Demad and Supply

Lecture 3
This lecture will focus on demand and supply,

what we mean by price, markets, the law of
demand and supply, movement and shift of the
demand curve; we will also focus on how
equilibrium prices are determined in a market,
what are the factors that lead to a change/shift
the demand and supply of goods and services.
Copyright 2004 South-Western
The Market for Demand and Supply

Supply and demand are the two words that
economists use most often.
Supply and demand are the forces that make
market economies work.
Modern microeconomics is about supply,
demand, and market equilibrium.
MARKETS
A market is a group of buyers and sellers of a particular
good or service.
Some markets are extremely organized (agricultural

commodities, the stock exchange) and some less
organized (ice cream market)
The terms supply and demand refer to the behavior of
people . . . as they interact with one another in markets.
MARKETS and PRICE

Buyers determine demand.
Sellers determine supply
The relationship between price and

opportunity cost
Price of an object is the number of dollars/taka
that must be given up in exchange of the object and it
is termed by Economists as money price.
Relative price is the ratio of one price to another price.
Example: If money price of a cup of coffee is $1 and
the money price of chewing gum is 50 cents, then
relative price is 100cents/50 cents = 2. Relative price is
also the opportunity cost as it shows that to get a cup
of coffee we are forgoing 2 packs of gum.
DEMAND
Quantity demanded is the amount of a good
that buyers are willing and able to purchase.
Law of Demand
The law of demand states that more will be
demanded at a lower price than at a higher price,
other things remaining equal/cateris paribus. In
other words, the quantity demanded of a good falls
when the price of the good rises.
Why does higher price reduce qty

demanded?
Substitution Effect-When price of a good rises its relative price
or opportunity cost rises and because it has substitute people
will buy less of that good and more of its substitutes, other
things remaining equal.
Income Effect-When price rises and all other influence on
buying plan remains unchanged, the price rises relative to
peoples income. So with high price and same income people
can not afford to buy all the things they previously bought. So
they buy less of the good whose price has risen.
The Demand Curve: The Relationship

between Price and Quantity Demanded
Demand Schedule
The demand schedule is a table that shows the
relationship between the price of the good and the
quantity demanded.
Demand Schedule
The Demand Curve: The Relationship

between Price and Quantity Demanded
Demand Curve
The demand curve is a graph of the relationship
between the price of a good and the quantity
demanded.
Figure 1 Demand Schedule and Demand Curve

Price of
Ice-Cream Cone
$3.00
2.50
1. A decrease
in price ...
2.00
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
Market Demand versus Individual Demand

Market demand refers to the sum of all
individual demands for a particular good or
service.
Graphically, individual demand curves are
summed horizontally to obtain the market
demand curve.
Change in Quantity Demanded or Movement

along the Demand Curve
Change in Quantity Demanded
Movement along the demand curve is called
change in quantity demanded
Change in quantity demanded is caused by a change
in the price of the product.
Changes in Quantity Demanded

Price of IceCream
Cones
$2.0
0
A tax that raises the

price of ice-cream
cones results in a
movement along the
demand curve.
A
1.00
D
0
8Quantity of Ice-Cream Cones

Shifts in the Demand Curve

The factors that may shift the demand curve:
Consumer income
Prices of related goods
Tastes
Expectations
Number of buyers/Population

Change in Demand
A shift in the demand curve, either to the left or
right is called change in demand
Change in demand is caused by any change that
alters the quantity demanded at every price. In other
words, more is demanded at any given price.
Figure 3 Shifts in the Demand Curve

Price of
Ice-Cream
Cone
Increase
in demand
Decrease
in demand
Demand curve, D3
0
Demand
curve, D1
Demand
curve, D2
Quantity of
Ice-Cream Cones
Copyright2003 Southwestern/Thomson Learning

Consumer Income
As income increases the demand for a normal good
will increase. Example: Air Travel
As income increases the demand for an inferior
good will decrease. Example: Public Transport
Consumer Income
Normal Good
Price of IceCream Cone
$3.0
0
2.5
0
2.0
0
1.5
0
1.0
0
0.5
0
An increase
in income...
Increase
in demand
D1
0 1
D2
Quantity
of Ice2 3 4 5 6 7 8 9 10 11 12
Cream
Cones
Consumer Income
Inferior Good
Price of IceCream Cone
$3.0
0
2.5
0
2.0
0
1.5
0
1.0
0
0.5
0
An increase
in income...
Decrease
in demand
D2
0 1
D1
2 3 4 5 6 7 8 9 10 11 12
Quantity of
Ice-Cream
Cones

