This document discusses demand, supply, and market equilibrium. It provides the following key points: 1) Demand is the relationship between price and the quantity consumers are willing and able to purchase. Supply is the relationship between price and the quantity producers are willing and able to provide. 2) The demand curve slopes downward and the supply curve slopes upward, showing that quantity demanded increases with lower prices and quantity supplied increases with higher prices. 3) Market equilibrium occurs where the supply and demand curves intersect, establishing the equilibrium price where quantity supplied equals quantity demanded.

1. Demand, Supply & Market
Equilibrium
P
S
D
Q

2. Demand
 A relation between the price of a good and the
quantity that consumers are willing and able
to buy during a given period, other things
constant.
 Willing: you want to buy the product
 Able: you can afford the buy the product

3. Demand Schedule and Curve
 Demand curve: Price of Quantity
 a curve showing the Good Demand
relation between the ed
price of a good and
quantity demanded $3 200
during a given period, $4 150
other things constant.
$5 100
 Suppose we are making
pizza. $6 75
$7 50

4. Law of Demand
 States that a quantity of a good demanded
during a given period relates inversely to its
price, other things constant.
 Price increases  Quantity Demanded
decreases
 Price decreases  Quantity demanded
increases
 Creates a downward sloping demand curve

5. Why?
 Substitution Effect
 Unlimited wants/scarce resources
 When the price of a good falls, consumers
substitute that good for other goods, which
become relatively more expensive.
 Reverse also holds true

6. Why?
 Income Effect
 Money income: is simply the number of dollars
received per period
 Real income: your income measured in terms of
what it can buy.
 A fall in the price of a good increases consumers’
real income making consumers more able to
purchase goods; for a normal good, the quantity
demanded increases.

7. Demand Curve
A curve showing the relation between
Price the price of a good and the quantity
demanded.
$6
$5 Point on the line that matches the schedule
Every point on the line matches the schedule.
$4 It is a price/quantity demanded that consumers
are willing and able to buy.
$3
Demand
0 Quantity
50 75 100 150 200

8. Movement Along the Demand Curve
 Caused by a change in price
 Only a change in price
 Move from one point to another on the same
graph
 Called a
 Change in quantity demanded.

9. Movement along the Demand Curve
Price
B
$6
$5 A
Demand
0
75 100 Quantity

10. Demand
 Individual demand
 The demand of an individual consumer
 Market demand
 Sum of individual demands of all consumers in
the market

11. Shifts in the Demand Curve
 A demand curve isolates the relation between
prices of a good and quantities demanded
when other factors that could affect demand
remain unchanged.
 Factors called assumptions or determinants

12. Determinants of Demand
 Changes in consumer income
 Changes in prices of related goods
 Changes in consumer expectations
 Changes in the number or composition of
consumers
 Changes in consumer tastes

13. Changes in determinants
 Results in changes to the RELATIONSHIP
BETWEEN PRICE AND QUANTITY
DEMANDED.
 At each and every price a DIFFERENT
quantity is demanded.
 Results in a shift in the demand curve
 New curve must be drawn

14. Changes in Demand
 Increase in demand
 At each and every price
MORE of the good is
Price
demanded
 Shifts to the right
P Qd1 Qd2 $5
A B
D2
$4 150 200
D1
$5 100 150 Quantity
100 150
$6 75 100

15. Causes of Increase in Demand
 Increase in consumer
income
 Causes consumers to
buy more of the
product at each and
every price.
 Normal goods
 Inferior goods

16. Change in consumer income
 Normal goods
 A good for which demand
increases as consumer
income rise
 Inferior goods
 A good which demand
increases as consumer
income falls

17. Changes in Price of Related Goods
 Substitutes
 Goods that are not
consumed jointly
 Goods that are related in
such a way that an increase
in the price of one shifts the
demand curve for the other
rightward.
 Increase in price of Coke
leads to increase in
demand for Pepsi

18. Changes in Price of Related Goods
 Substitutes
 Suppose that the price of Coke rises from $1 to
$1.50, then the demand for Pepsi will decrease
from 75 to 100.
$1
D1 D2
75 100

19. Changes in the price of related goods
 Complements
 Goods that are
related in a such a
way that an increase
in the price of one
shifts the demand of
the other leftward
 Two goods that are
consumed jointly.
 An decrease in the
price of one will
increase demand
for the other

