Microeconomics (ECON 1111)

Lecturer: Dr B. M. Nowbutsing

Topic Three : Demand, Supply, and the

Market
1. Demand

 A table showing the relationship between price and

quantity of a product demanded is known as
a demand schedule Price Quantity
 Quantity demanded: 0 200
The quantity of a good 0.10 160
or service that a 0.20 120
consumer is willing to 0.30 80
buy at a given price 0.40 40
0.50 0
2. Demand Curve

The Demand curve

shows the relation
Price

between price and

quantity demanded
holding other things
constant (ceteris paribus

D Write the equation!

Quantity
3. Market Demand

 Market demand shows the demand for a product

by all consumers for a given area/ country

Price Quantity Price Quantity

0 200 0 100
0.10 160 0.10 80
0.20 120 0.20 60
0.30 80 0.30 40
0.40 40 0.40 20
0.50 0 0.50 0
3. Market demand

 Market demand curve is obtained by horizontal

summation along the demand curve
 Write the Price Quantity
equation ! 0 300
0.10 240
0.20 180
0.30 120
0.40 60
0.50 0
4. Law of Demand

 Holding everything else constant, when price of a product

falls, the quantity demanded for the product will increase
(vice versa)
 This law is the result of the:
– substitution effect is the change is quantity demanded that
result from a change in price which make the product more
or less expensive relative to substitute
– income effect is the change in quantity demanded of a
good that result from the effect of a change in the price on
purchasing power
5. Ceteris Paribus
 Ceteris Paribus: The requirement that when analysing the
relationship between the two variables such as price and
quantity – other variables must be held constant.
 If other things held constant, there is a shift in the demand
curve.
 Variables that shift the demand curve are also known as
conditions of demand
6. Shift in the Demand Curve
 Price of related goods
– substitutes: goods and services that can be used for the same
purpose
– complements: goods and services that should be used
together
 Income
– Normal goods: goods for which demand increases as income
increases
– Inferior goods: goods for which demand decreases as income
increases
 Tastes
 Population and Demographics
 Expected Future Price
6. Shift in the Demand Curve

Price

Quantity
6. Shift in the Demand Curve

Price

Quantity
7. Increase in Demand: Two Ways

 (1) A movement along

the demand curve from
Price

A to B
 represents consumer
reaction to a price
P0 A change
P1
B
D

Q0 Q1 Quantity
7. Increase in Demand: Two Ways

 (2) A movement of the

demand curve from D0
Price

to D1
 leads to an increase in
C demand at each price
P0 A  e.g. at P0 quantity demanded
B increases from Q0 to Q1
D1
D0
Q0 Q1 Quantity
8. Supply

 A table showing the relationship between price

and quantity of a product supplied is known as a
supply schedule Price Quantity
 Quantity Supplied: 0 0
The quantity of a good 0.10 0
or service that a 0.20 40
consumer is willing to 0.30 80
supply at a given price 0.40 120
0.50 160
9. The Supply Curve

 The Supply curve shows

the relation between
Price

S price and quantity

supplied holding other
things constant
 Write the equation!

Quantity
10. Market Supply

 Market supply shows the supply for a product by all

producers for a given area/ country

Price Quantity Price Quantity

0 0 0 0
0.10 0 0.10 0
0.20 40 0.20 20
0.30 80 0.30 40
0.40 120 0.40 60
0.50 160 0.50 80
10. Market Supply

 Market supply curve is obtained by horizontal

summation along the supply curve
 Write the Price Quantity
equation ! 0 0
0.10 0
0.20 60
0.30 120
0.40 180
0.50 240
11. Law of Supply

 Holding everything else constant, when price

of a product rises, the quantity supplied for
the product will increase (vice versa)
12. Shift in the Supply Curve
 Price of Inputs
 Technological Change
– A positive or negative change in the ability of a
firm to produce a given level of output with a given
amount of inputs.
 Price of substitutes in production
 Expected Future Price
 Number of Firms in Market
13. Shift in the Supply Curve

Price

Quantity
13. Shift in the Supply Curve

Price

Quantity
14. Movement vs. Shift

A/B to C: Shift in
S S1 the supply curve
Price

(change in supply)
B
C
A to B: Movement
along the demand
A curve (change in
quantity supplied)

