Business Economic

Dr. Dina Yousri

Assistant Professor of Economics
Economics Department , Faculty of ManagementTechnology
German University in Cairo

1
Lecture Five

Supply and Demand

2
Last lecture we discussed………
Aggregate demand and Aggregate supply , studying the entire
economy( bigger picture).

This lecture we want to study single product/industry ( Narrow

view) and see what are the determinates of Supply and Demand
for a given product.
 Lecture Objectives

The Market
What is Demand in economics
What is the Demand function
Change in quantity demanded
Change in Demand
Supply & Quantity supplied
The Supply function
Change in quantity supplied
Change in Supply
Equilibrium
 What is a Market?

Market is a mechanism through which buyers (representing consumer side) and

sellers (representing production side) interact in order to determine the prices and
quantities of commodities.

Some markets are physical places where buyers and sellers meet (examples: meat,
cars markets); but now, modern markets are mainly group of people spread
around the world who never physically meet ( examples: the e-commerce).

Production Side represented in Supply and Consumer side represented in Demand.

 What is Demand in Economics?

 if you demand something, then you:

 want it (desire, willingness)
 can afford it (purchasing power, ability)
 have made a definite plan to buy it (effective demand)

So, the Quantity demanded of a good or service is the amount that

consumers are willing and able to buy during a specific period of time at a
given price.
 What is the Demand function?
The demand for the product is the dependent variable and the factors
affecting the demand are the independent variables, such as:
 price of the good.
 consumer’s income.
 Taste or preferences.
 price of related goods (substitutes or complementary).

Demand for tea= function (Pt, Y, T, Pr)

 Change in quantity demanded

Law of Demand states:

other factors remaining constant, the higher the price

of a good, the lower the quantity demanded. that is why it is a ‘downward
sloping demand curve’, it has a negative slope.

•Movement along the curve is the result of

changing the price while holding everything
else constant
 Movement Along the Curve

•Change in quantity demanded:

Movement along the curve from

A
P1 point A to point B, as if the demand
is stretched, caused by a decrease
P2 B in the price of the commodity

Q1 Q2
 Movement Along the Curve

Change in quantity demanded :

Movement along the curve from point

P1 B to point A, as if the demand is
A
contracted, caused by an increase in
B the price of the commodity
p2

Q1 Q2
 Change in Demand

When other factors, except for the price of the product, change the demand curve
shifts (to the right in case of increase and to the left in case of decrease).
Here we say ‘change in demand’ and not change in quantity demanded.
For example: (Demand for tea)
 If consumer’s income increases
 If people start to prefer this type of tea (change in taste or preferences due to
advertising or change in traditions, culture)
 If the price of coffee, as a substitute good, increases.
 If the price of sugar, as a complement good, decreases.
 All these factors may work in the opposite direction, the demand for tea will
decrease and the demand curve for tea will shift to the left.
 The change in demand, and accordingly the shifts in the curve work on the
long run unlike the effect of the price that works on the short run.
 Shifts in the Demand Curve

Shifts in demand:
An increase in demand at every price is represented by a rightward shift in the
demand curve, at any given price buyers are willing to buy more of the good

Price of good
x

D2

D1

Q of good x
 Shifts in the Demand Curve

A decrease in demand at every price is represented by a leftward shift of the

demand curve.

Price of good
x

D2

D1

Q of good x
 Supply & Quantity supplied

Supply:
Quantity of goods and services that sellers are willing and able to sell at
several prices during a specific period of time.

Quantity Supplied:
It shows the quantity of the good or service that sellers are willing and able
to sell at a given single price level .
 The Supply function

The supply function is the relationship between the supply of a given product (as
a dependent variable) and the independent factors of variables affecting this
supply .

Supply of X= f {price of x, cost of production (price of inputs), government

policies, technology, natural factors}
 The Supply function

There is a positive relationship between quantity supplied and price, in other

words firms sell more at higher prices

A graph of the relationship between the price and the quantity supplied. It is a
upward line connecting the points depicting prices and quantities supplied
 Change in quantity supplied

Change in quantity supplied:

Movement along the curve is the result of changing the price while holding
everything else.

Movement along the

B curve from point A to
Price
point B, since the
quantity supplied
increased, caused by
A an increase in the
price of the
commodity

quantity
 Change in quantity supplied: (2/2)

Change in quantity supplied:

Price B
Movement along the curve from point
B to point A, since the quantity
A supplied decreased, caused by a
decrease in the price of the
commodity

Demand
 Change in Supply

Variables that Shift the Supply Curve

 Cost of production (price of inputs: raw materials, level of wages)
 Technology ( improvement in technology)
 Government policies {encourage producers and investors (reduce taxes, offer
subsidies, simplifying procedures), discourage producers and investors
(increase taxes)}
 Change in Supply

Price of good
Shifts in Supply: x S1
•An change in supply:
increase in quantity Supplied at every S2
price is represented by a shift to the
right of supply curve.

