Some key terms

 Market
 a set of arrangements by which buyers and sellers are in contact
to exchange goods or services

Chapter 2  Demand
 the quantity of a good buyers wish to purchase at each
Demand, supply, and the market conceivable price
 Supply
 the quantity of a good sellers wish to sell at each conceivable
price
 Equilibrium price
 price at which quantity supplied = quantity demanded

1 2

Outline Markets
The terms demand and supply refer to the
 Demand actions of participants within a market
 Supply Buyers/consumers determine demand
 Market equilibrium Sellers/producers determine supply
 Predicting changes in price and
quantity
 Government’s intervention
 Externality
3 4

Demand Demand Schedule

Demand is the amount of a product that PRICE QUANTITY

per apple DEMANDED
consumers are willing and able to purchase at The demand per unit time
each specific price over a specified time, schedule is a table $0.00 14

ceteris paribus that shows the 0.50 12

quantities 1.00 10
The various quantities demanded over a range demanded of a 1.50 8
of different prices can be shown in: product for a range 2.00 6
a demand schedule of prices over a 2.50 4
a demand curve given period. 3.00 2
e.g. demand for apples
3.50 0
5 6

1
 Demand Curve Individual demand and market
demand
 The demand curve
is a downward-sloping Price of apples
line which shows the
• The market demand curve is the horizontal
3.50
relationship between
3.00
sum of the individual demand curves and is
the price of apples formed by adding the quantities demanded
2.50
and the quantity of
apples demanded 2.00 Demand by each individual at each price.
Curve
for a given period, 1.50
ceteris paribus 1.00
0.50
 Market demand is derived by 0
the horizontal summation of 2 4 6 8 10 12 14
each individual demand curve
Quantity
7 8

Individual and market demand Individual and market demand

curves curves
Price ($ per Quantity of movies demanded
movie)
Lisa Chuck Market
7 1 0 1
6 2 0 2
5 3 0 3
4 4 1 5
3 5 2 7
2 6 3 9 9 10

Law of Demand Demand- Change in Quantity Demanded versus

Change in Demand
1) Price of apples: price increases, quantity demanded
The law of demand states that there is an falls (movements along the curve)
inverse relationship between price and 2) Consumer income
• Normal or superior goods-demand varies directly with income
quantity demanded, cet.par • Inferior goods-demand varies inversely with income
Shown in the negative slope of the demand curve
3) Prices of related goods:
• Substitutes/complements

 Based on 4) Tastes and preferences

 Substitution effect
5) Expectations
6) Number of consumers
 Income effect
2, 3, 4, 5, 6 change: change (shift) in demand
11 12

2
 Change in Quantity Demanded Change in Demand

Price  E.g. price of bananas Price

 Only caused by declines
Movement along the D2 D1
changes in price demand curve
 bananas are a Shift to
2.50
 If price of apples rises ‘substitute’ for
the left

law of demand tells us 1.50 Demand 1.50

apples so lower
quantity demanded of
apples will fall price decreases
4 8 demand for apples
Quantity 5 8
Fall in quantity demanded Quantity
Consumers buy 3 fewer
is 4 units apples at the same price
13 14

Checkpoint Practice question: 1

Can you explain the Law of Demand?

“During the recession in Japan it was
Do you understand the determinants of observed that the price of restaurant
demand? meals declined but fewer people were
Can you distinguish between a change in dining out. This appears to disprove the
demand and a change in quantity demanded? law of demand”
Do you agree with this statement?
Explain

15 16

Supply Supply Schedule

The supply schedule

Supply is the amount of a product that is a table that PRICE
per apple
QUANTITY
SUPPLIED
producers are willing and able to produce and shows the per unit time
$0.00 0
make available for sale at each specific price quantities supplied
0.50 2
per unit of time, ceteris paribus of a product for a 1.00 4
range of prices over 1.50 6
The various quantities supplied over a range a given period. 2.00 8
of different prices can be shown in: e.g. supply of apples 2.50 10

a supply schedule 3.00 12

3.50 14
a supply curve
17 18

3
 Supply Curve Law of Supply
The supply curve
is an upward-sloping
Price of apples Supply The law of supply states that there is a direct
line which shows the Curve
3.50 relationship between price and quantity
relationship between
3.00 supplied, ceteris paribus
the price of apples 2.50
Shown in the positive slope of the supply curve
and the quantity of 2.00
apples supplied 1.50

for a given period, 1.00

0.50
ceteris paribus
0
2 4 6 8 10 12 14
Quantity
19 20

Supply- Change in Quantity supplied versus

Change in Quantity Supplied
Change in supply
1) Price of apples- as prices rise quantity supplied
Price
increases (movements along the curve)  Only caused by Supply
2) Expectations changes in price Curve
2.50
3) Prices of inputs  If the price of
apples rises, law of
4) Prices of other goods related in production supply tells us 1.50 Movement along
the supply curve
5) Technology quantity supplied
of apples will rise
6) Number of sellers
2, 3, 4, 5, 6 change: change (shift) in S Rise in quantity
6 10
Quantity
supplied of 4 units
21 22

Change in Supply Practice Questions: 2

If the government increases the tax on cigarettes

 E.g. wages increase Price by 2,000 dong, how will the price and
 labour is an input
S2 S1 equilibrium Q change?
Shift to
in production so 2.00 the left
higher wages
increase costs of
production and
decrease supply

