Ch.

2: Demand and Supply

Ch. 3: Competitive Economics

What is Demand
Quantity of a goods or service that consumers (buyers) are willing and able to buy at various prices in
particular period of time.

Price per CD Quantity Demanded #1 Quantity Demanded #2

$10 1 2
8 2 4
6 3 6
4 4 8
2 5 10

Characteristics of Demand

i) Slope downward to the right

ii) P  Q d and P  Q d

This relationship is called Law of Demand

Change in Demand Vs. Change in Quantity Demanded

Change in Demand
 Different quantity of goods being demanded at each of previous prices
 Shift in Demand curve

Change in Quantity Demanded

 Demand curve unchanged
 Movement along the curve
 The effect of change in price
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Changes in Demand
1. Number of buyers  more buyers = more demand & fewer buyers = less demand
2. Income effect  for normal products increased income = increased demand, BUT for inferior
products (e.g. Kraft dinner) increased income = decreased demand
3. Prices of Substitute Products  margarine and butter
4. Prices of Complementary Products  cars and gasoline
5. Consumer Preferences  DVDs more popular than video tapes
6. Consumer Expectations  expect price to change in the future (e.g. gas price increases in the
future so buy now)

Utility Maximization
 Measurement in utils of human satisfaction when consuming products
 Consume up to and including the point where your satisfaction level is equal between two
products MU / P1 = MU / P2
 Law of Diminishing Marginal Utility  satisfaction diminishes with increased consumption
therefore must decrease price to increase consumption

The Nature of Supply

What is supply
 Refers to “the relationship between the various possible prices of a product and the quantities
of the product that businesses are willing to put on the market”

Supply Schedule for final exams in economics class

Price per exam Quantity teacher is willing to sell

$10 000 5
$ 8 000 4
$ 6 000 3
$ 4000 2
$ 3000 1
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Characteristics of Supply
i) upward sloping to the right
ii) PQs
iii) P Qs
This direct relationship between price and the quantity supplied (ceteris paribus) is called the law of
supply

Changes in supply
 a change (increase or decrease) in the quantity supplied of a commodity at each price in the
supply schedule

Causes (Supply Determinants)

i) number of producers-increase in producers leads to increase in supply (shift to right)
ii) resource prices (cost of production) – higher costs less supply
iii) state of technology – increased efficiency leads to increased supply
iv) changes in nature (e.g. drought, flood, earthquake, early frost)
v) prices of related products

Change in Supply vs. Change in Quantity Supplied

 change in supply illustrated by movement of the curve to left or right
 caused by change in supply determinant
 change in quantity supplied illustrated by movement on the curve
 the effect of a change in price

Elasticity
 sensitivity of quantity demanded and supplied to price

1. Elastic Demand / Supply

 price increase met by a larger corresponding increase in quantity demanded / supplied
(e.g. good with many substitutes like Big Mac for demand / plastic toys with molds already
existing for supply)
∆Q ÷ Avg. Q > 1
Dd  P ↑  TR ↓ ∆P ÷ Avg. P

2. Inelastic Demand / Supply

 price increase met by a less than corresponding increase in quantity demanded / supplied
(e.g. essential good like medicine or cheap product like salt for demand / limited amount of
goods such as agriculture for supply)
∆Q ÷ Avg. Q = 0 - 1
Dd  P ↑  TR ↑ ∆P ÷ Avg. P

3. Unit Elastic Demand / Supply

 price increase met by a corresponding increase in quantity demanded / supplied (e.g. cars for
demand / oil for supply)
∆Q ÷ Avg. Q = 1
Dd  P ↑  TR - ∆ P ÷ Avg. P
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 INTERACTION OF SUPPLY AND DEMAND
Equilibrium Price
- a price determined in the marketplace by the interaction of supply and demand

Equilibrium Quantity
- the quantity sold (bought) at the equilibrium price

At the point of equilibrium: Qs = QD

 therefore no excess demand or supply
 therefore price is stable with no pressure to increase or decrease
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Excess Supply (Price Floor)

Qs  QD, therefore sellers have to lower price to sell surplus products
-lower price will cause consumers to increase the quantity they demand of the product and sellers to
decrease the quantity they supply.
-in a situation of excess supply there will be pressure on price to drop which will cause quantity
demanded to increase and quantity supplied to decrease until they equal one another (i.e.
equilibrium)

Excess Demand (Price Ceiling)

QD Qs
-therefore sellers can raise price to exploit shortage of product
-higher price will cause consumers to decrease the quantity they demand of the product and sellers to
increase the quantity they sell
-in a situation of excess demand there will be pressure on the price to rise which will cause quantity
demanded to decrease until they equal one another (i.e. equilibrium)

Product: Final Exams Market: Economics Class

P- Price in thousands of dollars
Qs-Quantity Supplied of final exams
QD-Quantity demanded of final exams

P Qs QD
10 10 2
8 8 4
6 6 6
4 4 8
2 2 10
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1. Plot the following on a graph

2. Show the equilibrium price and quantity
3. What is the situation when the teacher charges $8000
4. What is the situation when the teacher charges $4000

Changes in Supply and Demand

In competitive markets supply and demand interact freely to determine the equilibrium
price and quantity, which will change as supply or demand change.

Product: Final Exams Market: Gr. 12 Economics Class

P Qs QD P – Price of thousands of dollars

Qs – Quantity Supplied of final exams
$10 10 2 QD - Quantity Demanded for final exams
8 8 4
6 6 6 In equilibrium P= $ 6000.00
4 4 8
2 2 10

1. What would the equilibrium price and quantity be if the teacher supplies two less
exams at each of the previous prices?

Show this on a market schedule and graphical illustration.

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P Qs0 Qs1 QD

$10 10 8 2
8 8 6 4
6 6 4 6
4 4 2 8
2 2 0 10

2. Assuming equilibrium price is $6000 and quantity is 6 final exams what would
occur if the students in the teacher’s class demand two more exams at each of
the previous prices.
Show this on a market schedule and graphical illustration.

P Qs QD0 QD1

$10 10 2
8 8 4
6 6 6
4 4 8
2 2 10