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Supply and Demand

Overheads

Equilibrium
Equilibrium is defined a state of rest;
a situation that, one achieved, will not change,
unless some external factor,
previously held constant, changes.

Market Equilibrium
A market is said to be in equilibrium
if the price in the market is such that
the quantity supplied (QS) in the market
and the quantity demanded (QD) in the market

are equal.

Price

Demand and Supply of Hamburger Patties

Supply = Demand

3.5
3
2.5
2
1.5
1

D0
S0

0.5
0

2000

4000

3333.33

6000

8000
6666.66

10000 12000

Quantity

Quantity
Price (per lb) supplied
0.3
0.60
0.90
1.20
1.50
1.80
2.10
2.40
2.50

1000
2000
3000
4000
5000
6000
7000
8000
9000

Quantity
demanded
9800
8600
7400
6200
5000
3800
2600
1400
200

Excess supply and excess demand


Excess supply
At a given price, the excess of the
quantity supplied over the quantity demand
is called the excess supply.

Excess supply = QS (P) - QD (P)

Quantity
Price (per lb) supplied
0.3
0.60
0.90
1.20
1.50
1.80
2.10
2.40
2.50

1000
2000
3000
4000
5000
6000
7000
8000
9000

Quantity
demanded
9800
8600
7400
6200
5000
3800
2600
1400
200

At a price of $2.10, excess supply (QS (P) - QD (P) ) is given by

7,000 - 2,600 = 4,400

Quantity
Price (per lb) supplied
0.3
0.60
0.90
1.20
1.50
1.80
2.10
2.40
2.50

1000
2000
3000
4000
5000
6000
7000
8000
9000

Quantity
demanded
9800
8600
7400
6200
5000
3800
2600
1400
200

At a price of $1.20, excess supply (QS (P) - QD (P) ) is given by

4,000 - 6,200 = -2,200

Excess demand
At a given price, the excess of the
quantity demanded over the quantity supplied
is called the excess demand.

Excess Demand = QD (P) - QS (P)

Quantity
Price (per lb) supplied
0.3
0.60
0.90
1.20
1.50
1.80
2.10
2.40
2.50

1000
2000
3000
4000
5000
6000
7000
8000
9000

Quantity
demanded
9800
8600
7400
6200
5000
3800
2600
1400
200

At a price of $0.90, excess demand (QD (P) - QS (P) ) is given by

7,400 - 3,000 = 4,400

Quantity
Price (per lb) supplied
0.3
0.60
0.90
1.20
1.50
1.80
2.10
2.40
2.50

1000
2000
3000
4000
5000
6000
7000
8000
9000

Quantity
demanded
9800
8600
7400
6200
5000
3800
2600
1400
200

At a price of $2.10, excess demand (QD (P) - QS (P) ) is given by

2,600 - 7,000 = -4,400

Market Equilibrium
A market is in equilibrium when the price is
such that the quantity supplied
is equal to quantity demanded.
A market is in equilibrium when the price is
such that excess supply equals
excess demand equals zero.

Excess supply and excess demand and price pressure

When the quantity demanded in the market


exceeds the quantity supplied at a given price,

QD (P) > QS (P)


there is excess demand,
and the price will tend to rise.

Excess demand and excess supply


and price pressure
When the price in the market rises,
quantity demanded falls
& quantity supplied rises
until an equilibrium is reached at which
quantity demanded equals quantity supplied.

The process of price rising so that


excess demand falls to zero is called
price rationing

Price

Graphical analysis of excess supply


QS (P) > QD (P)

3.5
3

Supply = Demand

Price Falls

2.5
2
1.5
1

D0
S0

0.5
0

2000

4000

6000

8000

10000 12000

Quantity

Price

Graphical analysis of excess demand


Supply = Demand

3.5
3

Price Rises

2.5
2
1.5
1

D0
S0

0.5
0

2000

4000

6000

QD (P) > QS (P)

8000

10000 12000

Quantity

Algebraic analysis of supply and demand


Equilibrium Supply = Demand

To find an equilibrium in a market:


1.

Set supply equal to demand


and solve for P.

2.

Substitute P in the supply and


demand equations
to get the quantities.

Example Demand Equation


QD = 20 - 2P

Demand
Price

QD = 20 - 2P
14
12
10
8
6
4
2
0

D0

8 10 12 14 16 18 20 22 24

Quantity

Example Supply Equation


QS -4 + 2P

Supply
Price

QS -4 + 2P
14
12
10
8
6
4
2
0

S0

8 10 12 14 16 18 20 22 24

Quantity

Demand and Supply


Price

QD = 20 - 2P

QS -4 + 2P

14
12
10
8
6
4
2
0

D0
S0

8 10 12 14 16 18 20 22 24

Quantity

Example Calculation
Set supply equal to demand and solve the equation for P.
QD = 20 - 2P = -4 + 2P = QS
20 - 2P = -4 + 2P
+4
+4
24 - 2P = 2P
+2P +2P
24 = 4P
24 = 4P
4
4

6 = P

QD = 20 - 2P
= 20 2(6)
=8

Some notes on solving equations


We get equivalent equations if on both sides
of the equality sign we do the following:
a.

add the same number

b.

subtract the same number

c.

multiply by the same number 0

d.

divide by the same number 0.

Comparative Statics or
What happens when things change

Demand Shifts
Increases in demand (shifts to the right)
will increase the equilibrium price and quantity.
Decreases in demand (shifts to the left)
will decrease the equilibrium price and quantity.

Price

Changes in Demand
16

S0
D0
D1
D2

14
12

10
8
6
4

2
0
0

10

15

20

Quantity

25

Supply Shifts
Increases in supply (shifts to the right)
will decrease the equilibrium price
and increase the equilibrium quantity.
Decreases in supply (shifts to the left)
will increase the equilibrium price
and decrease the equilibrium quantity.

Price

Changes in Supply
D0
S0
S2
S1

14
12
10
8
6
4
2
0
0

10

15

20

Quantity

Price Ceilings
A price ceiling occurs when some outside force
sets a price for the market
that is below the equilibrium price.
When quantity supplied & quantity demanded differ,
the short side of the market
whichever of the two quantities is less
will prevail.

Price

Price Ceiling
Supply Demand

3.5
3

Queuing

2.5
2
1.5
1

D0
S0

0.5
0

2000

4000

6000

QD (P) > QS (P)

8000

10000 12000

Quantity

The results:
Queuing

Shortages

A black market

Price Floors
A price floor occurs when some outside force
sets a price for the market
that is above the equilibrium price.
When quantity supplied & quantity demanded differ,
the short side of the market
whichever of the two quantities is less
will prevail.

Price

Price Floor
Supply Demand

QS (P) > QD (P)

3.5
3

Excess Supply

2.5
2
1.5
1

D0
S0

0.5
0

2000

4000

6000

8000

10000 12000

Quantity

The results:
Excess supply

Unemployment