Class 1

Demand & Supply

Quantity Demanded

• Quantity demanded is the amount

(number of units) of a product that a
household would buy in a given time
period if it could buy all it wanted at the
current market price.
Demand in Output Markets
ANNA'S DEMAND
• A demand schedule is a
SCHEDULE FOR table showing how much
TELEPHONE CALLS of a given product a
QUANTITY household would be
PRICE DEMANDED willing to buy at different
(PER
CALL)
(CALLS PER
MONTH)
prices.
$ 0 30 • Demand curves are
0.50 25
3.50 7
usually derived from
7.00 3 demand schedules.
10.00 1
15.00 0
The Demand Curve
ANNA'S DEMAND
SCHEDULE FOR
• The demand curve is a
TELEPHONE CALLS graph illustrating how
PRICE
QUANTITY
DEMANDED
much of a given product
(PER
CALL)
(CALLS PER
MONTH)
a household would be
$ 0
0.50
30
25
willing to buy at different
3.50 7 prices.
7.00 3
10.00 1
15.00 0
The Law of Demand
• The law of demand
states that there is a
negative, or inverse,
relationship between
price and the quantity of
a good demanded and its
price.
• This means that
demand curves slope
downward.
Shift of Demand Versus Movement Along a Demand
Curve

• A change in demand is
not the same as a change
in quantity demanded.
• In this example, a higher
price causes lower
quantity demanded.
• Changes in determinants
of demand, other than
price, cause a change in
demand, or a shift of the
entire demand curve, from
DA to DB.
A Change in Demand Versus a Change in Quantity
Demanded

• When demand shifts to

the right, demand
increases. This causes
quantity demanded to be
greater than it was prior to
the shift, for each and
every price level.
A Change in Demand Versus a Change in Quantity
Demanded

To summarize:
Change in price of a good or service
leads to

Change in quantity demanded

(Movement along the curve).

Change in income, preferences, or

prices of other goods or services
leads to

Change in demand
(Shift of curve).
 The Impact of a Change in the Price
of Related Goods
• Demand for complement good
(ketchup) shifts left

• Demand for substitute good (chicken)

shifts right

• Price of hamburger rises

• Quantity of hamburger
demanded falls
From Household to Market Demand
• Demand for a good or service can be defined
for an individual household, or for a group of
households that make up a market.
• Market demand is the sum of all the
quantities of a good or service demanded per
period by all the households buying in the
market for that good or service.
From Household Demand to Market Demand
• Assuming there are only two households in the
market, market demand is derived as follows:

+ =
Supply in Output Markets
CLARENCE BROWN'S • A supply schedule is a table
SUPPLY SCHEDULE showing how much of a product
FOR SOYBEANS
firms will supply at different
QUANTITY
SUPPLIED prices.
PRICE (THOUSANDS
(PER OF BUSHELS • Quantity supplied represents the
BUSHEL) PER YEAR)
$ 2 0 number of units of a product that
1.75 10
2.25 20
a firm would be willing and able to
3.00 30 offer for sale at a particular price
4.00
5.00
45
45
during a given time period.
The Supply Curve and
the Supply Schedule
• A supply curve is a graph illustrating how much
of a product a firm will supply at different prices.
CLARENCE BROWN'S 6

Price of soybeans per bushel ($)

SUPPLY SCHEDULE
FOR SOYBEANS 5
QUANTITY
SUPPLIED
4
PRICE (THOUSANDS
(PER OF BUSHELS
3
BUSHEL) PER YEAR) 2
$ 2 0
1.75 10 1
2.25 20
3.00 30 0
4.00 45
5.00 45 0 10 20 30 40 50
Thousands of bushels of soybeans
produced per year
The Law of Supply
Price of soybeans per bushel ($)
6 • The law of supply
5 states that there is a
4 positive relationship
3 between price and
2 quantity of a good
1 supplied.
0
• This means that supply
0 10 20 30 40 50
Thousands of bushels of soybeans curves typically have a
produced per year
positive slope.
Determinants of Supply
• The price of the good or service.
• The cost of producing the good, which in turn
depends on:
• The price of required inputs (labor, capital, and
land),
• The technologies that can be used to produce
the product,
• The prices of related products.
A Change in Supply Versus
a Change in Quantity Supplied

