DEMAND & SUPPLY

CONTENT

Demand
 Supply
 Market equilibrium

1 Copyright © 2014 by Quan Hong NGUYEN

 DEMAND & SUPPLY
I. Demand

1. Definition
2. The law of demand
3. Demonstrating demand
4. Determinants in demand function
5. Movement and shift of demand curve

2 Copyright © 2014 by Quan Hong NGUYEN

 DEMAND
1. Definition
- Demand (D): An economic principle describes the
quantity of goods/services that consumer is willing to
buy and afford to buy at various price level in a certain
time, ceteris paribus.
- Quantity demanded (QD): The quantity of goods and
services that consumer is willing to buy and afford to buy
at a price level in a certain time, ceteris paribus.
- Individual demand is the demand of one individual or
firm.
- Market demand is the sum of the individual demand
for a product from buyers in the market.
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 Market demand as the sum of individual demands
(demand schedule)

Price of ice-cream cone Catherine Nicholas Market

$0.00 12 + 7 = 19
0.50 10 6 16
1.00 8 5 13
1.50 6 4 10
2.00 4 3 7
2.50 2 2 4
3.00 0 1 1

The quantity demanded in a market is the sum of the quantities demanded by all the
buyers at each price. Thus, the market demand curve is found by adding horizontally
the individual demand curves. At a price of $2.00, Catherine demands 4 ice-cream
cones, and Nicholas demands 3 ice-cream cones. The quantity demanded in the
market at this price is 7 cones.
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 Market demand as the sum of individual demands
Catherine’s Nicholas’s Market
demand + demand = demand
Price of Price of Price of
Ice Ice Ice
Cream Cream Cream
Cones Cones Cones
$3.00 DCatherine $3.00 $3.00
DNicholas
2.50 2.50 2.50

2.00 2.00 2.00

1.50 1.50 1.50

DMarket
1.00 1.00 1.00

0.50 0.50 0.50

0 1 2 3 4 5 6 7 8 9 10 11 12 0 1 2 3 4 5 6 7 0 2 4 6 8 10 12 14 16 18
Quantity of Ice-Cream Cones Quantity of Quantity of Ice-Cream Cones
Ice-Cream Cones
5
 DEMAND
2. The law of demand
In a certain time, ceteris paribus, when the price of a good/service
rises, the quantity demanded of the good falls, and when the price
falls, the quantity demanded rises.
P QD
P QD

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 DEMAND
3. Demonstrating demand
- Demand schedule (Ex: Lavie)
P
- Demand curve
- Demand function
QD = aP + b (a < 0) A
P1
P = cQD + d (c < 0)
General form: P2 B
QD = f (Px, Py, I, T, E, N)

Q1 Q2 Q

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 DEMAND
4. Determinants in demand function
4.1. Price of related goods (PY)
- Substitutes goods: A and B are substitutes if the usage of A can
be replaced by the usage of B, provided that the initial
consumption target is unchanged

(Price of substitutes goods) PS ↑ → QDs ↓ → QDx ↑

(Price of substitutes goods) PS ↓ → QDs ↑ → QDx ↓

→ covariates

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 DEMAND
4.1. Price of related goods (PY)
- Complement goods: A and B are complements if the usage of A
must go together with the usage of B to ensure the initial utility
of both goods.

PC ↑ → QDc ↓ → QDx ↓
PC↓ → QDc ↑ → QDx ↑

→ inverse

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 DEMAND
4.2. Income of consumer (I)
(afford to buy)

I QD Normal goods
I QD

I QD
Inferior goods
I QD

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 DEMAND
4.2. Income of consumer (I)

- Engel curve: Attitude

toward any goods depends I3 Inferior
on buyer’s income, not on
goods’ quality
I*

I2

Normal
I1

Q1 Q3 Q2 Q

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 DEMAND
4.3. Taste of consumer (T)
The most obvious determinant of your demand is your tastes
(willing to buy)
Economists examine what happens when tastes change
4.4. Expectation of customers – E
Your expectations about the future may effect your demand for a
good/service at the present.
Ex: you have more income next month, you will spend more at the
present and future.
4.5. Number of consumers – N
In addition to the preceding factors, which influence the behavior
of individual buyers, market demand depends on the number of
these buyers.
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 DEMAND
4.4. Expectation of customers – E
Your expectations about the future may effect your demand for a
good/service at the present.
Ex: you have more income next month, you will spend more at the
present and future.
4.5. Number of consumers – N
In addition to the preceding factors, which influence the behavior
of individual buyers, market demand depends on the number of
these buyers.
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 DEMAND
5. Movement and shift of demand curve
- Movement): PX - endogenous variables
- Shift: The rest determinants - exogenous variables

