Department of Business Administration
SPRING2019
Demand, Supply, and Equilibrium
Source (Managerial economics in global economy by Dominick
Salvatore)
2
Demand, Supply and
Equilibrium
Economics begins and ends with the “Law” of supply
and demand. The laws of supply and demand are an
important beginning in the attempt to answer vital
questions about the working of a market system.
3
Demand, Supply and Equilibrium
Demand for a good or service is defined as quantities
of a good or service that people are ready (willing and
able) to buy at various prices within some given time
period, other factors besides price held constant.
4 Demand, Supply and Equilibrium
The supply of a good or service is defined as
quantities of a good or service that people are ready
to sell at various prices within some given time
period, other factors besides price held constant.
5
Demand, Supply and Equilibrium
Every market has a demand side and a supply side.
The demand side can be represented by a market
demand curve which shows the amount of
commodity buyers would like to purchase at different
prices.
Demand curves are drawn on the assumption that
buyers’ tastes, income, the number of consumers in
the market and the price of related commodities are
unchanged.
6 Law of Demand
The inverse relationship between the price of the
commodity and the quantity demanded per
period is referred to as the law of demand.
A decrease in the price of a good, all other things
held constant (ceteris paribus), will cause an
increase in the quantity demanded of the good.
An increase in the price of a good, all other
things held constant, will cause a decrease in the
quantity demanded of the good.
7 Change in Quantity Demanded
Price
An increase in price causes
a decrease in quantity
demanded.
P1
P0
Quantity
Q1 Q0
8 Change in Quantity Demanded
Price
A decrease in price causes
an increase in quantity
demanded.
P0
P1
Quantity
Q0 Q1
9
Changes in Demand
Changes in price result in changes in the quantity
demanded.
This is shown as movement along the demand
curve.
Changes in non price determinants result in changes
in demand.
This is shown as a shift in the demand curve.
10 Changes in Demand
Non price determinants of demand
Tastes and preferences
Income
Prices of related products
Future expectations
Number of buyers
Changes in Demand
11
Change in Buyers’ Tastes
-Today’ consumer purchases leaner meats compared to old
generations
-due to the level of blood cholesterol and body weight
Change in Buyers’ Incomes
Normal Goods
i.e., shoes, steaks, travel, automobiles, education
Inferior Goods
i.e., potatoes, hotdogs, hamburger
Change in the Number of Buyers
Change in the Price of Related Goods
Substitute Goods
i.e., Carrots can be replaced by cabbage
Complementary Goods
i.e., cars and gasoline or electric stove and electricity.
12 Change in Demand
An increase in demand refers to a
Price
rightward shift in the market
demand curve.
P0
Quantity
Q0 Q1
13 Change in Demand
A decrease in demand refers to a
Price
leftward shift in the market
demand curve.
P0
Quantity
Q1 Q0
14 Demand, Supply and Equilibrium
Every market has a demand side and a
supply side. The Supply side can be
represented by a market supply curve which
shows the amount of commodity sellers
would offer a sale at various prices.
Supply curves are drawn on the assumption
of technology and input or resources (as
such labor, capital and land) and prices.
15 Law of Supply
The direct relationship between the price of the
commodity and the quantity supplied per period
is referred to as the law of supply.
A decrease in the price of a good, all other
things held constant (ceteris paribus), will cause
a decrease in the quantity supplied of the good.
An increase in the price of a good, all other
things held constant, will cause an increase in
the quantity supplied of the good.
16 Change in Quantity Supplied
A decrease in price causes a
Price decrease in quantity
supplied.
P0
P1
Quantity
Q1 Q0
17 Change in Quantity Supplied
An increase in price causes
Price an increase in quantity
supplied.
P1
P0
Quantity
Q0 Q1
18 Changes in Supply
Non price determinants of supply
Costs and technology
Prices of other goods or services offered by
the seller
Future expectations
Number of sellers
Weather conditions
Changes in Supply
19
Change in Production Technology
An improvement in the technology and a reduction in input prices would make it possible to
produce a commodity at a lower cost. This indicates that sellers would be willing to sell more
the goods at each price
Change in Input Prices
↓ in agriculture product, ↓ price of lamb meat, ↑ quantity supplied so rightward shift in the
market supply curve
Change in the Number of Sellers
↑ in no of sellers, the market supply curve shifts to right or ↓ in no of sellers, the market
supply curve shifts to left
Prices of other goods or services offered by the seller
- i.e., BMW, Mercedes, Woswagen (Subs. Goods)
- i.e., lamp meat and lamp leather (comp. Goods)
20 Change in Supply
An increase in supply refers to a
rightward shift in the market supply
Price curve.
