The document discusses key concepts in supply and demand including: 1. Market equilibrium is reached at the price where quantity demanded equals quantity supplied. 2. Surpluses and shortages occur when quantities demanded and supplied are not equal. 3. Demand and supply curves can shift due to various factors, impacting equilibrium price and quantity. 4. Price controls like price floors and ceilings can cause surpluses or shortages and unintended consequences. 5. Elasticity measures responsiveness of quantity to price changes and depends on availability of substitutes, budget share spent, and other factors.

1. MARKET EQUILIBRIUM
AND
APPLICATION OF DEMAND
AND SUPPLY THEORY

2. MARKET EQUILIBRIUM
• Equilibrium is the unique price and
quantity established at the intersection
of the supply and the demand curves.
• Only at equilibrium does quantity
demanded equal quantity supplied.
2

3. P The Supply & Demand
for Tennis Shoes
120
90
S
Surplus
60
Shortage
30
D
1,000 2,000 3,000 4,000 Q

4. • Equilibrium Price = The price level at
which the quantity that consumers want to
buy equals the quantity sellers want to sell.
(Qd = Qs)
• Equilibrium Quantity = is achieved when
quantity that consumers want to buy and the
sellers want to sell are equal

5. SURPLUS AND SHORTAGE
~ A surplus or shortage exists at any price
where the quantity demanded and the
quantity supplied are not equal.
~ When the price of a good is greater than
the equilibrium price, there is an excess
quantity supplied called a surplus.
~ When the price is less than the
equilibrium price, there is an excess
quantity demanded called a shortage.
5

6. What can cause a shift in
a Demand Curve?
1. Number of buyers in the market
2. Tastes and preferences
3. Income
4. Expectations of consumers
5. Prices of related goods
6. Seasonal factors

7. P The Effects of an increase in
Demand on Market Equilibrium
$1200
S
$900
Shortage
$600
$300
D2
D1
4 8 12 16 Q

8. P The Effects of a fall in Demand on
Market Equilibrium
$40
S
$30
Surplus
$20
$10
D1
D2
10 20 30 40 Q

9. What can cause a shift in
a Supply Curve?
1. Number of sellers in the market
2. Technology
3. Resource prices
4. Taxes and subsidies
5. Expectations of producers

10. P The Effects of an increase in
Supply on Market Equilibrium
$4
S1 S2
$3 Surplus
$2
$1
D
20 40 60 80 Q

11. P The Effects of a fall in Supply on
Market Equilibrium
$800
S2
$600 S1
Shortage
$400
$200
D
2 4 6 8 Q

12. PRICE CONTROLS
Price ceiling is a maximum price that a seller
is allowed to charge on his product.
Objectives:
(3)to protect low income consumers; and
(4)to control inflation
Effects:
(1) shortage in the market
(2) unfair to producers
(3) emergence of black market
(4) producer reduces quality of product
(5) larger shortage in LR 12

13. P Price ceiling on low cost
houses results in a
$800
Shortage S
$600
$400 Price ceiling Shortage
$200 D
2 4 6 8 Q

14. PRICE CONTROLS
Price floor is a minimum legal price that a seller
can be paid.
Objectives:
(1) to help producers earn a decent income
(2) to create a buffer stock
Effects:
(1) surplus in the market
(2) unfair to consumers
(3) emergence of black market
(4) misallocation of resources (real resources and
tax money) 14

15. P A price floor on padi
Results in a Surplus
Wm Price floor S
Surplus
We
D
QD QE QS Q

16. PRICE ELASTICITY OF DEMAND
• Price elasticity of demand is a
measure of the responsiveness of the
quantity demanded to a change in price.
• Specifically, price elasticity of
demand is the ratio of the percentage
change in quantity demanded to the
percentage change in price.
16

17. Price Elasticity of Demand
% ∆ in Q demanded
Ed =
% ∆ in price

18. • Elastic demand is a change of more
than one percent in quantity demanded
in response to a one percent change in
price.
• Demand is elastic when the elasticity
coefficient is greater than one and total
revenue (price time quantity) varies
inversely with the direction of the price
change.
18

19. P
Elastic Demand
$40
$30
$20
$10 D
Q
10 20 30 40

20. • Inelastic demand is a change of less
than one percent in quantity
demanded in response to a one
percent change in price.
• Demand is inelastic when the
elasticity coefficient is less than one
and total revenue varies directly with
the direction of the price change.
20

21. P
Inelastic Demand
$40
$30
$20
$10 D
Q
10 20 30 40

22. • Unitary elastic demand is a one
percent change in quantity demanded in
response to a one percent change in
price.
• Demand is unitary elastic when the
elasticity coefficient equals one and
total revenue remains constant as the
price changes.
22

23. P
Unitary elastic Demand
$40
$30
$20
D
$10
Q
10 20 30 40

24. • Perfectly elastic demand is a
decline in quantity demanded to
zero for even the slightest rise or
fall in price.
• This is an extreme case in which
the demand curve is horizontal and
the elasticity coefficient equals
infinity.
24

25. P
$40
$30
$20 Perfectly Elastic Demand =
D
8
$10
Q
10 20 30 40

26. • Perfectly inelastic demand is no
change in quantity demanded in
response to price changes.
• This is an extreme case in which the
the demand curve is vertical and the
elasticity coefficient equals zero.
26

27. P D
$40
Perfectly Inelastic Demand Ed = 0
$30
$20
$10
Q
10 20 30 40

28. Determinants of price elasticity of demand
include
(b) the availability of substitutes,
(c) the percentage of budget spent on the
product,
(d) types of goods (luxury vs. necessity),
(e) Habits,
(f) the length of time allowed for adjustment
28

29. INCOME ELASTICITY OF DEMAND
• Income elasticity of demand is the
percentage change in quantity demanded
divided by the percentage change in
income.
• For a normal good or service, income
elasticity of demand is positive.
• For an inferior good or service, income
elasticity of demand is negative.
29

30. Income Elasticity of Demand
% ∆ in Q demanded
EY =
% ∆ in income

31. CROSS ELASTICITY OF DEMAND
• Cross elasticity of demand is the
percentage change in the quantity
demanded of one product caused by a
change in the price of another product.
• When the cross-elasticity of demand is
negative, the two products are
complements.
• When the cross-elasticity of demand is
positive, the two goods are substitutes 31

32. Cross Elasticity of Demand
% ∆ in Q demanded for Good A
EC =
% ∆ in price of Good B

33. PRICE ELASTICITY OF SUPPLY
• Price elasticity of supply is a
measure of the responsiveness of the
quantity demanded to a change in
price.
• Price elasticity of supply is the ratio
of the percentage change in quantity
supplied to the percentage change in
price. 33

34. Price Elasticity of Supply
% ∆ in Q supplied
ES =
% ∆ in price

35. Determinants of price elasticity of supply
include
(b) gestation period (time required to produce the
good)
(c) perishables vs. non-perishables
(d) change in production cost involved
(e) agricultural goods vs. manufactured goods
35

36. P
$40
$30
$20 Perfectly Elastic Supply =
S
8
$10
Q
10 20 30 40

37. P S
$40
Perfectly Inelastic Supply Es = 0
$30
$20
$10
Q
10 20 30 40

38. P
Unit Elastic Supply Es = 1
$40
$30
S
.5%
$20
.5%
$10
10 20 30 40 Q

39. P Elastic Supply Es > 1
S
$40
$30
$20
$10
Q
10 20 30 40

40. P Inelastic Supply Es < 1
$40 S
$30
$20
$10
10 20 30 40 Q