This document discusses demand and supply, including definitions of key concepts. It provides examples to illustrate how: 1. Supply curves show the relationship between price and quantity supplied by producers. The supply curve can shift due to changes in factors other than price. 2. Market equilibrium exists where quantity demanded equals quantity supplied. Equilibrium price and quantity can be determined using demand and supply curves. 3. Price elasticity of demand measures the responsiveness of quantity demanded to price changes. It depends on availability of substitutes and whether a good is a necessity.

1. Demand and Supply cont. 2.1
Lecturer: Assoc Prof Ergin Akalpler

2. Definition:The Market Supply function tells
us how the quantity of a good supplied by
the sum of all producers in the market
depends on various factors
Qs = f (p,po,w,…)
2

3. Definition:The Supply Curve plots the
aggregate quantity of a good that will be
offered for sale at different prices
Qs = Q (p)
3

4. 4
Example: Supply Curve for Wheat in Canada
0 Quantity (billions of
bushels per year)
Price (dollars per bushel)
Supply curve for wheat
in Canada
0.15

5. Definition:The Law of Supply Curve states
that the quantity of a good offered
increases when the price of this good
increases.
 Empirical regularity
5

6. The supply curve shifts when factors other than own
price change…
 If the change increases the willingness of producers to
offer the good at the same price, the supply curve
shifts right
 If the change decreases the willingness of producers
to offer the good at the same price, the supply curve
shifts left
6

7. A move along the supply curve for a good can only
be triggered by a change in the price of that good.
A shift in the supply curve for a good can be
triggered by a change in any other factor
A change that affects the producers’ willingness to
offer the good.
7

8. 8
Example: Canadian Wheat
• QS = p + .05r
• QS = quantity of wheat (billions of bushels)
• p = price of wheat (dollars per bushel)
• r = average rainfall in western Canada (inches)
• Suppose price is $2
• Quantity supplied no rainfall = $2
• Quantity supplied with rainfall of 3” = $2.15
• As rainfall increases, supply curve shifts right
• (e.g., r = 4 => Q = p + 0.2)

9. 9
Price ($)
Quantity,
Billion bushels
0

10. 10
Price ($)
Quantity,
Billion bushels
0
r = 0
Supply with
no rain

11. 11
Price ($)
Quantity,
Billion bushels
0
r = 0
r = 3
.15
Supply with
no rain
Supply with 3” rain
Price ($)
Quantity,
Billion bushels
0
r = 0
r = 3
.15
Supply with
no rain
Supply with 3” rain

12. 12
Law of Demand
Definition: The Law of demand Curve states that
the quantity of a good offered increases when the
price of this good decreases

13. 13
Law of Demand
Shift can be caused on the figure:
Increases in demand are shown by a shift to
the right in the demand curve. This could be
caused by a number of factors, including a rise in
income (right figure ),
a rise in the price of a substitute or a fall in the
price of a complement (left figure).

14. 14

15. Definition:A market equilibrium is a price
such that, at this price, the quantities
demanded and supplied are the same.
Demand and supply curves intersect at
equilibrium.
15

16. 16
Example: Market for Cranberries
• Suppose
• QD = 500 – 4P
• QS = –100 + 2P
• Where
• P = price of cranberries (euros per barrel)
• Q = demand or supply (in millions of barrels/year)

17. 17
Example: Market for Cranberries
• The equilibrium price is calculated by equating
demand to supply:
QD = QS or
500 – 4P = –100 + 2P
• Solving for P: P* = 100
• To get equilibrium quantity, plug equilibrium price
into either demand or supply
• Into demand: Q* = 500 – 4(100) = 100
• Into supply: Q* = –100 + 2(100) = 100

18. 18
Example: The Market For Cranberries
Price
Quantity
Market Supply: QS = -100 + 2P
50

19. 19
Price
Quantity
Price
Quantity
Market Demand: Qd = 50 – 4P
125
Example: The Market For Cranberries
Market Supply: QS = -100 + 2P
50

20. 20
Price
Quantity
Q* = 100
P*=100
125
•
Example: The Market For Cranberries
Market Supply: QS = -100 + 2P
50
Market Demand: Qd = 50 – 4P

21. 21
Definition: If at a given price, sellers cannot sell as
much as they would like, there is excess supply.
Definition: If at a given price, buyers cannot
purchase as much as they would like, there is
excess demand.