P P

A
P1

B P
P2

Q1 Q2 Q Q1 Q2
Q
14 Copyright © 2012 by Quan Hong NGUYEN
 DEMAND & SUPPLY
I. Supply

1. Definition
2. The law of supply
3. Demonstrating supply
4. Determinants in supply function
5. Movement and shift of supply curve

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 SUPPLY
1. Definition
- Supply (S): An economic principle describes the
quantity of goods/services that supplier is willing to
supply and able to supply at various price level in a
certain time, ceteris paribus.
- Quantity supplied (QD): The quantity of goods and
services that supplier is willing to supply and able to
supply at a price level in a certain time, ceteris paribus.
- Individual supply is the supply of one individual or
firm.
- Market supply is the sum of the individual supply for
a product from sellers in the market.
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 Market supply as the sum of individual supplies
(supply schedule)

Price of ice-cream cone Ben Jerry Market

$0.00 0 + 0 = 0
0.50 0 0 0
1.00 1 0 1
1.50 2 2 4
2.00 3 4 7
2.50 4 6 10
3.00 5 8 13

At a price of $2.00, Ben supplies 3 ice-cream cones, and Jerry supplies 4 ice-
cream cones. The quantity supplied in the market at this price is 7 cones

17
 Market supply as the sum of individual supplies
Ben’s Jerry’s Market
supply + supply = supply
Price of Price of Price of
Ice Ice Ice
Cream Cream Cream
Cones SBen Cones Cones
$3.00 $3.00 $3.00 SMarket
SJerry
2.50 2.50 2.50

2.00 2.00 2.00

1.50 1.50 1.50

1.00 1.00 1.00

0.50 0.50 0.50

0 1 2 3 4 5 6 7 8 9 10 11 12 0 1 2 3 4 5 6 7 0 2 4 6 8 10 12 14 16 18
Quantity of Ice-Cream Cones Quantity of Quantity of Ice-Cream Cones
Ice-Cream Cones
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 SUPPLY
2. The law of supply
In a certain time, ceteris paribus, when the price of a good/service
rises, the quantity supplied of the good also rises, and when the
price falls, the quantity supplied also falls.

P QS
P QS

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 SUPPLY
3. Demonstrating supply

- Supply schedule
P
- Supply curve
- Supply function P2
QS = aP + b (a > 0)
P = cQS + d (c > 0) P1
General form:
QS = f (Px, Pi, Te, G, E, N)
Q1 Q2
Q

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 SUPPLY
4. Determinants in supply function
4.1. Price of inputs - Pi

Pi C ∏ QS
Pi C ∏ QS

4.2. Technology - Te
4.3. Government’s policies - G
4.4. Expectation of suppliers – E
4.5. Number of suppliers – N

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 SUPPLY
5. Movement and shift of the supply curve
- Movement: PX - endogenous variables
- Shift: The rest determinants - exogenous variables

P S1
S P
S2
B
P2
A P1
P1

Q1 Q2 Q Q1 Q2 Q
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 DEMAND & SUPPLY

III. Market equilibrium

1. Equilibrium status
2. Surplus and shortage
3. Price controlling

23 Copyright © 2012 by Quan Hong NGUYEN

 Market equilibrium
1. Equilibrium status
1.1. Definition
 Equilibrium - a situation
 Market price has reached the level :
 Quantity supplied = quantity demanded

 Equilibrium price - the price:

 Balances quantity supplied and quantity demanded
 Equilibrium quantity
 Quantity supplied and the quantity demanded at the
equilibrium price

24 Copyright © 2014 by Quan Hong NGUYEN

 Market equilibrium
1. Equilibrium status
1.2. Method of determining
P
- Merger demand schedule and S
supply schedule
- Intersection of (S) and (D)
- Solve the system of equations
PE E

{ QD = aP + b
QS = cP + d
D
=> E(PE, QE)

QE Q

25 Copyright © 2014 by Quan Hong NGUYEN

 Market equilibrium
The equilibrium of supply and demand
Price of
Ice-Cream
Cones
Supply
$3.00

2.50
Equilibrium
price Equilibrium
2.00

1.50

1.00
Demand
Equilibrium
0.50
quantity

0 1 2 3 4 5 6 7 8 9 10 11 12

Quantity of Ice-Cream Cones

26 Copyright © 2012 by Quan Hong NGUYEN

 Supply and Demand Together
 Surplus
 Quantity supplied > quantity Surplus
demanded P1
+ P1 > PE PE
+ QS > QE > QD
 Excess supply QD QS
QE
 Downward pressure on price Surplus

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 Supply and Demand Together
 Shortage
 Quantity demanded > PE
quantity supplied
+ P2 < PE P2
+ QS < QE < QD Shortage
 Excess demand
 Upward pressure on price QS QE QD