Quantity
15. Market Equilibrium

 Market equilibrium is at E0
S where quantity demanded
Price

D0 equals quantity supplied

– with price P0 and
quantity Q0
P0 E0

S D0
Q0 Quantity
15. Market equilibrium

 If price were above P0 there would

be excess supply
– producers wish to supply more
S than consumers wish to demand
Price

D0
 If price were below P0 there would
be excess demand
– consumers wish to demand
more than producers wish to
P0 E0 supply

S D0
Q0 Quantity
16. A shift in demand

If the price of a substitute

D1 S good increases ...
Price

D0
more will be demanded at
P1 E1 each price
P0 E0
The demand curve shifts
from D0D0 to D1D1.
S D0 D1
The market moves to a
Q0 Q1 Quantity new equilibrium at E1.
17. A shift in supply

S1 Suppose safety
S0 regulations are tightened,
Price

D increasing producers’ costs

E2 The supply curve
P1
shifts to S1S1
P0 E0
If price stayed at P0 there
S1 would be excess demand
S0 D
So the market moves to a
Q1 Q0 Quantity new equilibrium at E2.
18. What, How and For Whom

 The market:
– decides how much of a good should be produced
• by finding the price at which the quantity demanded equals the
quantity supplied
– tells us for whom the goods are produced
• those consumers willing to pay the equilibrium price
– determines what goods are being produced
• there may be goods for which no consumer is prepared to pay a
price at which firms would be willing to supply
19. Price Controls

 Price controls are government rules of laws that

forbid the adjustment of prices to clear
 Price controls may be floor prices (minimum prices)
or ceiling prices (maximum prices)
20. Price Ceiling

 Price ceiling is the

D S maximum price at which
a commodity can be sold
PM
 The immediate effect is
P0
to create a shortage
Pc (quantity demanded >
quantity supplied)
D
S

Qs Qd
20. Price Ceiling

 Possible consequences of imposing a maximum price:

- goods will be supplied on a first come and first
serve basis
- base on seller’s preference
- emergence of black market while consumers are
willing to pay more than the regulated price in order
to obtain the commodity
21. Price Floor

 Price ceiling is the

D S minimum price at which
a commodity can be sold
PF
 The immediate effect is
P0
to create a surplus
(quantity supplied >
quantity demand)
D
S
Qd Qs
22. Effect of a Per Unit Tax

S1
 The effect of the tax is to
D shift the supply curve
S
parallel upwards
P1  The perpendicular
distance between the two
P0
supply is the amount of
the tax
S1 D
S
Q1 Q0
23. Who pays a commodity tax?

S' Area A is borne

by consumers
A S Area B is borne
by producers
P1
Area C is a
P0 welfare loss.
C
S' The incidence of the
B
tax depends upon the
S D elasticities of demand
and supply.
Q1Q0
24. Effect of a Per Unit Tax

 By how much price will increase will depend on the

slope of the demand curve
 Steeper demand curve: higher price increase – burden
more on the consumer
 Flatter demand curve: lesser price increase – burden
more on the supplier
25. Questions

D = 50 – 0.5 P and S = 20 + 0.25 P

D: Demand; S: Supply and P: Price
a) Calculate quantity demanded when price is Rs 10
b) Calculate quantity demanded when price is Rs 20
c) Calculate equilibrium price and quantity
d) Calculate the shortage/surplus if government imposes a regulatory price
of Rs 60. Is this a floor or ceiling?
e) If demand shift to 100 – 0.25 P, calculate new equilibrium price and
quantity.
f) Sketch both new and old demand and supply curve, illustrating the
equilibrium conditions
25. Questions

D = 100 – 0.25 P and S = 40 + 0.75 P

a) Calculate equilibrium price and quantity
b) If a maximum price of Rs 48 was imposed, what is the resulting
shortage?
c) Calculate the amount that the government will receive when
imposing such a price?
d) Estimate the extra revenue that can be generated from black
market.
e) Calculate the new equilibrium if supply changes to s = 60 + 0.25
P
f) Interpret what has happened to the original supply curve.