Introduction, Demand, Supply and the Equilibrium

1. Economics Topic C & E
Demand & Supply
Wan Fang High School
2022 Fall
Instructor: Mai-Huong Vo
vomaihuong89@gmail.com

2. Today’s lecture
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3. Today’s lecture
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4. Demand
• What is the demand?
• Demand: the quantity of good & services
the customers are willing and able to buy.
• Difference of demand and desire.
• Do you demand this…Or do you desire
this car?
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5. Why ceteris paribus?
People are complicated,
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important variables
influence choices,
and their economic choices
are usually influenced by
many variables. In order to
focus only on the most
that
the
ceteris paribus assumption
rules out changes in
certain variables that might
affect the model.

6. The Law of Demand
• Law of Demand is ………………………..……
• If the price increases then there will be less quantity
demanded
• Reasons for inverse relationship:
 Income effect: P , real wealth , less purchasing
power. For “normal” goods, Qd 
 Substitution effect: P , there is a disincentive to
purchase because alternative substitute goods are
relatively cheaper, Qd 
D
Qty
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P
(Relative
to other
good)

7. Demand Curve
• The demand curve illustrates the relationship b/w the
quantity demanded and the price of a good (assuming all
other influences on the demand are held constant).
• To calculate the market demand curve, adding up the
quantity demand of each individual at each different price, all
else constant.
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8. Demand Schedule
- Is the table stating the relationship between price and
quantity demand, all else constant?
Price Qd
(Fred)
Qd
(Mary)
Qd
(Total)
$5 5 7 12
$10 4 5 9
$15 3 3 6
$20 2 1 3
$25 1 0 1
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9. A change in Quantity demanded vs a
change in Demand
• If the price of a good itself changes then there is a
 movement along its' demand curve – the demand curve
does NOT shift
 change in quantity demanded
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10. A change in Quantity demanded vs a
change in Demand (cont)
• If another determinant of demand changes (e.g. ps) then
there is a
 shift of the demand curve
 change in demand either: an increase in demand, or
a decrease in demand
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11. IF price changes
There is a movement along
the demand curve.
When price
changes,
quantity
demanded
changes.
There is a
movement
along the
demand curve.
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12. IF non-price factors change
Change in
demand
Demand curve
shifts
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13. Non-price determinants of demand
Changes in demand occurs when the following non-price
determinants of demand change:
• number of buyers
• tastes and preferences
• Income
• Normal goods: shoes, vacation, etc.
• Inferior goods: bus ride, frozen food, etc.
• prices of related goods.
• Substitutes: tea & coffee
• Complements: coffee & milk
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14. Change in Demand
• Demand increases if (shift in the demand curve)
- price of substitutes increases (ps ↑)
- price of complements decreases (pc ↓
)
- income increases (y ↑
) and the good is normal
- income decreases (y ↓
) and the good is inferior
- preferences for the good increase (z ↑
)
- expected future prices increase (pe ↑)
- population increases (n ↑)
• Demand decreases if
- ps ↓
- etc …
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15. Change in Demand
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https://demonstrations.wolfram.com/ShiftsInTheDemandCurve/

16. Linear Demand Function
Linear Demand Function: Qd = 100 - 2P
To draw it… Find two points on the line by choosing any two
prices - say,
if P = 0, Qd = 100 (A) and if P = 30,Qd = 40 (B)
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17. Clicker Exercise
Which will NOT cause a change in the demand for good X?
a. a change in tastes
b. a change in income
c. a change in the price of X
d. a change in price of complementary product
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18. Clicker Exercise
An increase in demand:
a. results in a leftward shift of the demand curve.
b. could be caused by a decrease in the price of the good.
c.could be caused by an increase in the price of a substitute
good.
d. is shown as movement down along a demand curve.
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19. Demand and Marginal Benefit
"By a process of voluntary exchange, resources are shifted to
those uses in which the value to consumers, as measured by
their willingness to pay, is highest. When resources are being
used where their value is highest, we may say that they are being
employed efficiently.” (Richard Posner, Law and Economics, p.10)
Marginal benefit is the additional benefit received when consuming
an additional unit
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The maximum willingness to pay for an additional unit must equal
to the additional benefit that unit brings. Hence D = MB.
Quantity Total Benefit Marginal Benefit Willingness to pay
1 10 10 10
2 18 8 8
3 23 5 5
…

20. Stop and think
• Does the law of demand mean that you always choose the
cheapest products?
• Do you (they) choose the cheapest dentist/toothpaste?
• What is not equal?.........
For one, there incomes are not
equal, their information is not
equal, and as well ‘the law’
applies to identical products
(homogeneous products)…….
A Nike bag is a bag, a Louis Vuitton bag is a bag…. But ‘bags’ are not
homogeneous.
• The Law of demand does not mean we choose the cheapest
product….it means if two products are identical (homogenuous)
then you chose the cheaper one

