Lecture 1

Supply and Demand: Analysis of Consumption and Production Behaviors

Demand and Supply Analysis

Demand Curve
A curve that shows us the quantity of goods that consumers are willing to buy at different prices. It summarizes the behavior of consumers (Households)

Law of Demand
The inverse relationship between the price of a good and the quantity demanded, when all other factors that influence demand are held fixed

Supply curve
A curve that shows us the total quantity of goods that their suppliers are willing to sell at different prices. It summarizes the behavior of Producers (Firms)

Law of supply
The positive relationship between price and quantity supplied, when all other factors that influence supply are held fixed

Demand Curve
Price (per unit)

$30 25 20 15 10 Demand Curve 5 0 Quantity 10,000 20,000 30,000 40,000

As price rises the quantity demanded falls

Movement along versus Shift of Demand Curve

Movement along the demand curve Shift of the demand curve

Change in price of a good and service

Changes in other factors

Change in quantity demanded

Change in demand

Shift of a Demand Curve

The Variables that Shift Demand Curve
1. Income and Wealth
Normal Goods Inferior Goods

2. Prices of Other Goods and Services

Substitutes goods Complementary goods

3. Tastes and Preferences 4. Expectations

Shift of a Demand Curve

Price (per unit)

Decrease In demand

Increase In demand

D2

D1 D3 Quantity

Supply Curve
Price (per unit) 45 40 35 $30 25 20 15 10 5 0 Quantity 10,000 20,000 30,000 40,000

Supply Curve

As price rises the quantity supplied rises

Shift of a Supply Curve

Price (per unit)

Decrease in supply

Increase
In supply

S3

S1

S2

Supply curve Shifts when there is a change in the cost of producing the product (Labor, Capital, Land and Technology)

Quantity

Market Equilibrium
Equilibrium
The condition that exists when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change.

Excess demand (Shortage)

The condition that exists when quantity demanded exceeds quantity supplied at the current price.

Excess Supply (Surplus)

The condition that exists when quantity supplied exceeds the quantity demanded at the current price.

Markets in Equilibrium
Price (per unit) 45 40 35 30 $25 20 15 10 5 0 35,000 30,000 40,000 Demand Supply

The Equilibrium Price : $25 E The Equilibrium Quantity : 35,000

Quantity

10,000

20,000

Markets in Surplus
Price (per unit) 45 40 $35 30 25 20 15 10 5 0 Demand Surplus Supply

The market price of $35 is above the equilibrium price E surplus

Quantity 10,000 20,000 30,000 40,000

Markets in Shortage
Price (per unit) 45 40 35 30 $25 20 15 shortage 10 5 0 35,000 30,000 40,000 Demand Supply The market price of $15 is below the equilibrium price E

shortage

Quantity

10,000

20,000