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CHAPTER 2. SUPPLY AND DEMAND

Supply &
Demand Supply Demand
together

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Demand

Basic concepts

Law of demand

Demand schedule, demand curve and demand function

Movements along the Demand curve vs shifts in the demand curve

Demand Curve Shifters

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Basic concepts
- Quantity demanded: the amount of a good that buyers are willing and
able to purchase at a certain price, ceteris paribus.
- Demand: the amount of a good that buyers are willing and able to
purchase at different prices, ceteris paribus.
- Individual demand vs. market demand:
The quantity demanded in a market is the sum of the quantities
demanded by all the buyers.

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An example:

P QD Anna QD Ben QD Market

10 20 30

20 15 20

30 10 10

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Law of demand

• Law of demand: the claim that the quantity demanded of a good

falls when the price of the good rises, other things equal

• Examples?

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Demand schedule, demand curve

• Demand schedule is a table that shows the relationship

between the price of a good and the quantity demanded

• Demand curve is a graph of the relationship between the price

of a good and the quantity demanded

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30

20

10

0 20 35 50 QD

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Demand function

• In general:
QD = f (P, other factors)

• For linear demand curve:

QD = a P + b (a<0)

P = c QD + d (c<0)

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Find the demand

function of the
market.
P QD market

10 50

20 35

30 20

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Changes in Quantity Demanded

verus Shifts in the Demand Curve

• Change in Quantity Demanded

• Movement along the demand curve.

• Caused by a change in the price of the product.

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A
P1

P2 B
D

0 Q1 Q2 Q
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Changes in Quantity Demanded

verus Shifts in the Demand Curve

• Change in Quantity Demanded

• Movement along the demand curve.
• Caused by a change in the price of the product.

• Change in Demand
• A shift in the demand curve, either to the left or right.
• Caused by any change that alters the quantity demanded at every
price.

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D3 D1 D2
0
Q
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Demand Curve Shifters

• Prices of related goods (PY)

• Consumer income (I)

• Tastes (T)

• Expectations (E)

• Number of buyers (N)

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Demand Curve Shifters: Prices of Related Goods

• Two goods are substitutes if an increase in the price of one

causes an increase in demand for the other.

• Example:

• Coke and Pepsi

• Dasani & Lavie

• “Bun” & “Pho”

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Demand Curve Shifters: Prices of Related Goods

• Two goods are complements if an increase in the price of one

causes a fall in demand for the other.

• Example:

• computers and software,

• printer and ink,

• motorbike and petrol

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Demand Curve Shifters: Income

• Demand for a normal good is positively related to income.

(An increase in income shifts D curves for inferior goods to the right.)

• Demand for an inferior good is negatively related to income.

(An increase in income shifts D curves for inferior goods to the left.)

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Demand Curve Shifters: Taste

• Anything that causes a shift in tastes toward a good will

increase demand for that good and shift its D curve to the right.

• Example:

• Health caring trend increases the demand for Diet Coke

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Demand Curve Shifters: Expectations

• Expectations affect consumers’ buying decisions.

• Examples:

• When consumers know that the price of petrol will increase in the next
few hours, they tend to buy more.

• If the economy sours and people worry about their future job security,
demand for new autos may fall now.

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Demand Curve Shifters: Number of buyers

• Increase in number of buyers increases quantity demanded at

each price, shifts D curve to the right.

• Example:

• After summer vacation, the number of buyers of “Banh my” in front of

FTU increases, hence the quantity demanded increases at each price.

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Supply

Basic concepts

Law of supply

Supply schedule, supply curve and supply function

Movements along the supply curve vs shifts in the supply curve

Supply Curve Shifters

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Basic concepts
- Quantity supplied (Qs): the amount of a good that buyers are willing and
able to sell at a certain price, ceteris paribus.
- Demand (S): the amount of a good that buyers are willing and able to sell
at different prices, ceteris paribus.
- Individual supply vs. market supply:
The quantity supplied in a market is the sum of the quantities supplied by
all the sellerss.

