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MBA201a: Introduction to Supply and Demand
Economic units come in two classes.
Buyers
Sellers
– Consumers: finished goods
and services.
– Firms: raw materials, labor,
intermediate goods.
– Firms: finished goods.
– Workers: skilled and
unskilled labor.
– Resource owners: land, raw
materials.
MARKET: A collection of economic units resulting in the possibility of
exchange.
- Can be a physical location: NYSE floor, Fulton Street
Fish market.
- Can be a related set of transaction that are not in the same
geographical location: Berkeley housing market, labor market for IT
professionals.
Professor Wolfram
MBA201a - Fall 2009
Page 1
Demand, the buyer side of the market
Demand: the quantities of a good or service that people are willing
to buy at various prices within some given time period, other
factors besides price held constant.
• Willing to buy: a consumer would both like to (i.e., has the taste
for it) and is able to (i.e., have sufficient income to pay for it)
buy the good.
• Time period: especially for non-durables, the amount I’m willing
to buy depends on the time period.
• Other factors: the focus of demand is on the relationship
between price and quantity.
A demand curve describes the relationship between the price and
the quantity customers are ready to purchase at that price.
Professor Wolfram
MBA201a - Fall 2009
Page 2
A demand curve example
How do buyers respond to a
change in price?
The daily demand for pizza in Berkeley:
Price (per slice)
– Lower price buyers willing
to purchase more.
– Higher price  buyers
willing to purchase less.
Professor Wolfram
Quantity
demanded
$6.00
0
$4.50
1000
$3.00
5000
$1.50
6000
$0
7000
MBA201a - Fall 2009
Page 3
The demand for pizza in Berkeley graphically
$6
Price
$4.5
$3
$1.5
0
1000
5000
6000
7000
Quantity
Professor Wolfram
MBA201a - Fall 2009
Page 4
Demand versus quantity demanded
“Demand” describes
the entire curve.
Price
Demand
0
Quantity
Quantity demanded
Price
“Quantity demanded”
describes a particular
point, corresponding to
a particular price.
$1.5
0
6000
Quantity
Professor Wolfram
MBA201a - Fall 2009
Page 5
What, other than price, drives demand?
P
- TASTES (e.g. advertising)
Demand Curve B
- PRICES OF RELATED
PRODUCTS (substitutes and
complements)
-INCOME
-DEMOGRAPHICS
Demand Curve A
Q
Professor Wolfram
MBA201a - Fall 2009
Page 6
A supply curve summarizes the supply side of the
market.
Supply: the quantities of a good or service that firms are willing to
sell at various prices within some given time period, other
factors besides price held constant.
• This definition is identical to the definition of demand, except
that we’ve substituted the word “sell” for the word “buy.”
A supply curve describes the relationship between the price and
the quantity firms are willing to supply at that price.
Professor Wolfram
MBA201a - Fall 2009
Page 7
A supply curve example
How do firms respond to a change
in price?
The daily supply of pizza in Berkeley:
Price (per slice)
– Lower price firms willing
to supply less.
– Higher price  firms willing
to supply more.
$6.00
7000
$4.50
6000
$3.00
5000
$1.50
1000
$0
Professor Wolfram
Quantity
supplied
MBA201a - Fall 2009
0
Page 8
The supply of pizza in Berkeley graphically
$6
Price
$4.5
$3
$1.5
0
1000
5000
6000
7000
Quantity
Professor Wolfram
MBA201a - Fall 2009
Page 9
Demand and supply on the same graph
S
$6
Price
$4.5
$3
$1.5
D
0
1000
5000
6000
7000
Quantity
Professor Wolfram
MBA201a - Fall 2009
Page 10
What happens if the price is $4.50?
S
$6
Price
$4.5
$3
$1.5
D
0
1000
5000
6000
7000
Quantity
Professor Wolfram
MBA201a - Fall 2009
Page 11
What happens if the price is $1.50?
S
$6
Price
$4.5
$3
$1.5
D
0
1000
5000
6000
7000
Quantity
Professor Wolfram
MBA201a - Fall 2009
Page 12
What happens if the price is $3.00?
S
$6
Price
$4.5
$3
$1.5
D
0
1000
5000
6000
7000
Quantity
Professor Wolfram
MBA201a - Fall 2009
Page 13
The market mechanism
If the market price is above the equilibrium price (P>P*), there will
be a surplus until:
• producers tend to lower their prices, and
• quantity demanded tends to expand.
If the market price is below the equilibrium price (P<P*), there will
be a shortage until:
• producers tend to raise their prices, and
• quantity demanded tends to contract.
At the market clearing price (P = P*),, there is no tendency for the
price to change and the market is in equilibrium.
• Consumers can buy all they want, given the price.
• Firms can sell all they want, given the price.
Professor Wolfram
MBA201a - Fall 2009
Page 14
Market equilibrium
A perfectly competitive market equilibrium is economically efficient:
– Every consumer who values the product at least as much as
it costs to produce it is able to purchase it.
– Every producer can find buyers willing to pay a price that at
least covers the costs of production.
Professor Wolfram
MBA201a - Fall 2009
Page 15
Supply versus quantity supplied
“Supply” describes
the entire curve.
Price
Supply
0
Quantity
Quantity supplied
Price
“Quantity supplied”
describes a particular
point, corresponding to
a particular price.
$1.5
0
6000
Quantity
Professor Wolfram
MBA201a - Fall 2009
Page 16
What, other than price, drives supply?
P
- PRICE OF INPUTS (both
Supply Curve B
substitutes and complements)
- TECHNOLOGY
Supply Curve A
Q
Professor Wolfram
MBA201a - Fall 2009
Page 17