• A change in supply is
not the same as a
change in quantity
supplied.
• In this example, a higher
price causes higher
quantity supplied, and
a move along the
demand curve.
• In this example, changes in determinants of supply, other
than price, cause an increase in supply, or a shift of the
entire supply curve, from SA to SB.
A Change in Supply Versus
a Change in Quantity Supplied

• When supply shifts

to the right, supply
increases. This
causes quantity
supplied to be
greater than it was
prior to the shift, for
each and every price
level.
A Change in Supply Versus
a Change in Quantity Supplied

To summarize:
Change in price of a good or service
leads to

Change in quantity supplied

(Movement along the curve).

Change in costs, input prices, technology, or prices of

related goods and services
leads to

Change in supply
(Shift of curve).
From Individual Supply
to Market Supply
• The supply of a good or service can be defined for an
individual firm, or for a group of firms that make up a
market or an industry.
• Market supply is the sum of all the quantities of a
good or service supplied per period by all the firms
selling in the market for that good or service.
Market Supply
• As with market demand, market supply is the
horizontal summation of individual firms’ supply
curves.
Market Equilibrium
• The operation of the market depends
on the interaction between buyers and
sellers.
• An equilibrium is the condition that
exists when quantity supplied and
quantity demanded are equal.
• At equilibrium, there is no tendency for
the market price to change.
Market Equilibrium
• Only in equilibrium is
quantity supplied equal
to quantity demanded.

• At any price level

other than P0, the
wishes of buyers
and sellers do not
coincide.
Market Disequilibria
• Excess demand, or shortage,
is the condition that exists
when quantity demanded
exceeds quantity supplied at
the current price.

• When quantity demanded

exceeds quantity
supplied, price tends to
rise until equilibrium is
restored.
Market Disequilibria
• Excess supply, or surplus, is
the condition that exists
when quantity supplied
exceeds quantity demanded
at the current price.

• When quantity supplied

exceeds quantity
demanded, price tends to
fall until equilibrium is
restored.
Consumer & Producer Surplus
• Consumer Surplus (CS) is the total
Consumer Surplus
benefit of all the consumers in the
P market. The total benefit of all the
= ΔABP
A consumers in the market can be
found by calculating the area under
S the demand curve which is above
the equilibrium price.
• Similarly, the Producer Surplus (PS)
P B is the total profit that all the
producers earn from selling their
product in the market. The total
profit of all the producers in the
C D market can be found by calculating
the area above the supply curve
Producer Surplus =
Q which is below the equilibrium
ΔCPB
price.
Exercise
(a) Soln:

Given, supply function:

demand function:
We know that, at the equilibrium, quantity demanded and quantity
supplied are the same and there will be only one equilibrium price.
Therefore, at the equilibrium,

Therefore, the equilibrium quantity is,

Using the value of in equation (1) we get,

Therefore, the equilibrium price is,

 Exercise
(b) Soln:

The vertical intercepts can be found by arbitrarily holding

P
Q = 0 in the supply and demand functions. The consumer
A surplus is the CBP* triangular area and the producer
350
surplus is the ABP* triangular area. Therefore,
S
• Consumer Surplus,

P*=163.33 B • Producer Surplus,

• Total Surplus, +
70
C D

Q* Q
=1
33
.33
Increases in Demand and Supply

• Higher demand leads to higher • Higher supply leads to lower

equilibrium price and higher equilibrium price and higher
equilibrium quantity. equilibrium quantity.
Decreases in Demand and Supply

• Lower demand leads to • Lower supply leads to higher

lower price and lower price and lower quantity
quantity exchanged. exchanged.
Relative Magnitudes of Change

• The relative magnitudes of change in supply and

demand determine the outcome of market equilibrium.
Relative Magnitudes of Change

• When supply and demand both increase, quantity

will increase, but price may go up or down.