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An example:

P QS Tocotoco QS Feeling tea QS Market

10 5 10

20 15 20

30 25 30

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Law of supply

• Law of supply: the claim that the quantity supplied of a good

increases when the price of the good rises, other things equal

• Examples?

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Supply schedule, supply curve

• Supply schedule is a table that shows the relationship

between the price of a good and the quantity supplied.

• Supply curve is a graph of the relationship between the price

of a good and the quantity supplied.

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30 S

20

10

0 15 35 55 Q
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Supply function

• In general:
QS = f (P, other factors)

• For linear demand curve:

QS = a P + b (a>0)

P = c QS + d (c>0)

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Find the supply

function of the
market
P Qs market

10 15

20 35

30 55

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Changes in Quantity supplied

verus Shifts in the Supply Curve

• Change in Quantity Supplied

• Movement along the supplied curve.

• Caused by a change in the price of the product.

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P2
N

P1 M

0 Q1 Q2 Q
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Changes in Quantity supplied

verus Shifts in the Supply Curve

• Change in Quantity Supplied

• Movement along the supplied curve.

• Caused by a change in the price of the product.

• Change in Supply
• A shift in the supply curve, either to the left or right.

• Caused by any change that alters the quantity supplied at every price.

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P
S2
S1

S3

0 Q
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Supply Curve Shifters

• Input prices

• Government policies

• Technology

• Expectations

• Number of sellers

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Supply Curve Shifters: Input prices

• A fall in input prices makes production more profitable at each output price,
so firms supply a larger quantity at each price, and the S curve shifts to the
right.

• Examples of input prices:

wages, prices of raw materials.

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Supply Curve Shifters: Government policies

• An increase in tax on sellers shifts the supply curve to left.

• An increase in subsidy on sellers shifts the supply curve to the right

• If the government levy the tax of $t per unit of quantity, the supply curve
will shift upwards by t.

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Supply Curve Shifters: Technology

• Technology determines how much inputs are required to produce a unit of

output.

• A cost-saving technological improvement has the same effect as a fall in

input prices, shifts S curve to the right.

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Supply Curve Shifters: Expectations

• In general, sellers may adjust supply* when their expectations of

future prices change.
(*If good not perishable)

• Example: when house prices are expected to increases, sellers

may want to sell them in the future instead of selling them now.

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Supply Curve Shifters: Number of sellers

• An increase in the number of sellers increases the quantity

supplied at each price, shifts S curve to the right.

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Supply and Demand together

Market equilibrium

Shortage and Surplus

Price control
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Market equilibrium

• Equilibrium is a situation in which supply and demand have been

brought into balance.

• Equilibrium price is the price that balances supply and demand.

• Equilibrium quantity is the quantity supplied and the quantity

demanded when the price has adjusted to balance supply and
demand.

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An example:

P QD market QS market

10 50 15

20 35 35

30 20 55

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PE = 20 E

0 QE = 35 Q

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Find the equilibrium

• Demand function is QD = -1.5 P + 65

• Supply function is QS = 2P - 5

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Surplus and shortage

• Surplus is a situation in which quantity supplied is greater than

quantity demanded.

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Surplus
P1 S

PE E

0 QD1 QE QS1 Q
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Surplus and shortage

• Surplus is a situation in which quantity supplied is greater than

quantity demanded.

• Shortage is a situation in which quantity demanded is greater

than quantity supplied

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PE E

P2 D

Shortage

0 QS2 QE QD2 Q

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Surplus and shortage

• Surplus is a situation in which quantity supplied is greater than

quantity demanded.

• Shortage is a situation in which quantity demanded is greater than

quantity supplied

• Law of supply and demand is the claim that the price of any good
adjusts to bring the supply and demand for that good into balance

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Price controls
• Price ceiling: a legal maximum on the price of a good or service
• A price ceiling above the equilibrium price is not binding –it has no effect on the
market outcome.
• The ceiling below the equilibrium price is a binding constraint on the price, and
causes a shortage.

• Price floor: a legal minimum on the price of a good or service

• A price floor below the equilibrium price is not binding –it has no effect on the market
outcome.
• The price floor above the equilibrium price is a binding constraint on the price, and
causes a surplus.
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