Market Supply and

Demand
• Key Concepts
• Summary
• Practice Quiz
 What is the
Law of Demand?
The principle that there is an
inverse relationship between
the price of a good and the
quantity buyers are willing to
purchase in a defined time
period, ceteris paribus
What does “ceteris
paribus” mean?
All else remains the same
 What is a demand
curve?
Depicts the relationship
between price and
quantity demanded
 Individual’s Demand Curve for Compact Discs

P
Rs20 A
Individuals Buyer’s Demand Schedule for Compact Discs

Point Price
per compact disk
Quantity demanded
(per year)

A Rs 20 4
Rs15 B B Rs 15 6
C Rs 10 10

Rs10 C D Rs 5 16
7

Rs5 D
Demand Curve
4 8 12 16 Q
 Why do demand curves
have a negative slope?
At a higher price consumers
will buy fewer units, and at a
lower price they will buy
more units
 What is a
demand schedule?
Shows the specific quantity of
a good or service that people
are willing and able to buy at
different prices
What is market demand?

The summation of the

individual demand schedules
IMPORTANT

KNOW THE DIFFERENCE

BETWEEN A CHANGE IN THE
QUANTITY DEMANDED AND A
CHANGE IN DEMAND
When price changes -
what happens?
The curve does not shift -
there is a change in the
quantity demanded
 Increase in
Quantity
Demanded

Decrease in
Price
 P
Rahul’s Demand Curve
Rs20

Rs15

Rs10

Rs5
D1
1 2 3 4 5 6 7 8 9 Q
 P
Mohan’s Demand Curve
Rs20

Rs15

Rs10

Rs5 D2
1 2 3 4 5 6 7 8 9 Q
 P Market Demand Curve
Rs20

Rs15

Rs10
D3
Rs5

Q
3 4 5 6 7 8 9 101112
 P
P Rs20
Mohan’s Demand Curve
Rahul’s Demand Curve
Rs20
Rs15
Rs15
Rs10
Rs10

Rs5
Rs5 D2
D1
1 2 3 4 5 6 7 8 9 Q
1 2 3 4 5 6 7 8 9 Q
13

12

P Market Demand Curve

Rs20

Rs15

Rs10
D3
Rs5
Q
3 4 5 6 7 8 9 10 11 12 14
Market Demand Schedule for Compact Discs
Price Fred Mary Total Demanded

Rs25 1 + 0 = 1
Rs20 2 1 3
Rs15 3 3 6
Rs10 4 5 9
Rs5 5 7 12
 P
Rs20
A change in price causes a
change in the quantity
demanded

Rs15 A
Rs10 B
Rs5
D
Q
10 20 30 40 50
When something changes
other than price, what
happens?
The whole curve
shifts,there is a change
in demand
 P
When the ceteris paribus assumption
is relaxed, the whole curve can shift
Rs20

Rs15 A B
Rs10
D
Rs5
D12
Q
10 20 30 40 50
 Increase
in demand

Change in
nonprice
determinant
What can cause a shift in a
demand curve?
• Tastes and preferences
• Number of buyers in the market
• Income
• Expectations of consumers
• Prices of related goods
 Decrease in
quantity
demanded

Upward
movement
along the
demand curve
Price
increases
 Increase in
quantity
demanded

Downward
movement
along the
demand curve
Price
decreases
 Decrease or
increase in
demand