Prices of Related Goods
When a fall in the price of one good reduces the
demand for another good, the two goods are called
substitutes.
When a fall in the price of one good increases the
demand for another good, the two goods are called
complements.
Shifts in Demand
Tastes
Economists usually do not try to explain peoples
taste because it is based on historical and
psychological forces that are beyond the realm of
economics. However, the focus is more on what
happens when the taste of an individual or a
consumer changes.
Shifts in Demand
Expectation
Our future expectation may affect our demand for a
demand or service today. If we expect that our
income would go up in future we may spend more
today and save less.
e.g. if we expect a strike we may want to buy more
of some household necessities on the premonition
of a shortage in future. Similarly, if we expect a
particular share prices to go up we may want to buy
more of it on the expectation of a gain.
Shifts in Demand
Number of Buyers
Marker demand depends on the number of buyers.
If there are more buyers the demand for a product
would be more at each and every price. Also it
depends on the size and structure of population.
Example: An increase in aging population may
mean that the demand of hospitals would go up. A
increase in working population may mean an
increase in movie theatres, restaurants etc.
Table 1 Variables That Influence Buyers
Copyright2004 South-Western
SUPPLY
Quantity supplied is the amount of a good that
sellers are willing and able to sell during a
given period of time at a particular price.
Law of Supply
The law of supply states that, other things equal, the
quantity supplied of a good rises when the price of
the good rises.
The Supply Curve: The Relationship between

Price and Quantity Supplied
Supply Schedule
The supply schedule is a table that shows the
relationship between the price of the good and the
quantity supplied.
Supply Schedule
The Supply Curve: The Relationship between

Price and Quantity Supplied
Supply Curve
The supply curve is the graph of the relationship
between the price of a good and the quantity
supplied.
Figure 5 Supply Schedule and Supply Curve

Price of
Ice-Cream
Cone
$3.00
1. An
increase
in price ...
2.50
2.00
1.50
1.00
0.50
1 2
9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity of cones supplied.

Market Supply versus Individual Supply

Market supply refers to the sum of all
individual supplies for all sellers of a particular
good or service.
Graphically, individual supply curves are
summed horizontally to obtain the market
supply curve.
Shifts in the Supply Curve

The factors that shift the supply curve: Input prices
Price of related goods produced
Technology
Expectations
Number of sellers
Change in Quantity Supplied/Movement

along the supply curve
Change in Quantity Supplied
Movement along the supply curve is called change
in quantity supplied
Change is quantity supplied is caused by a change
in anything that alters the quantity supplied at each
price.
The Factors that Shift the Supply

Curve
Input Prices:
In order to produce a good, various inputs are used
and when the price of those inputs increase, then
production becomes less profitable and firms supply
less of that good. Example: To produce an ice cream
the sellers use cream, sugar, flavorings, the premises in
which ice cream is manufactured, the capital
machineries used and the labour used. An increase in
price of any of the inputs will lead to a shift in supply
curve to the left.
continued
Technology:
The invention of mechanized ice cream machine may
reduce the amount of labour required thus shifting the
supply curve to the right.
Expectations:
If a firm expects that the price of a good it produces
will go up in future the firm may want to store some of
its current production and supply less to the market.
Number of Sellers:
More the number of sellers more the supply and
viceversa.
Change in Quantity Supplied

Price of IceCream
Cone
S
C
$3.0
0
1.00
A rise in the price

of ice cream
cones results in a
movement along
the supply curve.
Quantity of
Ice-Cream
Cones
Shifts in the Supply Curve

Change in Supply
A shift in the supply curve, either to the left or right.
Caused by a change in a determinant other than
price.
Figure 7 Shifts in the Supply Curve

Price of
Ice-Cream
Cone
Supply curve, S3
Decrease
in supply
Supply
curve, S1
Supply
curve, S2
Increase
in supply
Quantity of
Ice-Cream Cones
Table 2 Variables That Influence Sellers
SUPPLY AND DEMAND

