eco-2-Demand-and-Supply.

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Introducción a la Economía

1º Grado en Administración y Dirección de Empresas

Facultad de Economía
Universitat de València

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 Demand and Supply

1. Markets and competition: types of markets

Market: The meeting point for buyers and sellers.

Features that make markets different:

1) Number of buyers and sellers
2) Degree of product similarity/homogeneity
3) Easiness with which firms can enter or leave the market
4) Existence (or inexistence) of strategic interaction between buyers and sellers
5) Existence (or inexistence) of agreements between buyers and sell
Depending on these characteristics, markets can take different forms: competitive, monopoly, oligopoly,
monopolistic competition, etc.
We use the competitive market as a benchmark model:
- Homogeneous (non-differentiated) products
- Many buyers and many sellers.
↳Buyers and Sellers are price-takers. They are MANY and have no influence over price.

2. The demand curve: concept and shifts

Demanded Quantity: the total amount of a good or service that consumers demand over a given time interval.

Determinants of the demanded quantity:

1) Price of the good (P).
2) Price of other goods (Py, Pz, ...).
3) Consumers’ income (I).
4) Expectations on the evolution of the good’s price or availability (E).
5) Finance facility and finance cost (r).
6) Tastes and preferences (T).

DEMAND FUNCTION: what describes a relationship between one variable and its determinants, describes
how much quantity of goods is purchased at alternative prices of goods and related goods, alternative income
levels, and alternative values of other variables affecting demand. Changes in the demanded quantity can come
from the variation of each one of its determinants.
↳Qd = D (P, Py, Pz, I, E, r, T)

CETERIS PARIBUS CLAUSE: (all other things being equal)indication of the effect one economic variable has
on another, provided all other variables remain the same.

Sign of the determinants of Qd (Remember! Ceteris paribus clause):

* P and Qd change in opposite directions: dQd /dP → DEMAND LAW (when the price↗, the quantity
demanded ↘ – and vice versa)
* If y and x are complements, Py and Qd change in opposite directions: dQd / dPy < 0
* If z and x are substitutes, Pz and Qd change in the same direction: dQd / dPz > 0
* If x is a normal good, Qd and I change in the same direction: dQd /dI > 0
* If x is an inferior good, Qd and I change in opposite directions: dQd /dI < 0

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Reservados todos los derechos. No se permite la explotación económica ni la transformación de esta obra. Queda permitida la impresión en su totalidad.
 * If the price of the good is expected to increase (decrease) in the future, Qd increases (decreases).
* If the availability of the good is expected to increase (decrease) in the future, Qd decreases (increases)
* If the finance cost decreases (increases), Qd increases (decreases).
* If the finance facility increases (decreases), Qd increases (decreases).
* If the tastes become more (less) favorable towards the good, Qd increases (decreases).

Example: Qd = -20P + 2I – 500r + 10Pa + 2Ph - Ps

Reservados todos los derechos. No se permite la explotación económica ni la transformación de esta obra. Queda permitida la impresión en su totalidad.
Qd= quantity of demanded houses each year P = House
price (hundreds €) I = Consumers’ total income (hundreds
€) r = Interest rate (%) Pa = Price of rental housing
(hundreds €) Ph = Price of a hotel room (hundreds €) Ps =
Price of house insurance (hundreds €)
P = 5; I = 200; r = 0.03; Pa = 1; Ph = 0.5; Ps = 1 Qd = 295

What if one of the variables affected by the ceteris paribus

clause changes?
Income ↘ to I’ = 100 → New demand curve: Qd = 195 - 20P
With respect to the first one, it maintains the slope, but it is
shifted to the left
↓
For any price, the demanded quantity is lower than in the initial
situation. → SHIFT OF THE DEMAND CURVE → decrease
in demand
Variations in the demanded quantity → cause movements along the demand curve if there is a change in the
price of a good
Changes in the demand → The demand curve will shift if there is a change in other variables that affect it

3 The supply curve: concept and shifts

Supplied Quantity: Amount of the good that producers want and can sell for every unit of time.
Determinants of the supplied quantity:
1) Price of the good (P).
2) Price of factors of production (w, r).
3) Production technology (MgPL, MgPK ). 4) Number of sellers (n).
5) Other factors (OF): climate (agriculture, hostelry, etc.), prestige (culture)...

SUPPLY FUNCTION: Associates the supplied quantity with its determinants. Changes in the supplied quantity
can come from the variation of each one of its determinants.
↳Qs = S (P, w, r, MgPL, MgPK, OF)

Sign of the determinants of Qs (Remember! Ceteris paribus clause):

* QS and P move in the same direction: dQs /dP > 0
* Qs and the price of production factors move in opposite directions: dQs /dw < 0, dQs /dr < 0
* Qs and the productivity of production factors in the same direction: dQs /dMgPL > 0, dQs /dMgPK > 0
* Qs and the number of sellers move in the same direction: dQs /dn > 0

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 Reservados todos los derechos. No se permite la explotación económica ni la transformación de esta obra. Queda permitida la impresión en su totalidad.
4. The market equilibrium
Is a market state where the supply in the market is equal to the demand in the market, the sold quantity and the
bought quantity in the market must be the same. (Intersection of the supply and demand curves)
The market equilibrium changes when any of the variables change, when the supply and/or demand curve shifts.

5. Changes in the equilibrium

INCREASE IN SUPPLY→ increase in quantity, decrease in prices.
DECREASE IN SUPPLY→ Decrease in quantity, increase in price

INCREASE IN DEMAND→ increase in quantity, increase in price

DECREASE IN DEMAND→ decrease in quantity, decrease in price

When there is a shift in both supply and demand:

Shifts in the demand: positive relation with price and quantity.
Shifts in the supply: positive relation with quantity and negative with price.

1) ⬆S and ⬆D →⬆Q The change in P depends on the relative dimension of the changes in S and D.
2) ⬇S and ⬇D →⬇Q
3) ⬆S and ⬇D →⬇P The change in Q depends on the relative dimension of the changes in S and D.
4) ⬇S and ⬆D →⬆P

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