supply and demand

1. THE LAW OF SUPPLY
AND DEMAND
Understanding Equilibrium Price
and Quantity

2. DEFINITION OF SUPPLY AND DEMAND
Supply and demand are fundamental
concepts in economics that describe the
relationship between the quantity of a good
or service that producers are willing to sell
and the quantity that consumers are willing
to purchase.

3. SUPPLY Refers to the total amount of a specific good
or service that is available to consumers. It is
influenced by factors such as production
costs, technology, and the number of
suppliers in the market.
DEMAND Refers to the quantity of a good or service
that consumers are willing and able to
purchase at various prices. It is affected by
factors such as consumer preferences,
income levels, and the prices of related
goods.

4. IMPORTANCE IN ECONOMICS
The interaction between supply and demand
determines the market price and quantity of
goods sold. Understanding these concepts is
crucial for several reasons:

5. 1. MARKET EQUILIBRIUM
 Supply and demand help to establish the
equilibrium price, where the quantity
supplied equals the quantity demanded.
2. RESOURCE ALLOCATION
 They guide how resources are allocated in
an economy, influencing production
decisions and consumer behavior.

6. 3. POLICY MAKING
Policymakers use supply and demand
analysis to understand market dynamics and
to formulate economic policies.

7. DEFINITION
 The Law of Demand states that, all else
being equal, as the price of a good or service
decreases, the quantity demanded by
consumers increases, and conversely, as the
price increases, the quantity demanded
decreases. This inverse relationship is a
fundamental principle in economics.
THE LAW OF DEMAND

8. MATHEMATICAL EXPRESSION

9. THE LAW OF SUPPLY
 The Law of Supply states that, all else being
equal, as the price of a good or service
increases, the quantity supplied by
producers also increases. Conversely, as the
price decreases, the quantity supplied
decreases. This direct relationship is a key
principle in economics.
DEFINITION

10. MATHEMATICAL EXPRESSION Overall, the Law of
Supply is essential for
understanding producer
behavior and market
dynamics, as it illustrates
how price changes
influence the willingness
of producers to supply
goods and services.

11. MARKET EQUILIBRIUM
 Market equilibrium is the state in which the
quantity of a good or service supplied by
producers equals the quantity demanded by
consumers at a particular price. At this point,
the market is in balance, and there is no
tendency for the price to change unless an
external factor disrupts this balance.
DEFINITION OF MARKET EQUILIBRIUM

13. NO SURPLUS OR SHORTAGE AT
EQUILIBRIUM
 At market equilibrium, there are no
surpluses or shortages:
 Surplus
- A surplus occurs when the quantity
supplied exceeds the quantity demanded at
a given price. This typically leads to
downward pressure on prices as producers
lower prices to sell excess inventory.

14.  Shortage
- A shortage occurs when the quantity
demanded exceeds the quantity supplied at a
given price. This situation creates upward
pressure on prices as consumers compete to
purchase the limited goods available.
 At equilibrium, the market clears, meaning
that the quantity supplied equals the
quantity demanded, and there are no forces
pushing the price to change. This stability is
crucial for efficient market functioning.

15. DETERMINING EQUILIBRIUM PRICE AND
QUANTITY
 Setting Quantity Demanded Equal to
Quantity Supplied
- To determine the equilibrium price and
quantity, we start by setting the quantity
demanded equal to the quantity supplied:

17. SOLVING FOR EQUILIBRIUM
 To find the equilibrium price, we can express
the quantity demanded and quantity
supplied as functions of price:

19.  This will give us the quantity of goods or services that
are bought and sold at the equilibrium price.

In summary, determining the equilibrium price and
quantity involves setting the demand and supply
equations equal to each other, solving for the price,
and then using that price to find the corresponding
quantity. This process is essential for understanding
how markets reach a state of balance.

20.  Shifts in supply and demand are
fundamental concepts in economics that
describe how various factors can influence
the quantity of goods and services that
consumers are willing to purchase and
producers are willing to sell.
Factors Affecting Demand
1. Consumer Preferences - Changes in tastes
and preferences can lead to an increase or
decrease in demand for certain products. For
example, if a new health trend emerges, the
demand for organic foods may rise.

21. 2. Income Levels - As consumers’ income increases, they
may be more willing to purchase more goods, leading to an
increase in demand. Conversely, a decrease in income can
reduce demand for non-essential goods.
3. Prices of Related Goods - The demand for a product can
be affected by the prices of related goods, which can be
either substitutes or complements. For instance, if the price
of coffee rises, the demand for tea (a substitute) may
increase.

22. FACTORS AFFECTING SUPPLY
1. Production Costs - If the costs of production increase
(due to higher wages, raw material costs, etc.), the
supply of goods may decrease as producers may not be
able to maintain profitability at previous price levels.
2. Technology - Advances in technology can lead to
more efficient production processes, which can increase
supply. For example, automation in manufacturing can
reduce costs and increase output.

23. 3. Number of Sellers - An increase in the number of
sellers in a market can lead to an increase in supply, as
more producers are available to meet consumer
demand. Conversely, if sellers exit the market, supply
may decrease.
Understanding these factors helps in analyzing how
shifts in supply and demand can affect market
equilibrium, prices, and overall economic activity.