TOGETHER
Equilibrium refers to a situation in which the
price has reached the level where quantity
supplied equals quantity demanded.
SUPPLY AND DEMAND

TOGETHER
Equilibrium Price
The price that balances quantity supplied and
quantity demanded.
On a graph, it is the price at which the supply and
demand curves intersect.
Equilibrium Quantity
The quantity supplied and the quantity demanded at
the equilibrium price.
On a graph it is the quantity at which the supply and
demand curves intersect.
SUPPLY AND DEMAND

TOGETHER
Demand
Schedule
Supply
Schedule
At $2.00, the quantity demanded

is equal to the quantity supplied!
Figure 8 The Equilibrium of Supply and Demand

Price of
Ice-Cream
Cone
Supply
Equilibrium
Equilibrium price
$2.00
Equilibrium
quantity
0
Demand
9 10 11 12 13
Quantity of Ice-Cream Cones
Figure 9 Markets Not in Equilibrium
(a) Excess Supply

Price of
Ice-Cream
Cone
Supply
Surplus
$2.50
2.00
Demand
4
Quantity
demanded
10
Quantity
supplied
Quantity of
Ice-Cream
Cones
Equilibrium
Surplus
When price > equilibrium price, then quantity
supplied > quantity demanded.
There is excess supply or a surplus.
Suppliers will lower the price to increase sales, thereby
moving toward equilibrium.
Equilibrium
Shortage
When price < equilibrium price, then quantity
demanded > the quantity supplied.
There is excess demand or a shortage.
Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward
equilibrium.
Figure 9 Markets Not in Equilibrium
(b) Excess Demand

Price of
Ice-Cream
Cone
Supply
$2.00
1.50
Shortage
Demand
4
Quantity
supplied
10
Quantity of
Quantity
Ice-Cream
demanded
Cones
Equilibrium
Law of supply and demand
The claim that the price of any good adjusts to bring
the quantity supplied and the quantity demanded for
that good into balance.
Predicting Changes in
Price and Quantity
A Change in Demand
What would happen to the price and quantity of

CD-Rs if the price of a CD Burner falls from $300
to $100.
The Effects of a Change in

Demand
Price
Quantity demanded
(millions of CD-Rs per week)
(dollars
per CD-R )
.50
Quantity supplied
CD Burner $300 CD Burner $100 (millions of CD-Rs per week)
1.00 6
1.50 4
2.00 3
2.50 2
6
The Effects of a Change in

Demand
Price
Quantity demanded
(dollars
per CD-R )
.50
Quantity supplied
CD Burner $300 CD Burner $100 (millions of CD-Rs per week)
13
1.00 6
10
1.50 4
2.00 3
2.50 2
6
A Change in Supply
An increase in supply shifts the supply curve
down and to the right.
The new equilibrium price is lower, but the
equilibrium quantity is higher.
The Effects of a Change in Supply

Quantity supplied
Price
(dollars
Quantity demanded
per CD-R ) (millions of CD-Rs per week)
.50
1.00
1.50
2.00
2.50
old
technology
new
technology

Quantity supplied
Price

(dollars
Quantity demanded
old
new
technology
technology
.50
1.00
1.50
2.00
2.50
6

Quantity supplied
Price
(dollars
Quantity demanded
.50
1.00
1.50
2.00
10
2.50
12
old
technology
new
technology
Three Steps to Analyzing Changes in

Equilibrium
Decide whether the event shifts the supply or demand
curve (or both).
Decide whether the curve(s) shift(s) to the left or to the
right.
Use the supply-and-demand diagram to see how the
shift affects equilibrium price and quantity.
Figure 10 How an Increase in Demand Affects the

Equilibrium
Price of
Ice-Cream
Cone
1. Hot weather increases

the demand for ice cream . . .
Supply
New equilibrium
$2.50
2.00
2. . . . resulting
in a higher
price . . .
Initial
equilibrium
D
D
0
7
3. . . . and a higher
quantity sold.
10
Quantity of
Ice-Cream Cones
Three Steps to Analyzing Changes in