20. Changes in Price of Related Goods
 Complements
 An decrease in the
price of DVD
players, increases the
demand for DVDs
 Suppose that DVD
players decrease in $20
price from $145 to
$100, now the
demand for DVDs
will decrease from D D2
750 at $20 to 900.
750 900

21. Changes in Consumer Expectations
 Such as expectations in
 Prices and income
 Affect how consumers
spend their money and
their demand
 If product cheaper
today than tomorrow,
then increase in demand

22. Changes in consumer tastes
 Consumer preferences
likes and dislikes in
consumption assumed to
be constant along a given
demand curve assumed
constant along a given
demand curve
 Changes in taste will
cause a shift in the
demand curve as different
quantities are demanded
at each and every price.

23. Changes in taste
 Consumers
prefer platform
shoes.
$50
 At $50, demand
increases from
100 to 200. D D2
100 200

24. Change in the number and composition
of consumers
 The market demand curve is the sum of the
individual demand curves.
 If the number of consumers falls then the sum
will be smaller thus shifting the demand curve

25. Changes in Demand
 Decrease in demand
 At each and every price
Less of the good is
Price
demanded
 Shifts to the Left
P Qd1 Qd2 $5
B
A
D1
$4 150 110
D2
$5 100 90 Quantity
90 100
$6 75 60

26. Causes of Decrease in Demand
 Decrease in consumer
income
 Causes consumers to
buy less of the product
at each and every price.

27. Changes in Price of Related Goods
 Complements
 An decrease in the
price of DVD
players, increases the
demand for DVDs
 Suppose that DVD
players increase in $20
price from $100 to
$145, now the
demand for DVDs
will decrease from D2 D1
900 at $20 to 750.
750 900

28. Change in the number and composition
of consumers
 The market demand curve is the sum of the
individual demand curves.
 If the number of consumers falls then the sum
will be smaller thus shifting the demand curve

29. Review of Demand
 A change in quantity demanded is not a change in
demand
 Change in quantity demanded is caused by a change
in price
 Change in quantity demanded is a movement along
the demand curve
 Change is demand is caused by a change in the
determinants
 Change in demand shifts the demand curve

30. Supply
 Producer’s side
 A relation between the price of a good and the
quantity that the producers are willing and
able to offer for sale during a given period,
other things constant.

31. Law of Supply
 The quantity of a good supplied during a
given period is usually directly related to the
price of the good
 Increase in price leads to increase in quantity
supplied
 Decrease in price leads to decrease in quantity
supplied.
 Creates upward sloping supply curve

32. Supply Curve
Price
Price of Quantity
Good Demanded
6 Supply
$3 50
$4 75
5
$5 100
$6 150
Quantity
$7 200

33. Movement along the supply curve
 A change in price and only in price
 Causes a movement along the supply curve
 Called a Change in Quantity Supplied
Supply
$6
B
$4 A
100 150

34. Supply
 Individual supply
 The supply of an individual producer
 Market supply
 The sum of individual supplies of all producers in
the market

35. Determinants for the Supply Curve
 Changes in technology
 Changes in prices of relevant resources
 Changes in the prices of alternative goods
 Changes in Producer Expectations
 Changes in the number of producers

36. Changes in Supply
 Caused by changes in the determinants to
the supply curve
 Results in changes to the relationship
between the price and quantity supplied
 At each and every price a different
quantity is supplied
 New supply curve - shift in supply

37. Increase in Supply
 At each and every price more of the good
is supplied
S1
S2
$6
300 400

38. Causes of increase in Supply
 Improvements in Technology
 Changes in relevant resources
 Decrease in the price of resources
 Lowers costs
 Changes in price of alternative goods
 If price of alternative good increases, supply of
the good increases
 Changes in producers expectations

39. Changes in technology
 Technology is the economy’s stock of
knowledge about how to combine resources
efficiently

40. Changes in Technology
 Improvements in technology
 Causes an increase in supply
 More of the product is available at all prices
S1
S2
$6
300 400

41. Changes in Relevant Resources
 Decrease in
resource prices
S1
 Increases the S2
$6
supply of the
good at each and
every price.
300 400

