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.
 Demand and Supply of Hamburger Patties

3.5 Supply = Demand

Price

3
2.5
2 D0
1.5 S0
1
0.5
0
0 2000 4000 6000 8000 10000 12000
3333.33 6666.66 Quantity
 Quantity Quantity
Price (per lb) supplied demanded
0.3 1000 9800
0.60 2000 8600
0.90 3000 7400
1.20 4000 6200
1.50 5000 5000
1.80 6000 3800
2.10 7000 2600
2.40 8000 1400
2.50 9000 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 Quantity
Price (per lb) supplied demanded
0.3 1000 9800
0.60 2000 8600
0.90 3000 7400
1.20 4000 6200
1.50 5000 5000
1.80 6000 3800
2.10 7000 2600
2.40 8000 1400
2.50 9000 200

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

7,000 - 2,600 = 4,400

 Quantity Quantity
Price (per lb) supplied demanded
0.3 1000 9800
0.60 2000 8600
0.90 3000 7400
1.20 4000 6200
1.50 5000 5000
1.80 6000 3800
2.10 7000 2600
2.40 8000 1400
2.50 9000 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 Quantity
Price (per lb) supplied demanded
0.3 1000 9800
0.60 2000 8600
0.90 3000 7400
1.20 4000 6200
1.50 5000 5000
1.80 6000 3800
2.10 7000 2600
2.40 8000 1400
2.50 9000 200

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

7,400 - 3,000 = 4,400

 Quantity Quantity
Price (per lb) supplied demanded
0.3 1000 9800
0.60 2000 8600
0.90 3000 7400
1.20 4000 6200
1.50 5000 5000
1.80 6000 3800
2.10 7000 2600
2.40 8000 1400
2.50 9000 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
 Graphical analysis of excess supply

QS (P) > QD (P) Supply = Demand

3.5
Price

3
2.5
Price Falls
2 D0
1.5 S0
1
0.5
0
0 2000 4000 6000 8000 10000 12000

Quantity
 Graphical analysis of excess demand

3.5 Supply = Demand

Price

3 Price Rises
2.5
2 D0
1.5 S0
1
0.5
0
0 2000 4000 6000 8000 10000 12000

QD (P) > QS (P) 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
QD = 20 - 2P
14
Price

12
10
8 D0
6
4
2
0
0 2 4 6 8 10 12 14 16 18 20 22 24
Quantity
Example Supply Equation

QS -4 + 2P
 Supply
QS -4 + 2P
14
Price

12
10
8
6 S0
4
2
0
0 2 4 6 8 10 12 14 16 18 20 22 24
Quantity
 Demand and Supply
QD = 20 - 2P
14 QS -4 + 2P
Price

12
10
8 D0
6 S0
4
2
0
0 2 4 6 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
QD = 20 - 2P
24 = 4P
= 20 – 2(6)
24 = 4P =8
4 4
6 = P
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.
 Changes in Demand

16
S0
Price

14
D0
12
10
D1
8 D2
6
4
2
0
0 5 10 15 20 25

Quantity
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.
 Changes in Supply
D0
S0
S2
Price

14
12 S1
10
8
6
4
2
0
0 5 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 Ceiling

3.5 Supply  Demand

Price

3 Queuing
2.5
2 D0
1.5 S0
1
0.5
0
0 2000 4000 6000 8000 10000 12000

QD (P) > QS (P) 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 Floor

QS (P) > QD (P) Supply  Demand

3.5
Price

3 Excess Supply
2.5
2 D0
1.5 S0
1
0.5
0
0 2000 4000 6000 8000 10000 12000

Quantity
The results:

Excess supply

Unemployment
 e E n d
Th