Chap 2: SUPPLY AND DEMAND

I. DEMAND
1.1. Definition

• Demand (D) describes the quantity of goods/services that consumers are willing to
buy and afford to buy at various price levels during a period of time, ceteris paribus.

• Quantity demanded (QD) describes the quantity of goods and services that
consumers are willing to buy and afford to buy at a particular price level in a certain
time, ceteris paribus.

=> Demand describes the relationship of price and quantity demanded

Graphed out, demand is the entirety of the demand curve, whereas quantity
demanded is a single point

Question: Demand = ∑Quantity demanded ?

=> No, D is not a number ( contrast to Qd), it just shows the relationship between…
( D is a curve)
 1.2. Law of demand ( nghịch biến)

• The claim that other things equal: the quantity demanded (Qd) of a good falls when
the price (P) of the good rises, and vice versa.

P ↑ ⇒ Qd ↓
P ↓ ⇒ Qd ↑
• Reasons (2) : ceteris paribus
+ Budget unchanged -> buy the same product less
+ As the price of a good increases, consumers tend to purchase less of that good
because it becomes relatively more expensive compared to other ( substitute)
goods ( with the price unchanged - cheaper - )
=> buy another (brand) good with cheaper price instead

+ On the other hand, as the price of a good decreases, consumers tend to purchase
more of that good because it becomes relatively cheaper compared to other
goods.
=> Therefore, the price and quantity demanded of a good have an inverse relationship.

1.3. Illustrating demand

• Demand schedule :
a table that shows the relationship between the price of a good and the quantity
demanded
• Demand curve :
a downward-sloping curve that shows the relationship between the price of a good
and the quantity demanded

• Demand equation :
Describes the relationship of price and quantity demanded

Qd = a.P + b
( y = ax +b )
Where:
a, b = parameter

a = ∆Qd/∆P ( change in Qd / change in P ) , a < 0

( Q2-Q1 / P2-P1 )

a: slope of demand curve

b: = Qd when P=0

Ex: Finding the demand equation of A ? Qd = aP + b

Step 1: Find a

a = ∆Qd/∆P = -1/30

Step 2: Plug in random couple of Qd and P => Find b

1 = -1/30 x 60 + b => b = 3

Step 3: Conclude

Qd = 3 - 1/30P
C2: System of equation:
2 = a.30 + b
1 = a.60 + b
=> a=…, b=….

Individual demand – Market demand

• The quantity demanded in the market is the sum of the quantities demanded (Qd)
by all buyers at each price: Qd(MK) = QdA + QdB + …

Market demand curve :

1.4. Determinants of demand : Pr, I, N, T, E

• Price of related goods (Pr) :

Hàng thay thế: Pr↑→D↑ (Pr↓→D↓) Substitute

=> P sp B tăng -> mua A ( alternative của B) thay vì B => D dành cho sp A tăng
VD: cùng là nước ngọt : Coca vs Pepsi

Hàng bổ sung: Pr↑→D↓ (Pr↓→D↑) Complement

=> P sp B tăng -> D sp B giảm => D dành cho sp A ( bổ sung của sp B ) giảm
VD: P xe tăng -> giảm D xe -> giảm D xăng

Phone n charger
• Income (I) :

Hàng thông thường: I↑→ D↑ (I↓ → D↓) Normal

VD: quần áo, gạo, đồ gia dụng …

Hàng thứ cấp: I↑→ D↓ (I↓→ D↑) Inferior

Hàng hóa thứ cấp có đặc điểm là chất lượng thấp – và là hàng hóa có các lựa chọn
thay thế tốt hơn.
VD: mì gói, đồ hộp, ….

*normal or inferior depends on individuals

*undesirable goods => neither => Not related to D

• Number of buyers (N) :

N↑→ D↑ (N↓→ D↓)
• Taste (T) : ( liking)
T↑→ D↑ (T↓→ D↓)

How to: advertise, influencers, alter the price….

• Expectation (E) :
E↑→ D↑ (E↓→ D↓)

Expect tomorrow the price go up => buy it now ( when still cheap ) => D rises
1.5. Movement and shift of DEMAND curve

• Moving along the D curve when price changes => D curve unchanged.

• Shifting D curve when non-price determinants change

D↑ => D curve shifts to the right

D↓ => D curve shifts to the left

Questions: D curve shifts to ...?
• N↑ : right
• Pr↑ (Complements) : left
• Pr↑ (Substitutes) : right
• T↓ : left
• E↑ : right
• I↑ : depends on what kind of good ( normal : right, inferior :
left )
• P↑ : unchanged

Question: if P of Pepsi decreases: The demand curve of Coca changes?

Question: if P of Toothbrush increase: The demand curve of Toothpaste changes?

*increase income is the key to solve many economic problems ( khủng hoảng thừa)
II. SUPPLY
2.1. Definition

• Supply (S) describes the quantity of goods/services that ___sellers___ are willing to
sell and able to __sell____at ____various price levels____ in a certain time, ceteris
paribus.

• Quantity supplied (Qs) describes the quantity of goods and services that sellers are
willing to sell and afford to sell at___a particular price level___in a certain time,
ceteris paribus.

=> Supply describes the relationship between price and quantity supplied

2.2. Law of supply ( đồng biến - positive relationship)

• The claim that other things equal, the quantity supplied of a good rises when the
price of the good rises, and vice versa.

P↑ → Qs↑
P↓ → Qs↓

• Reason: we are rational

Producers are incentivized to increase the quantity of a good supplied in response to
an increase in price because it becomes more profitable to produce and sell the good
=> The law of supply reflects the basic economic principle that producers respond to
incentives and are motivated by profit.
it becomes more profitable for firms to produce and supply more of that good or
service.
- However, cannot supply forever => scarcity
 2.3. Illustrating supply

• Supply schedule: a table that shows the relationship between the price of a good and
the quantity supplied.

• Supply curve: a upward- sloping curve that shows the relationship between the
price of a good and the quantity supplied

• Supply equation: Describes the relationship of price and quantity supplied

Qs = c.P + d
• Where:

c, d = parameter;

c = ∆Qs/∆P ( change in Qs/ change in price) , c > 0;

c: slope of supply curve

 Individual supply – Market supply

The quantity supplied in the market is the sum of the quantities supplied by all
sellers at each price.

Market supply curve:

2.4. Determinants of supply ( Pi,Te,Es,Ta,Ns) - ceteris paribus

• Technology (Te)
Te↑→ S↑ (Te↓→ S↓)

• Number of sellers (Ns)

Ns↑→ S↑ (Ns↓→ S↓)
• Input prices (Pi)
Pi↑→S↓ (Pi↓→S↑)

• Expectation of sellers (Es)

Es↑→ S↓ (E↓→ S↑)

Expect tomorrow the price go up => not produce now but wait until it ( S decrease )

• Tax (Ta)
Ta ↑→ S↓ (Ta↓→ S↑)

2.5. Movement and shift of supply curve

• Moving along S curve when price changes => S curve unchanged

• Shifting S curve when non-price determinants change

S↑ → S curve shifts to the right

S↓ → S curve shifts to the left