21. Supply
• No. of units of a good or service firms are willing and able to
produce during a period, under a given set of conditions
• Law of Supply is…………………………..
• If the price increases then
- it’s ‘worth it’, i.e. more profitable, to divert resources to
producing more
- the relatively higher price will compensate for the
increased opportunity costs of producing more
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22. Supply and the Production Possibility Frontier
• The production possibility frontier (PPF) shows the alternative
combinations of goods and services that can be produced given
resources and technology
-A linear PPF, constant opportunity cost (i.e. factors are
homogenous)
- A concave PPF, increasing opportunity cost
• An important reason why there are increasing opportunity costs is that
some factors are better in certain activities than others (i.e. factors are
not homogeneous)
- From 2x to 3x, O.C is 1 Y
- From 3x to 4x, O.C is 3 Y
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23. Supply and the Production Possibility
Frontier (cont)
• Competitive supply price measures the opportunity cost of
each marginal unit (i.e. the marginal cost MC).
• Supply = MC
- If PPF is linear, the supply curve is horizontal
- If PPF is concave, the supply curve is upward sloping
Supply curve:
• The supply curve shows the relationship between quantity
supplied & price, other things being the same (ceteris
paribus)
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24. Supply Schedule
• Is the table stating the relationship between price and
quantity supply, all else constant
• To calculate the market supply curve, adding up the quantity
supply of each individual at each different price, all else
constant.
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25. Changes in quantity supplied
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26. Changes in supply
Changes in supply occur when the following NON-PRICE
determinants of supply change:
• number of sellers in the market
• available technology
• input prices
• taxes and subsidies
• expectations of producers
• prices of other goods the firm could produce.

27. Supply Determinants
Supply of a good (or service) depends on:
 price of the good itself (p)
 price of other goods
- substitutes in supply (pss)
- complements in supply (pcs)
 intermediate inputs (pi)
 prices of factors of production
- labour (w)
- capital and land (r)
- technology (t)
 expected future prices (pe)
 number of suppliers (ns)
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28. Change in Quantity Supplied vs
Change in Supply
• If the price of a good itself changes then there is a
- movement along its' supply curve
- change in quantity supplied
•If another determinant of supply
changes (e.g. pss) then there is a shift
of the supply either
- an increase in supply, or
- a decrease in supply
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29. Change in Supply
)
• Supply increases if
- price of substitutes in supply decreases (pss ↓)
- price of complements in supply increases (pcs ↑)
- price of intermediate inputs decreases (pi ↓)
- wage rates decrease (w ↓)
- rental rates decrease (r ↓)
- technology improves (t ↑)
- expected future prices decrease (pe ↓
- number of suppliers increases (ns ↑)
• Supply decreases if
- pss ↑
- etc etc
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30. Equilibrium
• If prices are free to adjust, they will move to equate quantity
demanded and quantity supplied. Then the market is at the
equilibrium
• If quantity supplied exceeds quantity demanded then there is an
excess supply (‘oversupply’) and pressure for prices to fall.
• If quantity demanded exceeds quantity supplied then there is an
excess demand (‘shortage’) and pressure for prices to rise.
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31. Equilibrium (cont)
• E.g. price is too high at P0
• Qd =A; Qs = B
• Surplus =AB
• Price is lower until Pe
•Price is lower, Qd increase
(movement fromA – E0)
•Price is lower, Qs decrease
(movement from B – E0)
• E0 is the equilibrium
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32. Equilibrium (cont)
Qd = 100 – 2P (demand curve)
Qs = - 20 + 2P (supply curve)
Equilibrium is where
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Qd = Qs
100 – 2P = - 20 + 2P
100 = - 20 + 4P
120 = 4P
30 = P (Equilibrium price)
Calculate equilibrium quantity by substituting into the demand equation
Qd = 100 – 2 (30) = 100 – 60 = 40
or calculate equilibrium quantity using the supply equation
Qs = - 20 + 2 (30) = - 20 + 60 = 40

33. Examples on shortage and surplus

34. Examples on shortage and surplus
(cont)

35. Clicker Exercise
Which of the following will increase the supply of a good?
a. An increase in the price of another good producers could produce.
b. A lower price paid resources used in the production of the good
c. A decrease in the number of sellers.
d. An increase in taxes paid to the government by producers.
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36. Clicker Exercise
If a shortage exists in a market then:
a. The price is below equilibrium.
b. The quantity demand exceeds the quantity supplied.
c. The price will rise in the near future.
d. All of the above
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37. Key terms
• Ceteris paribus
• Demand curve/schedule
• Supply curve/schedule
• Quantity demanded
• Quantity supplied
• Normal goods
• Substitution effect
• Income effect
• Market equilibrium
• Substitutes
• Law of demand
• Law of supply
• Inferior goods
• Complements
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