2.

DEMAND, SUPPLY, AND MARKET

EQUILIBRIUM
PART I
Outline
(A) Demand
(B) Supply
(C) Market Equilibrium
(D) Effects of Changes in Demand and Supply
(A) Demand

• Demand is a desire to buy something with an ability to pay for it.

Demand = Willingness + Ability to pay
• The buying decisions are affected by several factors such as:
1- Price of the good
2- Income
3- Prices of related goods
4- Advertising
5- Consumer tastes
6- Consumer expectations
7- Population
(A) Demand

• The relationship between the quantity demanded from a good and all the factors
affecting it can be represented by the demand function.
Qxd = f(𝐏𝐱 , PY , M, H)
Qxd = quantity demand of good X
Px = price of good X
PY = price of a related good Y
M = income
H = any other variable affecting demand
(A) Demand

• Demand is affected by many factors, but the price of the good demanded is the
most important factor.
• The relation between the quantity demanded of a good and its price is known as
the law of demand.
• The law of demand states that when the price of a good rises (falls), the quantity
demanded from that good falls (rises), other things remaining the same.
• The demand curve is downward sloping.
(A) Demand

Example:
Demand Function
Qxd = 10 – 2Px
Inverse Demand Function:
2Px = 10 – Qxd
Px = 5 – 0.5Qxd