P0
Quantity
Q0 Q1
21 Change in Supply
A decrease in supply refers to a
leftward shift in the market supply
Price curve.
P0
Quantity
Q1 Q0
22 Market Equilibrium
Market equilibrium is determined at the intersection of
the market demand curve and the market supply
curve.
Equilibrium price: The price that equates the
quantity demanded with the quantity supplied.
Equilibrium quantity: The amount that people are
willing to buy and sellers are willing to offer at the
equilibrium price level.
The equilibrium price causes quantity demanded to be
equal to quantity supplied.
An increase or decrease in the demand or supply
curve, it defines a new equilibrium point.
If the quantity
23 Market Equilibrium supplied of a
commodity exceeds
the quantity
demanded, this is
Price called excess supply
or surplus between D
D S and S over point p.
If the quantity
demanded of a
commodity exceeds
the quantity
P
supplied, this is
called excess demand
or shortage between
D and S below point
p.Quantity
Q
24 Market Equilibrium
Shortage: A market situation in which the
quantity demanded exceeds the quantity
supplied.
A shortage occurs at a price below the
equilibrium level.
Surplus: A market situation in which the
quantity supplied exceeds the quantity
demanded.
A surplus occurs at a price above the
equilibrium level.
25 Market Equilibrium
26 Market Equilibrium
Price
D0 D1 S0
An increase in demand will
cause the market equilibrium
P1 price and quantity to increase.
P0
Quantity
Q0 Q1
27 Market Equilibrium
Price
D1 D0 S0
A decrease in demand will
cause the market equilibrium
P0 price and quantity to decrease.
P1
Quantity
Q1 Q0
28 Market Equilibrium
Price An increase in
supply will cause
D0 the market
S0 S1
equilibrium price
to decrease and
quantity to
increase.
P0
P1
Quantity
Q0 Q1
29 Market Equilibrium
Price A decrease in
supply will cause
D0 the market
S1 S0
equilibrium price
to increase and
quantity to
decrease.
P1
P0
Quantity
Q1 Q0
The Demand Schedule and the demand curve
30
Example
How can the relationship between quantity
demanded and price be portrayed?
Demand schedule
Demand curve
Table 1: A demand schedule for carrots
31 Table 1 is a
hypothetical demand
schedule for carrots.
P ( Price per ton ) Q( quantity demand )Thousands ton per months It shows the quantity
20 110 of carrots that would
be demanded at
40 90 various prices on the
assumption that
60 77.5 average household
80 67.5 income is fixed at $
20000 and all other
100 62.5 price do not change.
120 60 (i.e. if the price of
carrots were $60 per
Avarage Household Income for :$ 20000 ton, consumers
would desire to
purchase $77,500
tons of carrots per
month.
32
A demand curve for carrots
A second method of showing the relation between quantity
demanded and price is to draw a graph. It is a downward slope
which indicates quantity demanded increases as price falls.
140
120
100
80
Price
60
40
20
0
60 62.5 67.5 77.5 90 110
Quantity
33 Shifts in the demand curve-Example
A demand curve or line is drawn on the assumption that
everything except the commodity’s own price is held
constant. A change in any of variables previously held
constant will shift the demand curve or line to a new
position. (i.e. A rise in household income has shifted the
demand curve or line to the right.
A demand curve can shift in mainly two ways: If more
bought at each price, the demand curve shift right so that
each price corresponds to a higher quantity than before. If
less is bought at each price, the demand curve shifts left
so that each price represents to a lower quantity than
before.
Table 2: Two Alternative Demand
34
Schedule for carrots
ܳௗ ܳௗଵ
An increase in average
P income will rise the
quantity demanded at each
20 110 140 price. When AV income
40 90 116 rises from $20000 to $
24000 per year, quantity
60 77.5 100.8 demanded at price of $60
80 67.5 87.5 per ton increases from
77500 tons per month to
100 62.5 81.3 100800 tons per month.
Similar rise occurs at every
120 60 78 other price.
Avarage income per household = $20,000.00 $24,000
35 Table 2: Two Alternative Demand Schedule
for carrots
Put differently, A rise in av household income shifts
the demand curve for most commodities to right so
this indicates that more will be demanded at each
possible price. Ultimately, the demand schedule
relating columns P and D is replaced by one relating
columns P and D1 in the previous table. The
graphical presentation of the two functions are seen
in the following graph.