•decrease in quantity Supplied at every Q of good x

price is represented by a shift to the left
of the Supply curve Price of good S2
x

S1

Q of good x
 Equilibrium

Equilibrium: refers to a situation in which the price has reached the level where
quantity supplied equals quantity demanded.

At the equilibrium situation, the market is clear, no gaps of surplus or shortage
exist and quantity demanded equals quantity supplied. This is why we may call
clearing price and quantity or equilibrium
 Equilibrium Point

Equilibrium Price
The price that balances quantity supplied and quantity demanded. On a
graph, it is the price at which the supply and demand curves intersect.

Equilibrium Quantity
The quantity supplied and the quantity demanded at the equilibrium price.
On a graph, it is the quantity at which the supply and demand curves
intersect.
 Equilibrium in the short run
 The market equilibrium occurs at the intersection of the supply and
demand curves.
 At price = 17, the quantity supplied = quantity demanded = 23.

Price Demand
Supply

17

23 Quantity
 Market Surplus

Equilibrium is at P = 17 and X
= 23. Price Demand
Supply
 The price floor is 25.

 At the artificially high Surplus = 16

25
price of 25, sellers want
to sell 31.
17
 But buyers only want to
buy 15.

 There is a surplus of 16.

15 23 31 Quantity
 Market Shortage

Equilibrium is at P = 17 and X =
23. Price Demand

 Suppose there is a price Supply

ceiling of 10.

 At the artificially low price

of 10, buyers want to buy
30. 17

 But sellers only want to

10
sell 16. Shortage = 14

 There is a shortage of 14.

16 23 30 Quantity
 Equilibrium in the short run

If the price is higher than the equilibrium:

quantity supplied > quantity demanded Surplus

There will be competition among suppliers to eliminate their surplus so prices
will decrease. Till we reach back to Equilibrium

if the price is lower than the equilibrium:

Quantity supplied < Quantity demanded Shortage

There will be competition among Buyers to eliminate the shortage so prices will
increase Till we reach back to Equilibrium
 Equilibrium at the long run

A. Increased Demand
The increased demand intersects the original supply curve to the right of the
original equilibrium.
Price New Demand
Demand
 Price = 22 and Supply

quantity supplied
= quantity
demanded = 28 22

17

28
23 Quantity
 Equilibrium at the long run

Increased demand is indicated by a greater quantity demanded at every price.

The demand curve shifts right and a movement along the supply curve results.
When demand increases:
Equilibrium price increases
Equilibrium quantity increases
Note the movement in the same direction
 Market Equilibrium decreased
Demand
b. Decreased Demand
The decreased demand intersects the original supply curve to the left of the
original equilibrium.
Price Demand
Supply

 Price = 14.5 and

quantity supplied =
quantity demanded
= 20.5 17
14.5

New Demand

20.5 23 Quantity
 Summary: Market Equilibrium
Decreased Demand
Decreased demand is indicated by a smaller quantity demanded at every price.
The demand curve shifts left and a movement along the supply curve results.
When demand decreases:
Equilibrium price decreases
Equilibrium quantity decreases
Note the movement in the same direction
 Market Equilibrium Increased Supply
The increased supply intersects the original demand curve to the right of the original
equilibrium.

Price Demand
Supply

 Price = 14.5 and

quantity supplied =
quantity demanded =
25.5 17

14.5

New Supply

23 Quantity
25.5
 Increased Supply

Increased supply is indicated by a greater quantity supplied at every price.

The supply curve shifts right and a movement along the demand curve results.
When supply increases:
Equilibrium price decreases
Equilibrium quantity increases
Note the movement in opposite directions
 Market Equilibrium
Decreased Supply
The decreased supply intersects the original demand curve to the left
of the original equilibrium.

Price

 New price = P* and

new quantity supplied P*

= quantity demanded P
= X*.
 Equilibrium price
rises and equilibrium
quantity falls.
X* X Quantity
 Summary: Market Equilibrium
Decreased Supply

Decreased supply is indicated by a smaller quantity supplied at every price.

The supply curve shifts left and a movement along the demand curve results.
When supply decreases:
Equilibrium price increases
Equilibrium quantity decreases
Note the movement in opposite directions