Leftward or
rightward shift in
the demand curve

Nonprice
determinant
 What is a normal
good?
Any good for which
there is a direct
relationship between
changes in income and
its demand curve
 What is an
inferior good?
Any good for which
there is an inverse
relationship between
changes in income and
its demand curve
 What are
substitute goods?
Goods that compete with
one another for
consumer purchases
 What happens when the
price increases for a good
that has a substitute?
The demand curve for the
substitute good increases
 What happens when the
price decreases for a good
that has a substitute?
The demand curve for the
substitute good decreases
 What does a direct
relationship between
price and quantity
mean?
The two move in the same
direction
What are complementary
goods?
Goods that are jointly
consumed with
another good
 What happens when the
price increases for a good
that has a complement?
The demand curve for the
complements good
decreases
 What happens when the
price decreases for a good
that has a complement?
The demand curve for the
complements good
increases
 What does an inverse
relationship between price
& quantity mean?
It means that the two
move in opposite
directions
 What is the
law of supply?
The principle that there is a
direct relationship between
the price of a good and the
quantity sellers are willing
to offer for sale in a defined
time period, ceteris paribus
 Why do supply curves
have a positive slope?
Only at a higher price will it be
profitable for sellers to incur
the higher opportunity cost
associated with supplying a
larger quantity
 P
A company’s
Supply Curve for
Supply Curve
Rs20
Compact Discs A
Rs15

Rs10
B
C
Rs5

10 20 30 40 Q
An Individual Seller’s Supply for Compact Discs

Point Price Quantity

A Rs20 40
B 10 30
C 6 20
 What is a market?
Any arrangement in which
buyers and sellers interact
to determine the price and
quantity of goods and
services exchanged
 What is market supply?
The horizontal summation of all
the quantities supplied at
various prices that might
prevail in the market
 P Market Supply Curve

Rs25

Rs20

Rs15
S total
Rs10

40 45 55 60 Q
 P Super Sound Supply Curve

Rs 25
S1
Rs20

Rs15

Rs10

10 15 20 25 Q
 P High Vibes Supply Curve

Rs25
S2
Rs20

Rs15

Rs10

20 25 30 35 Q
Market Supply Schedule for Compact Discs
Price Super Sound High Vibes Total

Rs25 25 + 35 = 60
Rs20 20 30 50
Rs15 15 25 40
Rs10 10 20 30
Rs5 5 15 20
IMPORTANT

KNOW THE DIFFERENCE

BETWEEN A CHANGE IN
THE QUANTITY SUPPLIED
AND A CHANGE IN
SUPPLY
 When price changes,
what happens?
The curve does not shift -
there is a change in the
quantity supplied
 P
A change in price
causes a change
Supply Curve
Rs20
in the quantity
supplied
A
Rs15

Rs10
B
C
Rs5

10 20 30 40 Q
 Increase in
Quantity
Supplied

Increase in
Price
When something changes
other than price, what
happens?
The whole curve shifts - there
is a change in supply
 When the ceteris paribus
P assumption is relaxed, the
whole curve can shift
Rs20
S1 S2
Rs15

Rs10

Rs5

10 20 30 40 Q
 Increase
in supply

Change in
nonprice
determinant
What can cause a shift in a
supply curve?
1. Number of sellers in the market
2. Technology
3. Resource prices
4. Taxes and subsidies
5. Expectations of producers
6. Prices of other goods the firm
could produce
 P
Rs1200
The Supply & Demand
for Tennis Shoes

Rs900
S
Surplus
Rs600

Rs300 Shortage
D
1,000 2,000 3,000 4,000 Q
 What is an equilibrium?
A market condition that occurs
at any price for which the
quantity demanded and the
quantity supplied are equal
 What is the price
system?
A mechanism that uses the
forces of supply and
demand to create an
equilibrium through rising
and falling prices
 Cross Price Elasticity
• Suppose that the Intel microprocessor chips
(Pentium, etc.) increases in price by about
10%. What will happen to Microsoft
software?
• If the price of one product rises and the
quantity demanded of another product falls,
then we say the products are complements.
 Cross Price Elasticity
• Suppose that Coca-Cola raises its price by
10%.
• What happens to sales of Pepsi?
• If the price of one product rises and the
quantity demanded of another product rises,
we say the products are substitutes.
 Utility Max: Marginal
• Suppose you could measure happiness
from consumption of apples, then,
suppose that the following situation
exists:

• Unit 1 = 8 units of happiness

• Unit 2 = 6 units of happiness
• Unit 3 = 4 units of happiness
• Unit 4 = 2 units of happiness
 Utility Max: Marginal
• The total amount of happiness depends on
how much of the good we have.

