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Demand and Supply
© Peter Berck 1998
Goods
• A particular thing in a particular place at a
particular time.
– Coal today and coal tomorrow are not the same
good.
– A rotten peach and a yummy peach are not the
same good.
– Wheat in Minneapolis and wheat in Iowa are
not the same good.
Lecture Outline
• Firms Supply Goods;
• People Demand Goods;
• Firm’s Demand Inputs
• Keep them Separate
• Demand and Supply intersect at the
equilibrium price and quantity
Demand Curve
• Q as function of P not Q
itself
P
• Diagram: P on vertical
• D(p) is the demand curve.
It associates a
quantity with every price.
• D-1(Q) is the inverse
demand curve. It
associates a price with
every quantity.
D-1(Q)
Q
Shifting the Demand Curve
• Qown = D(pown,pother,y)
• If the price of the
P
other good goes up
and the demand curve
shifts in, the goods are
complements.
• If it shifts out, they are
substitutes.
D-1
Q
Shifting the Demand Curve: y
• Qown = D(pown,pother,y)
• If income goes up and P
the demand curve
shifts out, the good is
a normal good.
• If it shifts in, it is an
inferior good.
D-1
Q
Supply
• S(pout , pin , x)
– pout is the price of the product the firm makes
(an output).
– pin are the prices of the inputs the firm uses to
make the output.
– x are exogenous factors, like the weather.
– slope up or flat (assumed for this course) in pout.
– shift in with increased price of input
Equilibrium
• The equilibrium price and quantity are the
coordinates of the point where the supply
and demand curve intersect.
• One observes only this equilibrium price
and quantity in the market.
Example
3
2.5
P
2
S
D
1.5
1
0.5
0
0
2
4
6
Q
8
10
Algebraic Example
• Q = 3 p is S(p)
• Q = 12 - 4p is D(p)
• (graph using y = mx + b)
– ps = Q/3 slope 1/3
– pd = 3 - Q/4 slope - 1/4
• Equilibrium: p = ps=pd : Q/3=3-Q/4
– Q= 36/7; p= 12/7
Excess S or D
3
2.5
P
2
S
D
1.5
1
0.5
0
0
2
4
Suppose P is 2.5.
Suppose P is 1
6
8
10
Q
Suppose Q = 2
Suppose Q = 8
E Coli Burgers
3
2.5
P
2
S
D
D'
1.5
1
0.5
0
0
2
4
6
8
10
Q
Which curve shifted? Where was there a movement along
a curve? What points are observed?
Ag. Programs: Loan
• PL: amnt at which will purchase any or all
wheat 3
2.5
P
2
S
D
1.5
1
0.5
0
0
2
4
6
Q
8
10
Rent Control
• Excess demand for housing
– lines
– bribes
• When rent control ends can students be
worse off?
Horizontal Addition
P
demand from developed world
from less developed world
Total Demand
Q
Pinhead’s View of Hunger
P
demand from developed world
from less developed world
Supply*
$2.74
Supply
Total Demand
QE
Q