42. Changes in prices of Alternative Goods
 Alternative goods
 Other goods that use Price
some or all of the same S1
resources as the good in S2
$6
question
 Beef and leather.
 If the price of beef
increases, producers Q Leather
will supply more beef 300 400
thus increasing the
supply of leather. Above is the market for the
supply of leather

43. Changes in Producers Expectations
 Expectation of future prices of resources or
their own product can cause producers to
change what they offer at each individual
price

44. Changes in the Number of Producers
 As the number of
producers change so
does the supply of the
product
 A decrease in the
number of producers will
lead to a decrease in
supply

45. Decrease in Supply
 At each and every price LESS of the good is
supplied
5
S1
S2
400 600

46. Causes of Decrease in Supply
 Backward movement in Technology
 Changes in relevant resources
 Increase in the price of resources
 Raises costs
 Changes in price of alternative goods
 If price of alternative good decreases, supply of
the good decreases
 Changes in producers expectations

47. Changes in Relevant Resources
 Are those employed in
the production of the
good in question
$9  Increase in price of
resources
S1  Results in decrease in
S2
supply
500 600  Less of the good is
available at all prices

48. Changes in prices of Alternative Goods
 Alternative goods
 Other goods that use Price
some or all of the same
S1
resources as the good in
$6
question
 Beef and leather.
 If the price of beef
decreases, producers Q Leather
will supply less beef 300 400
thus decreasing the
supply of leather. Above is the market for the
supply of leather

49. Producer’s Expectation
 Nationalization
 Expropriation

50. Supply Review
 Change in Quantity Supplied
 Caused by a change in the price of the product
 Movement along the supply curve
 Change in Supply
 Caused by change in the determinants
 Results in a shift in the supply curve

51. Market Equilibrium
 Market
 Includes all the
arrangements used to
buy and sell
 Reduce transaction
costs
 The place where
buyers and sellers
meet to determine
price and quantity

52. Equilibrium
 At specific price where:
Quantity demanded = Quantity supplied
 Equilibrium price –
 market clearing price
 Equilibrium quantity –
 D=S

53. Equilibrium
P
 At specific
price where: S
Quantity
demanded $5 Equilibrium
Equals
Quantity D
Supplied Q
150

54. Reaching Equilibrium
P Surplus  If market price is
S ABOVE equilibrium
$6  Qs > Q D
$5  Economy is at a
SURPLUS
D  Market price will
Q
fall
100 150 200

55. Reaching Equilibrium
 If the market P
price is BELOW S
the equilibrium
price
 QD > Qs $5
 Shortage exists $4
 Market price rises D
to equilibrium Shortage
Q
100 150 200

56. Shifts in Demand
 Demand P
increases S
 Equilibrium price
$6
increases B
$4 A
 Equilibrium
quantity increases D1
D
Q
100 150 200

57. Shifts in Demand
P
S
 Decrease in demand
 decrease in price
$6 B  decrease in equilibrium
$5 A
D1
D
Q
100 200

58. Shifts in Supply
 Increase in supply
Price
 Decrease in
S1 equilibrium price
S2
$6  Increase in quantity
$5
Q Leather
300 400

59. Shifts in Supply
 Decrease in supply
 Price increases
 Quantity decreases

60. Simultaneous Shifts in Supply and
Demand
 The change in equilibrium price and quantity
depends on which curve shifts the most.
S
S1
5 A
B
4
D1
D
200 300

61. Simultaneous Changes
Change in Change in Effect on Effect on
Supply Demand Equilibrium Equilibrium
Price Quantity
Increase Decrease Decrease Indeterminate
Decrease Increase Increase Indeterminate
Increase Increase Indeterminate Increase
Decrease Decrease Indeterminate Decrease

62. Government Intervention
 Government enters
the economy
 Price Setting
 Subsidies
 Government payments
to reduce the cost of
product or to limit
production.

63. Price Floors
 A minimum
legal price Surplus
below which a
S
good or service
cannot be sold $7
 If above $6
equilibrium
causes surplus
D
Q
100 150 200

64. Price Ceilings
P  A maximum legal
S price above which
a good or service
cannot be sold
$5
 Below equilibrium
price
D
Shortage
 Shortage occurs
Q
100 150 200