Units Total Happiness

Unit 1 6 units of happiness
Unit 2 14
Unit 3 18
Unit 4 20
 Utility Max: Marginal
The total amount of happiness depends on how
much of the good we have.
Units Total Happiness Marginal
Unit 1 6 6
Unit 2 14 8
Unit 3 18 4
Unit 4 20 2
MU 10
8 The first Unit
6 gives us 6 units
4
2 of happiness
Total utility
20
15
10
5
1 2 3 4 5 6
Quantity of Good or Activity
MU
10 The second unit
gives us 8 units
8
6 of happiness
4
2
Total utility
20
The first two units
15 then are providing a
10 total of 14 units of
happiness
5
1 2 3 4 5 6
Quantity of Good or Activity
MU
10
8
6
4
2 Even though MU
Total
utility is falling, total
utility continues to
15
rise until .....
10
5
1 2 3 4 5 6
Quantity of Good or Activity
MU 10
8
6
MU reaches zero.
4 Zero MU means MAX
2 Total Utility. Any
Total more consumption
utility and MU is negative so
total utility declines
15
10
5
1 2 3 4 5 6
Quantity of Good or Activity
 Key Concepts
• What is the law of demand?
• What is a demand curve?
• Why do demand curves have a negative slope?
• When price changes, what happens?
• When something changes other than price, what happe
• What can cause a shift in a demand curve?
Key Concepts
 Key Concepts cont.
• What is the law of supply?
• Why do supply curves have a positive slope?
• When price changes, what happens?
• When something changes other than price, what happe
• What can cause a shift in a supply curve?
• What is a market?
• What is an equilibrium?
Summary

68
The law of demand states there is
an inverse relationship between
the price and the quantity
demanded, ceteris paribus. A
market demand curve is the
horizontal summation of individual
demand curves.

69
 Individual’s Demand Curve for Compact Discs

P
Rs20 A
Individuals Buyer’s Demand Schedule for Compact Discs

Point Price
per compact disk
Quantity demanded
(per year)

A Rs 20 4
Rs15 B B Rs 15 6
C Rs 10 10

Rs10 C D Rs 5 16
7

Rs5 D
Demand Curve
4 8 12 16 Q
A change in quantity demanded is a
movement along a stationary
demand curve caused by a change
in price. When any of the nonprice
determinants of demand changes,
the demand curve responds by
shifting. An increase in demand
(rightward shift) or a decrease in
demand (leftward shift) is caused
by a change in one of the nonprice
determinants.
71
 P
When the ceteris paribus assumption
is relaxed, the whole curve can shift
Rs20

Rs15 A B
Rs10
D2
Rs5
D1
Q
10 20 30 40 50
Nonprice determinants of demand:
a. the number of buyers,
b. tastes and preferences.
c. income (normal and inferior).
d. expectations of future p;rice and
income changes, and
e. prices of related goods
(substitutes and complements)
73
The law of supply states there is a
direst relationship between the
price and the quantity supplied,
ceteris paribus. The market supply
curve is the horizontal summation
of individual supply curves.

74
A change in quantity supplied is a
movement along a stationary
supply curve caused by a change in
price. When any of the nonprice
determinants of supply changes,
the supply curve responds by
shifting. An increase in supply
(rightward shift) or a decrease in
supply (leftward shift) is caused by
a change in one of the nonprice
determinants.
75
 P
A company’s
Supply Curve for
Supply Curve
Rs20
Compact Discs A
Rs15

Rs10
B
C
Rs5

10 20 30 40 Q
 P When the ceteris
paribus assumption
Rs20 is relaxed, the whole
curve can shift S1 S2
Rs15

Rs10

Rs5

10 20 30 40 Q
Nonprice determinants of supply:
a. the number of sellers.
b. technology
c. resource prices.
d. taxes and subsidies.
e. expectations of future price
changes,
f. prices of other goods.
78
A surplus or shortage exists at any
price where the quantity
demanded and the quantity
supplied are not equal. When the
price of a good is greater than the
equilibrium price, there is an
excess quantity supplied called a
surplus. When the price is less
than the equilibrium price, there is
an excess quantity demanded
called a shortage.
79
Equilibrium is the unique price and
quantity established at the
intersection of the supply and the
demand curves. Only at
equilibrium does quantity
demanded equal quantity
supplied.

