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Demand, Supply, &
Market Equilibrium
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Demand
 Quantity demanded (Qd)
 Amount of a good or service consumers are willing &
able to purchase during a given period of time
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Demand
 Six variables that influence Qd
 Price of good or service (P)
 Incomes of consumers (M)
 Prices of related goods & services (PR)
Taste patterns of consumers (  )
• Expected future price of product (Pe)
• Number of consumers in market (N)
•
• Generalized demand function
•
Qd  f ( P, M , PR , , Pe , N )
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Competition in the market
 Airtell Vs. Vodafone
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How do you choose?
- price
- brand (quality)
- distance
- service
Supply and Demand
DEMAND - from consumer's
point of view
SUPPLY - from producer's point
of view
Demand
 Quantity demanded: the amount of
a good that households want to
consume given their income and
prices in a given time period
Question
 How does what we "demand" differ from what we
"want"?
 demand is what you are willing and able to buy given
your income and the price of the good (limited)
 a want is a desire, but not necessarily something you
have the resources to buy
(unlimited)
Generalized Demand Function
Variable
Relation to Qd
P
Inverse
M
Direct for normal goods
Inverse for inferior goods
PR
Direct for substitutes
Inverse for complements

Direct
Pe
Direct
N
Direct

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The Law of Demand
 As the price of a good increases, the quantity
demanded falls, holding all else constant, (ceteris
paribus)
 Ceteris Paribus - holding all else constant
in real world many variables change simultaneously
 However, in order to understand the economy we must
first understand each variable separately.

Graphing Demand Curves
 Change in quantity demanded
 Occurs when price changes
 Movement along demand curve
 Change in demand
 Occurs when one of the other variables, or determinants
of demand, changes
 Demand curve shifts rightward or leftward
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The Demand Curve
 The market demand curve (or just demand curve)
shows the relationship between the price of a good and
the quantity demanded , holding constant all other
variables that influence demand
 Each point on the curve shows the total buyers would
choose to buy at a specific price
 Law of demand tells us that demand curves virtually
always slope downward
Figure 1: The Demand Curve
Price
per
Bottle
$4.00
A
When the price is
$4.00 per bottle,
40,000 bottles are
demanded (point A).
B
2.00
40,000
60,000
At $2.00 per bottle,
60,000 bottles are
demanded (point B).
D
Number of
Bottles per
Month
Figure 2: A Shift of The Demand Curve
Price
per
Bottle
$2.00
B
An increase in income
shifts the demand
curve from D1 to D2.
At each price, more
bottles are demanded
after the shift
C
D1
60,000
80,000
D2
Number of
Bottles per
Month
Income: Factors That Shift The Demand Curve
 An increase in income has effect of shifting demand
for normal goods to the right
 However, a rise in income shifts demand for inferior
goods to the left
 A rise in income will increase the demand for a normal
good, and decrease the demand for an inferior good
Wealth: Factors That Shift The Demand Curve
 Your wealth—at any point in time—is the total value
of everything you own minus the total dollar amount
you owe
 An increase in wealth will
 Increase demand (shift the curve rightward) for a
normal good
 Decrease demand (shift the curve leftward) for an
inferior good
Prices of Related Goods: Factors that Shift the Demand Curve
 Substitute—good that can be used in place of
some other good and that fulfills more or less the
same purpose
 A rise in the price of a substitute increases the demand
for a good, shifting the demand curve to the right
 Complement—used together with the good we are
interested in
 A rise in the price of a complement decreases the
demand for a good, shifting the demand curve to the left
Complements
V.S.
V.S.
Other Factors That Shift the Demand Curve
 Population
 As the population increases in an area
 Number of buyers will ordinarily increase
 Demand for a good will increase
 Tastes
 Combination of all the personal factors that go into
determining how a buyer feels about a good
 When tastes change toward a good, demand increases,
and the demand curve shifts to the right
 When tastes change away from a good, demand
decreases, and the demand curve shifts to the left
Movements Along and Shifts of The Demand Curve
Price
Entire demand curve
shifts leftward when:
• income or wealth ↓
• price of substitute ↓
• price of complement ↑
• population ↓
• expected price ↓
• tastes shift toward
good
•Taxes ↑ or subsidies
↓
D1
D2
Quantity
Supply
 Quantity supplied (Qs)
 Amount of a good or service offered for sale during a
given period of time
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Supply
 Six variables that influence Qs
 Price of good or service (P)
 Input prices (PI )
 Prices of goods related in production (Pr)
 Technological advances (T)
 Expected future price of product (Pe)
 Number of firms producing product (F)
 Generalized supply function

