Technology
Suppliers expectations
Government Regulations
Number of Suppliers

From Individual Supplies to a Market
Supply
Quantities
Supplied
A
B
C
D
E
F
G
H
I
(1)
Price
(per DVD)
(2)
Ann's
Supply
(5)
Market
Supply
(4)
Charlie's
Supply
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
0
1
2
3
4
5
6
7
8
0
0
1
2
3
4
5
5
5
0
0
0
0
0
0
0
2
2
0
1
3
5
7
9
11
14
15
(3)
Barry's
Supply
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
From Individual Supplies to a Market Supply
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Charlie Barry
Ann
Quantity of DVDs supplied (per week)
$4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0
I
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G
F
E
D
C
B
A
Market Supply
C
A

Equilibrium

In a free market, the forces of supply
and demand interact to determine
equilibrium quantity and equilibrium
price.

When the market is not in equilibrium,
you get either excess supply or excess
demand, and a tendency for price to
change.
Excess Supply, Excess Demand
Excess supply a surplus, the
quantity supplied is greater than
quantity demanded
Prices tend to fall.
Excess demand a shortage, the
quantity demanded is greater than
quantity supplied
Prices tend to rise.

Price Adjusts
The greater the difference between
quantity supplied and quantity
demanded, the more pressure there
is for prices to rise or fall.

When quantity demanded equals
quantity supplied, prices have no
tendency to change.

The Interaction of Demand and Supply
Price (per
DVD)
Quantity
Supplied
Quantity
Demanded
Surplus (+)
Shortage (-)
$3.50 7 3 +4
$2.50 5 5 0
$1.50 3 7 -4

A
The Interaction of Demand and Supply
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$5.00
4.00
3.50
3.00
2.50
2.00
1.50
1.00
S
D
Quantity of DVDs supplied and demanded
C
Excess demand
1 2 3 4 5 6 7 8 9 10 11 12
Excess supply
E
Shifts in Supply and Demand
Shifts in either supply or demand
change equilibrium price and
quantity.

An increase in demand creates
excess demand at the original
equilibrium price.

The excess demand pushes price
upward until a new higher price and
quantity are reached.

A
S
0

Quantity of DVDs (per week)
$2.50
2.25
0
9 8 10
Excess demand
D
1

Increase in Demand
D
0

B
Decrease in Supply
A decrease in supply creates excess
demand at the original equilibrium
price.

The excess demand pushes price
upward until a new higher price and
lower quantity are reached.
A
Decrease in Supply
Quantity of DVDs (per week)
$2.50
2.25
0
9 8 10
D
0

S
1

S
0

C
B
Excess demand
Price Ceiling
Price Floor
The Demand Function

A general equation representing the demand
curve
Qxd = f(Px , PY , M, H)
Qxd = quantity demand of good X.
Px = price of good X.
PY = price of a related good Y.
Substitute good.
Complement good.
M = income.
Normal good.
Inferior good.
H = any other variable affecting demand.
Inverse Demand Function

Price as a function of quantity demanded.
Example:
Demand Function
Qxd = 10 2Px
Inverse Demand Function:
2Px = 10 Qxd
Px = 5 0.5Qxd
The Supply Function
An equation representing the supply curve:

Qxs = f(Px , PR ,W, H,)

QxS = quantity supplied of good X.
Px = price of good X.
PR = price of a production substitute.
W = price of inputs (e.g., wages).
H = other variable affecting supply.
Inverse Supply Function
Price as a function of quantity supplied.

Example:
Supply Function
Qxs= -10 + 2Px

Inverse Supply Function:
2Px = 10 + Qxs
Px = 5 + 0.5Qxs
Market Equilibrium
Demand Function
Q = 10 2P
Supply Function
Q = -5 + 3P

What is Equilibrium P and Q ?

Market Equilibrium
Demand Function
Qd = 10 2P
Supply Function
Qs = -5 + 3P

Equilibrium P and Q ?
P = 3 and Q = 4