80
 P
Rs120
The Supply & Demand
for Tennis Shoes

Rs90
S
Surplus
Rs60

Rs30 Shortage
D
1,000 2,000 3,000 4,000 Q
The price system is the supply and
demand mechanism that
establishes equilibrium through the
ability of prices to rise or fall.

82
Quiz that all of you
love
1. If the demand curve for good X is downward-
sloping, this means that an increase in the
price will result in

a. an increase in the demand for good X.

b. a decrease in the demand for good X.
c. no change in the quantity demanded for
good X.
d. a larger quantity demanded for good X.
e. a smaller quantity demanded for good X.
 Answer 1
E. When price changes there
is a opposite change in the
quantity demanded as
measured on the horizontal
axis.
2. The law of demand states that the quantity
demanded of a good changes, other things
being equal, when

a. the price of the good changes.

b. consumer income changes.
c. the prices of other goods change.
d. a change occurs in the quantities of other
goods purchased.
 Answer 2
A. A “change in demand”
means that the whole curve
shifts, but a “change in the
quantity demanded” means
that there is movement
along a stationary curve.
3. Which of the following is the result of a
decrease in the price of tea, other things
being equal?

a. A leftward shift in the demand curve

for tea.
b. A downward movement along the
demand curve for tea.
c. A rightward shift in the demand curve
for tea.
d. An upward movement along the
demand curve for tea.
 Answer 3
B. Because demand curves
have a negative slope, as
the price declines, the
quantity demanded will
increase.
4. Which of the following will cause a
movement along the demand curve for X?

a. A change in the price of a close

substitute.
b. A change in the price of good X.
c. A change in consumer tastes and
preferences for good X.
d. A change in consumer income.
 Answer 4

B. Movement along a given

demand curve always occurs when
the price changes, if anything
other than price changes, then the
whole curve will shift.
5. Assuming that beef and chicken are
substitutes, a decrease in the price of
chicken will cause the demand curve for
beef to
a. shift to the left as consumers switch
from chicken to beef.
b. shift to the right as consumers switch
from chicken to beef.
c. remain unchanged, since beef and
chicken are sold in separate markets.
d. none of the above.
 Answer 5
A. With a decrease in the
price of chicken people will
want to buy more chicken;
because beef and chicken
are substitutes, they will
buy less beef.
6. Assuming that coffee and tea are substitutes,
a decrease in the price of coffee, other things
being equal, results in a (an)
a. downward movement along the demand
curve for tea.
b. leftward shift in the demand curve for tea.
c. upward movement along the demand curve
for tea.
d. rightward shift in the demand curve for tea.
 Answer 6
B. With a decrease in the
price of coffee people will
want to buy more coffee;
because coffee and tea are
substitutes, they will buy
less at possible prices for
tea.
7. Assuming steak and potatoes are
complements, a decrease in the price of
steak will

a. decrease the demand for steak.

b. increase the demand for steak.
c. increase the demand for potatoes.
d. decrease the demand for potatoes.
 Answer 7
C. With a decrease in the
price of steak people will
want to buy more steak;
because steak and potatoes
are complements, they will
buy more potatoes as well.
8. Assuming that steak is a normal good, a
decrease in consumer income, other things
being equal, will
a. cause a downward movement along the
demand curve for steak.
b. shift the demand curve for steak to the
left.
c. cause an upward movement along the
demand curve for steak.
d. shift the demand curve for steak to the
right.
 Answer 8
B. Normal goods are goods
that people will buy more
of as their incomes increase
and less of as their income
decreases.
9. An increase in consumer income, other
things being equal, will

a. shift the supply curve for a normal good

to the right.
b. cause an upward movement along the
demand curve for an inferior good.
c. shift the demand curve for an inferior
good to the left.
d. cause a downward movement along the
supply curve for a normal good.
 Answer 9
C. Inferior goods are goods
that people will buy less of
at possible prices as their
income increases.
10. Yesterday, seller A supplied 400 units of a
good X at Rs10 per unit. Today, seller A
supplies the same quantity of units at Rs5 per
unit. Based on this evidence, seller A has
experienced a (an)

a. decrease in supply.
b. increase in supply.
c. increase in the quantity supplied.
d. decrease in the quantity supplied.
e. increase in demand.
 Answer 10
B. A shift to the right of a
supply curve along a
stationary demand curve
will result in a lower price
as illustrated on the next
page.
 When the ceteris paribus
P assumption is relaxed, the
whole curve can shift
Rs20
S1 S2
Rs15

