Demand, Supply and Market Equilibrium

BY
TRI WAHYU YULIANI, S.E, M.E.
 In this chapter, learn about…
 The Law of Demand, Demand Curve, Factors affect demand for
goods
 The Law of supply, Supply Curve, Factors affect supply for goods
 Market Equilibrium
 Market and Competition
A market is a group of buyers (demand) and sellers (supply) of a particular good or service.

Goods for Sale

Sellers Buyers

A competitive market is one with many buyers and sellers, each has a negligible effect on price.
In this chapter, we assume that markets are perfectly competitive, so
• The goods offered for sale are all exactly the same
• The buyers and sellers are so numerous that no single buyer or seller has any influence over the market
price.
 The law of demand
The claim that the quantity demanded of a good falls when the price of the good rises, other things
equal
Demand schedule is a table that
shows the relationship between the
price of a good and the quantity
demanded.

The demand curve is a graph

ANNA'S DEMAND
SCHEDULE FOR
illustrating how much of a
TELEPHONE CALLS given product a household
would be willing to buy at
QUANTITY
PRICE DEMANDED different prices.
(PER (CALLS PER
CALL) MONTH)
$ 0 30
0.50 25
3.50 7
7.00 3
10.00 1
15.00 0
 The law of demand
The claim that the quantity demanded of a good falls when the price of the good rises, other things
equal

Demand
The quantity demanded ≠ Demand

Qd D
(Quantity Demanded) (Demand)

Changes in the price of a Changes in the price of a

product affect the quantity product affect the quantity
demanded per period demanded per period

Movement along the curve Shift of curve

Movement Along a Demand Curve Versus Shift of Demand
 Factors that will cause a shift in demand

1. Income
Normal good is positively related to income
Inferior good is negatively related to income
2. Price of other goods
Substitute goods (+) medical mask price increase, the demanded for cloth mask increases
Complemetary goods (-) the price of DVD player increases, the demanded for DVD falls
3. Taste
Anything that causes a shift in tastes toward a good will increase demand for that good
4. Expectations
(+) Price/Income Expectations Increases, Demand for goods now is increases too
5. Number of buyers
(+) An increase in the number of buyers causes an increase in quantity demanded
 The law of supply
The claim that the quantity supplied of a good rises when the price of the good rises, other things
equal
price of a good supplied Price Quantity
quantity of a good supplied a positive relationship = upward slope of of lattes
lattes supplied
Supply schedule: A table that shows the $0.00 0
relationship between the price of a good and
the quantity supplied. 1.00 3
Example: 2.00 6
Starbucks’ supply of lattes
Notice that Starbucks’ supply schedule 3.00 9
obeys the Law of Supply.
4.00 12
5.00 15
6.00 18
 Starbucks’ Supply Schedule & Curve

P Price Quantity
$6.00 of of lattes
lattes supplied
$5.00
$0.00 0
$4.00 1.00 3
$3.00 2.00 6
3.00 9
$2.00
4.00 12
$1.00 5.00 15
$0.00 6.00 18
Q
0 5 10 15
 The law of supply
The claim that the quantity supplied of a good rises when the price of the good rises, other things
equal

Supply
The quantity supplied ≠ Supply

Qs S
(Quantity Supplied) (Supply)

Changes in the price of a Changes in any other factor,

product affect the quantity such as technology or
supplied per period expectations, affect supply

Movement along the curve Shift of curve

Movement Along a Supply Curve Versus Shift of Supply
 Factors that will cause a shift in supply

1. Input prices
(-) A fall in input prices makes production more profitable at each output price, so firms
supply a larger quantity at each price
2. Technology
How much inputs are required to produce a unit of output→ cost saving →shifts the S
curve to the right (+)
3. Number of sellers
(+) An increase in the number of sellers increases the quantity supplied at each price
4. Expectations
(-)Price Expectations Increases, Supply for goods now is fall
5. State of Nature
(-) State of Nature increases causes an decrease in quantity supplied
 Market Equilibrium

P
$6.00 D S Equilibrium:
P has reached
$5.00
the level where
$4.00 quantity supplied
$3.00 equals quantity
demanded
$2.00
$1.00

$0.00 Q
0 5 10 15 20 25 30 35
 Equilibrium price:
The price that equates quantity supplied
with quantity demanded
P
$6.00 D S P QD QS
$5.00 $0 24 0
$4.00 1 21 5
$3.00 2 18 10
3 15 15
$2.00
4 12 20
$1.00
5 9 25
$0.00 Q 6 6 30
0 5 10 15 20 25 30 35
 Equilibrium quantity:
The quantity supplied and quantity demanded at
the equilibrium price
P
$6.00 D S P QD QS
$5.00 $0 24 0
$4.00 1 21 5
$3.00 2 18 10
3 15 15
$2.00
4 12 20
$1.00
5 9 25
$0.00 Q 6 6 30
0 5 10 15 20 25 30 35
 Surplus:
when quantity supplied is greater than
quantity demanded
P
$6.00 D Surplus S Example:
If P = $5,
$5.00
then
$4.00 QD = 9 lattes
$3.00 and
$2.00 QS = 25 lattes
$1.00 resulting in a surplus of
16 lattes
$0.00 Q
0 5 10 15 20 25 30 35
 Shortage:
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Example:
If P = $1,
$5.00
then
$4.00 QD = 21 lattes
$3.00 and
QS = 5 lattes
$2.00
resulting in a
$1.00 shortage of 16 lattes
$0.00 Shortage Q
0 5 10 15 20 25 30 35
 Chapter Summary
 The downward-sloping demand curve reflects the Law of Demand, which
states that the quantity buyers demand of a good depends negatively on
the good’s price.
 Besides price, demand depends on buyers’ incomes, the prices of
substitutes and complements, tastes, expectations, and number of buyers.
If one of these factors changes, the D curve shifts.
 The upward-sloping supply curve reflects the Law of Supply, which states
that the quantity sellers supply depends positively on the good’s price.
 Other determinants of supply include input prices, technology, the number
of sellers, and expectations. Changes in these factors shift the S curve.
 Chapter Summary
 The intersection of S and D curves determine the market
equilibrium. At the equilibrium price, quantity supplied equals
quantity demanded.
 If the market price is above equilibrium, a surplus results, which
causes the price to fall.
 If the market price is below equilibrium, a shortage results,
causing the price to rise.
EXERCISE :
Draw a demand curve for music downloads.
What happens to it in each of the following
scenarios? Why?
A. The price of iPods
falls
B. The price of music
downloads falls
 Next Chapter about “Elasticity and Application”
 The Concept of Elasticity and Computing The Price Elasticity
 The Price Elasticity of Demand and Its Determinants
 The Price Elasticity of Supply and Its Determinants
THANKYOU 