Qs  f ( P, PI , Pr , T , Pe , F )
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Generalized Supply Function
Variable
Relation to Qs
P
Direct
PI
Inverse
Pr
Inverse for substitutes
Direct for complements
T
Direct
Pe
Inverse
F
Direct
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Supply Function
 Supply function, or supply, shows relation between P &
Qs when all other variables are held constant

Qs = g(P)
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Graphing Supply Curves
 A point on a supply curve shows either:
 Maximum amount of a good that will be offered for sale
at a given price
 Minimum price necessary to induce producers to
voluntarily offer a particular quantity for sale
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Graphing Supply Curves
 Change in quantity supplied
 Occurs when price changes
 Movement along supply curve
 Change in supply
 Occurs when one of the other variables, or determinants
of supply, changes
 Supply curve shifts rightward or leftward
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The Supply Schedule and The Supply Curve
 Supply schedule—shows quantities of a good or
service firms would choose to produce and sell at
different prices, with all other variables held constant
 Supply curve—graphical depiction of a supply
schedule
 Shows quantity of a good or service supplied at various
prices, with all other variables held constant
Figure 4: The Supply Curve
Price
per
Bottle
When the price is
$2.00 per bottle,
40,000 bottles are
supplied (point F).
$4.00
2.00
S
G
F
At $4.00 per bottle,
quantity supplied is
60,000 bottles
(point G).
40,000 60,000
Number of
Bottles per
Month
Shifts vs. Movements Along the Supply Curve
 A change in the price of a good causes a movement
along the supply curve
 In Figure 4
 A rise (fall) in price would cause a rightward (leftward)
movement along the supply curve
 A drop in transportation costs will cause a shift in
the supply curve itself
 In Figure 5
 Supply curve has shifted to the right of the old curve (from Figure
4) as transportation costs have dropped
 A change in any variable that affects supply—except for the
good’s price—causes the supply curve to shift
Factors That Shift the Supply Curve
 Input prices
 A fall (rise) in the price of an input causes an increase
(decrease) in supply, shifting the supply curve to the
right (left)
 Price of Related Goods
 When the price of an alternate good falls(rises), the
supply curve for the good in question shifts rightward
(leftward)
 Technology
 Cost-saving technological advances increase the supply
of a good, shifting the supply curve to the right
Factors That Shift the Supply Curve
 Number of Firms
 An increase (decrease) in the number of sellers—with
no other changes—shifts the supply curve to the right
(left)
 Expected Price
 An expectation of a future price increase (decrease)
shifts the current supply curve to the left (right)
Factors That Shift the Supply Curve
 Changes in weather
 Favorable weather
 Increases crop yields
 Causes a rightward shift of the supply curve for that crop
 Unfavorable weather
 Destroys crops
 Shrinks yields
 Shifts the supply curve leftward
 Other unfavorable natural events may effect all
firms in an area
 Causing a leftward shift in the supply curve
Figure 5: A Shift of The Supply Curve
Price
per
Bottle
A decrease in
transportation costs shifts
the supply curve from S1
AtSeach
price, more
to
2.
bottles are supplied
$4.00 after the shift
S1
G
S2
J
60,000 80,000
Number of
Bottles per
Month
Figure 6(a): Changes in Supply and in Quantity
Supplied
Price
P2
S
Price increase
moves us
rightward along
supply curve
P1
Price increase
moves us
leftward along
supply curve
P3
Q3
Q1
Q2
Quantity
Figure 6(b): Changes in Supply and in Quantity
Supplied
Price
Entire supply curve
shifts rightward when:
• price of input ↓
• price of alternate good
↓
• number of firms ↑
• expected price
• technological advance
• favorable weather
S1
S2
Quantity
Figure 6(c): Changes in Supply and in Quantity
Supplied
Price
Entire supply curve
shifts rightward when:
• price of input ↑
• price of alternate
good ↑
• number of firms ↓
• expected price ↑
• unfavorable weather
S2
S1
Quantity
Market
Equilibrium
 Equilibrium price & quantity are determined by the
intersection of demand & supply curves
 At the point of intersection, Qd = Qs
 Consumers can purchase all they want & producers
can sell all they want at the “market-clearing” price
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Market Equilibrium
(Figure 2.5)
P
80
S0
70
Price (dollars)
60
•
50
•
•
40
30
•
•
20
10
D0
Qd , Qs
0
100
300
500
700
900
1,100
1,300
1,500
Quantity
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