Equilibrium
Shifts in Curves versus Movements along
Curves
A shift in the supply curve is called a change in
supply.
A movement along a fixed supply curve is called a
change in quantity supplied.
A shift in the demand curve is called a change in
demand.
A movement along a fixed demand curve is called a
change in quantity demanded.
Figure 11 How a Decrease in Supply Affects the Equilibrium

Price of
Ice-Cream
Cone
S2
1. An increase in the
price of sugar reduces
the supply of ice cream. . .
S1
New
equilibrium
$2.50
Initial equilibrium
2.00
2. . . . resulting
in a higher
price of ice
cream . . .
Demand
7
3. . . . and a lower
quantity sold.
Quantity of
Ice-Cream Cones
Table 4 What Happens to Price and Quantity When Supply

or Demand Shifts?
Summary
Economists use the model of supply and
demand to analyze competitive markets.
In a competitive market, there are many buyers
and sellers, each of whom has little or no
influence on the market price.
Summary
The demand curve shows how the quantity of a
good depends upon the price.
According to the law of demand, as the price of a
good falls, the quantity demanded rises. Therefore,
the demand curve slopes downward.
In addition to price, other determinants of how
much consumers want to buy include income, the
prices of complements and substitutes, tastes,
expectations, and the number of buyers.
If one of these factors changes, the demand curve
shifts.
Summary
The supply curve shows how the quantity of a
good supplied depends upon the price.
According to the law of supply, as the price of a
good rises, the quantity supplied rises. Therefore,
the supply curve slopes upward.
In addition to price, other determinants of how
much producers want to sell include input prices,
technology, expectations, and the number of sellers.
If one of these factors changes, the supply curve
shifts.
Summary
Market equilibrium is determined by the
intersection of the supply and demand curves.
At the equilibrium price, the quantity demanded
equals the quantity supplied.
The behavior of buyers and sellers naturally
drives markets toward their equilibrium.
Summary
To analyze how any event influences a market,
we use the supply-and-demand diagram to
examine how the even affects the equilibrium
price and quantity.
In market economies, prices are the signals that
guide economic decisions and thereby allocate
resources.

Demad and Supply

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Lecture 3

This lecture will focus on demand and supply,

Copyright 2004 South-Western

The Market for Demand and Supply

Copyright 2004 South-Western

Some markets are extremely organized (agricultural

MARKETS and PRICE

Sellers determine supply

Copyright 2004 South-Western

The relationship between price and

Copyright 2004 South-Western

Why does higher price reduce qty

Copyright 2004 South-Western

The Demand Curve: The Relationship

Copyright 2004 South-Western

Copyright 2004 South-Western

The Demand Curve: The Relationship

Copyright 2004 South-Western

Figure 1 Demand Schedule and Demand Curve

Market Demand versus Individual Demand

Copyright 2004 South-Western

Change in Quantity Demanded or Movement

Copyright 2004 South-Western

Changes in Quantity Demanded

A tax that raises the

8Quantity of Ice-Cream Cones

Shifts in the Demand Curve

Copyright 2004 South-Western

Shifts in the Demand Curve

Copyright 2004 South-Western

Figure 3 Shifts in the Demand Curve

Shifts in the Demand Curve

Copyright 2004 South-Western

Copyright 2004 South-Western

Shifts in the Demand Curve

Copyright 2004 South-Western

Copyright 2004 South-Western

Copyright 2004 South-Western

Table 1 Variables That Influence Buyers

Copyright 2004 South-Western

The Supply Curve: The Relationship between

Copyright 2004 South-Western

Copyright 2004 South-Western

The Supply Curve: The Relationship between

Copyright 2004 South-Western

Figure 5 Supply Schedule and Supply Curve

2. ... increases quantity of cones supplied.

Market Supply versus Individual Supply

Copyright 2004 South-Western

Shifts in the Supply Curve

Copyright 2004 South-Western

Change in Quantity Supplied/Movement

Copyright 2004 South-Western

The Factors that Shift the Supply

Change in Quantity Supplied

A rise in the price

Shifts in the Supply Curve

Copyright 2004 South-Western

Figure 7 Shifts in the Supply Curve

Table 2 Variables That Influence Sellers

SUPPLY AND DEMAND

Copyright 2004 South-Western

SUPPLY AND DEMAND

SUPPLY AND DEMAND