22. 22
Price
Quantity
Market Demand
Market Supply
50
125
Example: Excess Supply in the Market For Cranberries

23. 23
Price
Quantity
Market Demand
Market Supply
Q*
50
125
QS
Qd
Example: Excess Supply in the Market For Cranberries

24. 24
Price
Quantity
Market Demand
Market Supply
Q*
125
Excess Supply
•
•
QS
Qd
50
Example: Excess Supply in the Market For Cranberries

25. 25
 If there is no excess supply or excess demand,
there is no pressure for prices to change and we
are in equilibrium.
 When a change in an exogenous variable causes
the demand curve or the supply curve to shift,
the equilibrium shifts as well

26. 26
Definition: The own price elasticity of demand is
the percentage change in quantity demanded
brought about by a one-percent change in the
price of the good
Q,P= (% Q) = (Q/Q) = dQ . Pt-1
(% P) (P/P) dP Qt-1

27. 27
 Elasticity is not the slope
 Slope is the ratio of absolute changes in
quantity and price. (= dQ/dP).
 Elasticity is the ratio of relative (or
percentage) changes in quantity and price.

28. 28
1. Q,P = 0  Perfectly inelastic demand
 Quantity demanded is completely insensitive
to changes in price
2. Q,P  (-1, 0)  Inelastic demand
 Quantity demanded is relatively insensitive
to changes in price
3. Q,P = -1  Unitary elastic demand
 Percentage increase in quantity demanded
equals percentage decrease in price

29. 29
4. Q,P  (-, -1)  Elastic demand
 Quantity demanded is relatively sensitive to
changes in price
5. Q,P = -   Perfectly elastic demand
 Any increase in price results in quantity
demanded decreasing to zero
 Any increase in price results in quantity
demanded increasing to infinity.

30. 30
Example: Linear Demand Curve
• Suppose QD = a – bP
• a, b : positive constants
• P: price
• Notes:
• -b is the slope
• a/b is the choke price

31. 31
Example: Linear Demand Curve
• The elasticity is
Q,P= dQ . P = – b . P
dP Q Q
• So for linear demand curves
• Slope is constant.
• Elasticity falls from 0 to - along the demand curve.
• E.g., suppose Q = 400 – 10P
• At P = 30, Q = 100, so
Q,P= dQ . P = – b . P = –10 . 30 = –3 (elastic)
dP Q Q 100

32. 32
0
P
Q
Example: Elasticity with a Linear Demand Curve

33. 33
0
P
Q
a/2 a
a/2b
a/b
•
Example: Elasticity with a Linear Demand Curve

34. 34
0
P
Q
a/2 a
a/2b
a/b
• Q,P = -1
Inelastic region
Elastic region
Q,P = -
Q,P = 0
Example: Elasticity with a Linear Demand Curve

35. FOR NON LINEAR
CURVE
FLATTER PART OF
CURVE BECOMES
MORE ELASTIC
AND VERTICAL
PART OF THE
CURVE IS
INELASTIC
35

36. 36
Example: Constant Elasticity Demand Curve
• Suppose QD = Apε
• A: constant
• P: price
• ε : elasticity of demand
• The elasticity is
Q,P= dQ . P = εApε-1 . P = ε
dP Q Q
• So for Constant Elasticity demand curves
• Elasticity is constant.
• Slope falls from 0 to - along the demand curve.

37. 37
Quantity
Price
0 Q
P •
Observed price and quantity
Example: A Constant Elasticity
versus a Linear Demand Curve

38. 38
Quantity
Price
0 Q
P •
Observed price and quantity
Linear demand curve
Example: A Constant Elasticity
versus a Linear Demand Curve

39. 39
Quantity
Price
0 Q
P •
Observed price and quantity
Constant elasticity demand curve
Example: A Constant Elasticity
versus a Linear Demand Curve

40. 40
Quantity
Price
0 Q
P •
Observed price and quantity
Constant elasticity demand curve
Linear demand curve
Example: A Constant Elasticity
versus a Linear Demand Curve

41. 41
Quantity
Price
0
Example: A Constant Elasticity
versus a Linear Demand Curve
•

42. 42
 Factors that determine price elasticity of
demand
 Demand tends to be more price-elastic when
there are good substitutes for the good
 Demand tends to be more price-elastic when
consumer expenditure in that good is large
 Demand tends to be less price-elastic when
consumers consider the good as a necessity.

43. 43
Price Elasticity of Demand
for Selected Grocery
Products, Chicago, 1990s
Category Estimated Q,P
Soft Drinks -3.18
Canned Seafood -1.79
Canned Soup -1.62
Cookies -1.6
Breakfast Cereal -0.2
Toilet Paper -2.42
Laundry
Detergent
-1.58
Toothpaste -0.45
Snack Crackers -0.86
Frozen Entrees -0.77
Paper Towels -0.05
Dish Detergent -0.74
Fabric Softener -0.73

44. 44
Model Price Estimated
Q,P
Mazda 323 $5,039 -6.358
Nissan
Sentra
$5,661 -6.528
Ford
Escort
$5,663 -6.031
Lexus
LS400
$27,544 -3.085
BMW 735i $37,490 -3.515
Source: Berry, Levinsohn and
Pakes, "Automobile Price in
Market Equilibrium,"
Econometrica 63 (July 1995),
841-890.
Example: Price Elasticities of Demand for Automobile Makes, 1990.