5 8
Sellers supply 3 less apples Quantity
23 24
at the same price

4
 Practice question: 3 Supply and Demand Together

“During the recent drought in Australia Market Equilibrium

less wheat was harvested but the price of
wheat rose. This appears to disprove the
law of supply”
Do you agree with this statement?
Explain
when the buying decisions of consumers and the
selling decisions of producers are equated
Equilibrium Price
The price that balances supply and demand
Equilibrium Quantity
The quantity that balances supply and demand

25 26

To Determine Market Equilibrium Market Equilibrium

Quantity Price per Quantity Surplus or Price of apples
Supplied unit Demanded Shortage
14,000 $3.50 0 +14,000 Demand
12,000 3.00 2,000 +10,000 Equilibrium Supply

10,000 2.50 4,000 +6,000 Price

$1.75 Equilibrium
8,000 2.00 6,000 +2,000
6,000 1.50 8,000 -2,000
4,000 1.00 10,000 -6,000
2,000 0.50 12,000 -10,000
0 0 14,000 -14,000 7,000 Quantity
Equilibrium Quantity
27 28

Market Shortage Market Shortage (cont’d)

May be used as a price ceiling on the price
of housing-explain
A shortage exists when the quantity Price of apples ($’s)
consumers are willing to buy at the current Demand
Supply
price exceeds the quantity producers are
willing to supply
1.75 Equilibrium

1.00 Shortage of 6000 apples

Quantity
4 7 10 (000’s)
29 Quantity Quantity 30
supplied demanded

5
 Market Surplus Market Surplus (cont’d)
May be used as a price support (price
floor) eg price of labour. Explain
A surplus exists when the quantity consumers Price of apples ($’s)
are willing to buy at the current price is less Demand Supply
than the quantity producers are willing to 2.50 Surplus of 6000 apples
supply
1.75 Equilibrium

Quantity
4 7 10 (000’s)
Quantity
31 Quantity
supplied
32
demanded

Increase in Demand Increase in Supply

What happens to equilibrium price and quantity when What happens to equilibrium price and quantity when
there is an increase in demand? there is an increase in supply?

Price Price
D2 S1
D1 S D
Equilibrium
S2
P2 price___ and
quantity___
P1
P1 Equilibrium price ___
P2 and quantity ____

Q1 Q2 Quantity 33 Q1 Q2 Quantity 34

Demand and supply change in the

Change in Demand and Supply same direction
Price Original quantities New quantities
What happens to equilibrium price and quantity when both (dolla (millions of tapes (millions of tapes per
demand and supply increase? s per week) week)
per QD QS QD QS
Price tape)
D2 S1 Walkman Old Walkman New
S2 $200 techno $50 techno
D1
logy logy
Equilibrium quantity
____ and price _____ 1 9 0 13 3
P?
2 6 3 10 6
3 4 4 8 8
4 3 5 7 10
Quantity 35
Q1 Q2 5 2 6 6 1236

6
 Demand and supply change in opposite
direction
Price Original quantities New quantities
(doll (millions of tapes per (millions of tapes per
ars week) week)
per
QD QS QD QS
tape)
CD Old CD New
player technology player technology
$400 $200

1 13 0 9 3
2 10 3 6 6
3 8 4 4 8
4 7 5 3 10
37 38
5 6 6 2 12

Checkpoint

Can you explain the concept of market

equilibrium?
What is the impact of a shortage or a surplus
on the market?
Can you analyse the impact of changes in
demand and supply on equilibrium price and
quantity?

39 40

The Demand curve shows the relation between

price and quantity demanded holding other things
constant
 “Other things”
include:
Price

Summary the price of related

goods
consumer incomes
consumer
preferences
D
 Changes in these
Quantity other things affect the
position of the
41 42
demand curve

7
 The Supply curve shows the relation between price Market equilibrium
and quantity supplied holding other things constant

 “Other things”
include: S  Market equilibrium is
Price

S D0
at E0 where quantity
technology
demanded equals
input costs quantity supplied
P0 E0
government with price P0 and
regulations quantity Q0
 Changes in these
S D0
other things affect the
Quantity Q0
position of the Quantity
demand curve 43 44

Market equilibrium A shift in demand

 If price were above P0 If the price of a substitute

S D1 S good increases ...
D0 there would be excess D0
supply more will be demanded at
producers wish to P1 E1 each price
P0 E0 supply more than P0 E0
consumers wish to The demand curve shifts
demand from D0D0 to D1D1.
S D0 S D0 D1
The market moves to a
Q0 Quantity Q0 Q1 Quantity new equilibrium at E1.
45 46

Two ways in which demand may

A shift in supply increase
Suppose safety
S1 regulations are tightened,  (1) A movement along
S0 increasing producers’ costs the demand curve
D
The supply curve from A to B
E2
P1 shifts to S1S1  represents consumer
P0 A reaction to a price
P0 E0 If price stayed at P0 there P1
B change
would be excess demand
S1  this could follow a
S0 So the market moves to a D
D supply shift
new equilibrium at E2.
Q1 Q0 Quantity Q0 Q1 Quantity
47 48

8
 Two ways in which demand may
increase
 (2) A movement of the
demand curve from D0
to D1
 leads to an increase in
P0 C demand at each price
A
 e.g. at P0 quantity
B demanded increases from
D1 Q0 to Q1
D0
Q0 Q1 Quantity
49