Shortage

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 Markets not in equilibrium
(a) Excess Supply (b) Excess demand
Price of Price of
Ice Ice
Cream Supply Supply
Surplus Cream
Cones Cones

$2.50

2.00 $2.00

1.50
Demand Demand
Quantity Quantity Quantity Quantity
demanded supplied supplied Shortage
demanded
0 4 7 10 0 4 7 10
Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones
In panel (a), there is a surplus. Because the market price of $2.50 is above the equilibrium price,
the quantity supplied (10 cones) exceeds the quantity demanded (4 cones). Suppliers try to
increase sales by cutting the price of a cone, and this moves the price toward its equilibrium level.
In panel (b), there is a shortage. Because the market price of $1.50 is below the equilibrium price,
the quantity demanded (10 cones) exceeds the quantity supplied (4 cones). With too many buyers
chasing too few goods, suppliers can take advantage of the shortage by raising the price. Hence,
in both cases, the price adjustment moves the market toward the equilibrium of supply and
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demand
Supply and Demand Together
 Law of supply and demand
 The price of any good adjusts
 Bring the quantity supplied and the quantity
demanded into balance
 In most markets
 Surpluses and shortages are temporary

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Supply and Demand Together
 Three steps to analyzing changes in
equilibrium
1. Decide: the event shifts the supply curve, the
demand curve, or both curves
2. Decide: curve shifts to right or to left
3. Use supply-and-demand diagram
 Compare initial and new equilibrium
 How the shift affects equilibrium price and
quantity

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 How an increase in demand affects the equilibrium
Price of
Ice-Cream
Cones Supply 1. Hot weather
increases the demand
for ice cream . . .
2. …resulting in
a higher price . . .
$2.50 New equilibrium

2.00
Initial equilibrium

D2
D1

3. …and a higher quantity sold.

0 7 10
Quantity of Ice-Cream Cones

An event that raises quantity demanded at any given price shifts the demand
curve to the right. The equilibrium price and the equilibrium quantity both rise.
Here an abnormally hot summer causes buyers to demand more ice cream. The
demand curve shifts from D1 to D2, which causes the equilibrium price to rise
from $2.00 to $2.50 and the equilibrium quantity to rise from 7 to 10 cones
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 How a decrease in supply affects the equilibrium
Price of
Ice-Cream 1. An increase in the
Cones
price of sugar reduces
S2
the supply of ice cream . . .
2. …resulting in
a higher price . . . S1
$2.50
New equilibrium

2.00
Initial equilibrium

Demand

3. …and a smaller quantity sold.

0 4 7
Quantity of Ice-Cream Cones

An event that reduces quantity supplied at any given price shifts the supply curve
to the left. The equilibrium price rises, and the equilibrium quantity falls. Here an
increase in the price of sugar (an input) causes sellers to supply less ice cream.
The supply curve shifts from S1 to S2, which causes the equilibrium price of ice
cream to rise from $2.00 to $2.50 and the equilibrium quantity to fall from 7 to 4
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cones
 A shift in both supply and demand
Price of (a) Price Rises, Quantity Rises Price of (b) Price Rises, Quantity Falls
Ice Ice S2
Cream New Cream Small
Cones Large equilibrium S2
S1 Cones increase S1
in demand
increase New
in demand equilibrium
P2 P2

Large
D2 decrease
P1 Small P1 in supply
decrease
in supply D2

Initial Initial
equilibrium D1
D1 equilibrium

0 Q1 Q2 0 Q2 Q1

Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones

Here we observe a simultaneous increase in demand and decrease in supply. Two

outcomes are possible. In panel (a), the equilibrium price rises from P 1 to P2, and the
equilibrium quantity rises from Q1 to Q2. In panel (b), the equilibrium price again rises
from P1 to P2, but the equilibrium quantity falls from Q1 to Q2.
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 Market equilibrium
What happens to price and quantity when supply or
demand shifts?
No change An increase A decrease
In Supply In Supply In supply
No change P same P down P up
In demand Q same Q up Q down

An increase P up P ambiguous P up
In demand Q up Q up Q ambiguous

A decrease P down P Down P ambiguous

In demand Q down Q ambiguous Q down

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 Market equilibrium
3. Price controlling
- Controlled by the Government
- PC - Ceiling price
+ The highest price allowed
in the market
PE E
+ For the sake of buyer
+ Appear shortage PC
+ Government’s responsibility (G)

QS QE QD

36 Copyright © 2012 by Quan Hong NGUYEN

 Market equilibrium
3. Price controlling
-PF – Floor price
-The lowest price allowed in the
market (G)
- For the sake of supplier PF
- Appear surplus
- Government’s responsibility PE

QD QE QS

37 Copyright © 2012 by Quan Hong NGUYEN