36 Shifts in the demand curve-Example
P ܳௗ ܳௗଵ 160
20 110 140 140
1
120 𝑄𝑑
40 90 116 100
price
80
60 77.5 100.8 60 0
𝑄𝑑
40
80 67.5 87.5 20
0
100 62.5 81.3
60 80 90 100 120 140
120 60 78 Quantity
Avarage income per household = $20,000.00 $24,000
37 Other Prices
Earlier, we saw that the downward slope of a
commodity’s demand curve occurs because the lower
its price, the cheaper the commodity is relative to
other commodities that can satisfy the same needs or
desires. Those other commodities are called
substitutes (i.e. Carrots can be made cheap relative to
cabbage either by lowering the price of carrots or
raising the price of cabbage).
A rise in the price of a substitute for a commodity
shifts the demand curve for the commodity to the
right.
Other Prices
38
Another class of commodities is called complements.
These are the commodities that tend to be used
jointly each other. Such as cars and gasoline or
electric stove and electricity.
A fall in the price of a complementary commodity
will shift a commodity’s demand curve to the right.
For example, a fall in the price of airplane trips to
Paris will lead to a rise in the demand for Disney
Land tickets at paris even though their price is
unchanged.
39 Tastes
Tastes have a large effect on people’s
desired purchased. A change in tastes may
be long-lasting such as the shift from
fontain pens to ball-point pens. In this case,
a change in tastes in favor of a commodity
shifts the demand curve to the right.
40 Distribution of Income
A change in the distribution of income will shift to the right the
demand curves for commodities bought most by those gaining
income. On the other hand, it will shift to the left the demand
curves for commodities bought most by those losing income.
If, for example, the government increases the deductions for
children on the income tax and compensates by raising basic
taxes, income will be transferred from childness persons to the
large familes. So commodity more heavily bought by families
with no child decline in demand.
41
Population
Population growth does not by itself create new
demand. The additional people must have
purchasing power before demand is changed.
Extra people of working age, however, usually
means extra output and if they produce, they will
earn income.
When this happens, the demand for all the
commodities purchased by the new income earners
will rise. Thus a rise in population will shift the
demand curves to the right.
42 Individual Demand function
The demand for a commodity arises from the
consumers’ willingness and ability to purchase the
commodity. Consumer demand theory postulates
that the quantity demanded of a commodity is a
function of / or depends on the price of the
commodity, the consumers’ income, the price of
related commodities, and the tastes of the
consumer.
43 Functional form
Qdx= (Px, I, Py, T)
An inverse relationship is expected between
the quantity demanded of a commodity and
its price (law of demand). That is, when the
price rises, the quantity purchased declines,
and when the price falls, the quantity sold
increases.
44 Functional form
Qdx= (Px, I, Py, N,T)
QdX/PX < 0
QdX/I > 0 if a good is normal
QdX/I < 0 if a good is inferior
QdX/PY > 0 if X and Y are substitutes
QdX/PY < 0 if X and Y are complements
45 Recall: Consumer Demand Theory
Consumer demand theory postulates that the quantity demanded
of a commodity per time period increases with a reduction in its
price, with an increase in the consumer’s income, with an increase
in the price of substitute commodities and a reduction in the price
of complementary commodities, and with an increased taste for the
commodity. On the other hand, the quantity demanded of a
commodity declines with the opposite changes.
Consumer demand theory postulates that the quantity demanded
of a commodity is a function of / or depends on the price of the
commodity, the consumers’ income, the price of related
commodities, the number of consumers in the market, and the
tastes of the consumer.
46 Relating Concepts
The increase in Qx when Px falls occurs because in consumption, the
individual consumer substitutes commodity x for other commodities
which are now relatively expensive. This is called the substitution
effect.
In addition, when Px falls, a consumer can purchase more of x with a
given amount of money (i.e., the consumer’s real income increases).
This is called the income effect.
The movement along a given demand curve resulting from a change
in the commodity price is referred to as a change in the quantity
demanded, while a shift in the demand curve resulting from a change
in any of the factors that affect demand, other than the commodity
price, is referred to as a change in demand.
47 Individual and Market Demand Curve Example
Horizontal Summation: From Individual to Market Demand
48 Individual and Market Demand Curve Example
Given the following data: Pdx=$4 and Qdx=4 and
Qddx=400, while at Px=$3, Qdx=6 and Qdd=600,
construct the relevant individuals and market curves
Individuals Market
8 8
6 6
4 4
Px
Px
2 2
0 0
0 2 4 6 8 10 12 0 200 400 600 800 1000 1200
Qdx Qdx
49
The End
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