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Demand and Supply
Price per unit of Good A
SGood A
Pe
DGood A
Q
Quantity Demanded of Good A
The Demand Curve and the
Law of Demand
The quantity demanded of a good or
service is the quantity that consumers
are willing to buy at a particular price
during a particular period, ceteris
paribus.
Price per dozen 90
90
Quantity/mo.
80
80
70
200
200 300
300 400
400
60
50
40
40
500
500 600
600 700
700
90
A demand curve is a graphical
representation of a demand schedule. A
demand curve virtually always slopes
downward because as the price of a good
or service increases the quantity
demanded decreases, ceteris paribus.
This relationship is known as the law of
demand.
80
70
A
Price per dozen (cents)
A demand schedule is a table that shows
the quantities of a good or service
demanded at different prices during a
particular period, ceteris paribus.
60
Demand
Curve
50
B
40
30
20
10
0
100 200
300 400
500
600 700 800
Quantity (millions of dozens per month)
Price
Quantity
Quantity’
Quantity”
$.90
200
400
0
.80
300
500
100
.70
400
600
200
.60
500
700
300
.50
600
800
400
.40
700
900
500
A change in quantity demanded is a
movement along the curve; it results
from a change in the price of a good or
service.
A change in demand is a shift in the
demand curve itself and results from a
change in one of the variables held
constant.
90
80
A’
Price per dozen (cents)
70
A”
DEMAND SHIFTERS
A
• Consumer preferences/tastes (i.e.,
concerns about cholesterol)
60
50
D3
40
D1
• Income/wealth
• Prices of Substitutes and
Complements (normal vs. inferior
goods)
30
20
10
0
• Consumer Expectations
100 200 300
400
500
600
700
800
Quantity (millions of dozens per month)
• Demographic Characteristics
PRACTICE PROBLEM
Write an equation in the form indicated below to
represent the demand function in our
“eggsample.”
P = a + bQd
Next, express demand as a function of price.
SOLUTION:
Demand for eggs
P = a + bQd
b = Y/X = -10/100 so,
P = a - .1Qd
substitute an ordered pair
90 = a - .1(200)
110 = a
so,
P = 110 - .1Qd
To express quantity as a function of price
1P/.1 = 110/.1 - .1Qd/.1
divide the equation by .1 to yield
10P = 1100 - Qd
then algebraically,
Qd = 1100 - 10P
Price and the Supply Curve
A supply schedule is a table that
shows the quantities of a good or
service supplied at different prices
during a particular period, ceteris
paribus.
A supply curve is a graphical
representation of a supply schedule.
A supply curve virtually always slopes
upward because as the price a seller
receives for a good or service
increases the quantity supplied
increases, ceteris paribus. This
relationship is known as the law of
supply.
Price per dozen
Quantity/mo.
40
50
60
300 400 500
70
80
90
600 700 800
90
80
70
Price per dozen (cents)
The quantity supplied of a good or
a service is the quantity sellers are
willing to sell at a certain price during
a particular period, ceteris paribus.
60
Supply
Curve
50
40
30
20
10
0
100
200 300
400
500
600
700
Quantity (millions of dozens per month)
800
Price
Quantity
Quantity’
Quantity”
$.40
300
500
100
.50
400
600
200
.60
500
700
300
.70
600
800
400
.80
700
900
500
.90
800
1000
600
90
80
A change in the quantity supplied of a good
or service is a movement along the supply
curve, resulting from a change in the price
received for the good or service.
A change in supply is a shift in the supply
curve and results from a change in one of the
variables previously held constant.
SUPPLY SHIFTERS
70
Price per dozen (cents)
Prices of Factors of Production (Input
Costs)
60
50
40
Returns from Alternative Production
Activities
30
Technology
20
Suppliers’ Expectations
10
Natural Events
0
100
200 300
400
500
600 700 800
Quantity (millions of dozens per month)
Number of Sellers
PRACTICE PROBLEM
Write an equation in the form indicated below to
represent the supply function in our
“eggsample.”
P = a + bQs
Next, express supply as a function of price.
SOLUTION:
Supply of eggs
P = a + bQs
b = Y/X = 10/100 so,
P = a + .1Qs
substitute an ordered pair
40 = a + .1(300)
10 = a
so,
To express quantity as a function of price
P = 10 + .1Qs
1P/.1 = 10/.1 + .1Qs/.1
divide the equation by .1 to yield
10P = 100 + Qs
then algebraically,
10P - 100 = Qs
DEMAND, SUPPLY, AND
EQUILIBRIUM
When we combine the demand and
supply curves for a good on a single
graph, the point at which they intersect
is called the equilibrium price. In our
“eggsample,” the equilibrium price is
$.60 per dozen. Consumers demand, $.60
and suppliers supply, 500 million
dozen eggs at this price. This is what
economists call the equilibrium price
and output (quantity).
The model of demand and supply
combines the demand and supply
curves for a good to explain the
determination of price and output in a
market.
Pe Qe
S
D
500
PRACTICE PROBLEM
Show mathematically that the equilibrium price for
eggs equals 60 cents per dozen and the
equilibrium output equals 500 million dozens.
Remember the equilibrium condition, Qs = Qd
SOLUTION:
Since,
Qs = Q d
substitute
and
Qs = 10P - 100
Qd = 1100 - 10P
so that
10P - 100 = 1100 - 10P
algebraically,
therefore
20P = 1200
Pe = 60 cents/dozen
Now, substitute Pe into
or
Qs = 10P - 100
Qd = 1100 - 10P
to obtain
Qe = 500
Qs = 10(60) - 100
Qd =1100 - 10(60)
A surplus exists if the quantity of a
good or service supplied exceeds
the quantity demanded at the
current price level.
A shortage exists if the quantity of
a good or service demanded
exceeds the quantity supplied at the
current price.
Suppose the current price for eggs
is 80 cents per dozen.
How many eggs will be demanded?
How many will be supplied?
S
$.60
Suppose the current price is 40
cents per dozen. How many eggs
will be demanded? How many eggs
will be supplied?
D
500
At a price of $.80/dozen, the
quantity supplied is 700 million
dozen eggs and the quantity
demanded is 300 million dozen
eggs. Thus, there is a surplus of
400 million dozen eggs.
At a price of $.40/dozen, the
quantity supplied is 300 million
dozen eggs and the quantity
demanded is 700 million dozen
eggs. Thus, there is a shortage
of 400 million dozen eggs.
Given a surplus, in most markets
prices will quickly fall back
toward the equilibrium price.
Similarly, when a shortage of a
good or service exists, prices
quickly rise until the market
returns to equilibrium.
Surpluses and
Shortages in the Egg
Market
S
$.80
$.40
D
Shortage
or surplus
300
700
SUPPLY AND DEMAND SCORECARD
Supply
Demand
Price
Quantity