Rs10

Rs5

10 20 30 40 Q
11. An improvement technology causes a (an)
a. leftward shift of the supply curve.
b. upward movement along the supply
curve.
c. firm to supply a larger quantity at any
given price.
d. downward movement along the supply
curve.
 Answer 11
C. When price changes, the supply curve
itself does not change, but when other
things change, the whole curve will shift.
A change in technology is an example of
what can cause the supply curve to shift.
12. Suppose auto workers receive a substantial
wage increase. Other things being equal, the
price of autos will rise because of a (an)
a. increase in the demand for autos.
b. rightward shift of the supply curve for
autos.
c. leftward shift of the supply curve for
autos.
d. reduction in the demand for autos.
 Answer 12
C. A change in costs for a business is a
factor that will shift the supply curve. If
costs go up, as in the case of having to
pay higher wages, the supplier has less of
an ability to supply cars.
13. Assuming that soybeans and tobacco can both
be grown on the same land, an increase in the
price of tobacco, other things being equal, causes
a (an)
a. upward movement along the supply curve for
soybeans.
b. downward movement along the supply curve
for soybeans.
c. rightward shift in the supply for soybeans.
d. leftward shift in the supply for soybeans.
 Answer 13
D. With an increase in the price of tobacco
farmers will want to grow more tobacco
to take advantage of the higher price.
Farmers will therefore plant soybeans on
land they used to use for tobacco.
14. If Qd = quantity demanded and Qs =
quantity supplied at a given price, a
shortage in the market results when
a. Qd is greater than Qs.
b. Qs equals Qd.
c. Qs is less than or equal to Qd.
d. Qs is greater than or equal to Qd.
 Answer 14
A. When there are more units of something
being demanded than being supplied, a
shortage will result.
15. Assume that the equilibrium price for a good
is Rs10. If the market price is Rs5, a
a. shortage will cause the price to remain at
Rs5.
b. surplus will cause the price to remain at Rs5.
c. shortage will cause the price to rise toward
Rs10.
d. surplus will cause the price to rise toward
Rs10.
 Answer 15
C. When the price of a good is below the
market price, there are less units being
supplied than being demanded. The
result is a shortage and consumers will
bid the price up toward the equilibrium
price.
 P Supply & Demand Exhibit

S
Rs2.00

Rs1.50

Rs1.00

Rs.50
D
100 200 300 400 Q
16. In the market shown in the previous
graph, the equilibrium price and quantity of
good X are

Previous graph
a. Rs0.50, 200.
b. Rs1.50, 300
c. Rs2.00, 100
d. Rs1.00, 200
 Answer 16
D. The equilibrium price and equilibrium
quantity are at the point where the
quantity demanded equals the quantity
supplied. This is the price toward which
the economy tends.
17. In the previous graph, at a price of Rs2.00,
the market for good X will experience a
a. shortage of 150 units.
b. surplus of 100 units.
Previous graph
c. shortage of 100 units.
d. surplus of 200 units.
 Answer 17
D. At a price of Rs2.00 the quantity
demanded is 100 and the quantity
supplied is 300; 300 units minus 100
equals 200 units.
18. In the previous graph, if the price of good
X moves from Rs1.00 to Rs2.00, the new
market condition will put
a. upward pressure on price. Previous graph

b. no pressure on price to change.

c. downward pressure on price.
d. upward pressure on price.
 Answer 18
C. Anytime the price is above the
equilibrium price a surplus will result.
Suppliers will therefore lower price to get
rid of the surplus.
END