Demand and Supply

Session 2
Outline

• Market demand
• Market supply
• Market equilibrium
• Comparative statics analysis
• Supply, demand, and price
Learning Objectives

• Define supply, demand, and equilibrium price

• List and provide specific examples of the non-price
determinants of supply and demand
• Distinguish between the short-run rationing function
and long-run guiding function of price
• Illustrate how the concepts of supply and demand can
be used in management decisions about price and
allocations of resources.
• Use supply and demand diagrams to determine price in
the short and long run
Demand

• The demand for a good or service is defined

as:
– Quantities of a good or service that people are
ready, willing and able to buy at various prices
within some given time period. (Other factors
besides price held constant.)
– Willing (Preferred)
– Able (Affordable)
Demand: Law of demand ; graphical
representation
• Law of demand: Keeping other things (e.g price of
related goods, income & taste and preference)
constant, demand of the commodity varies inversely
with it’s own price.
Graphical exposition of the demand curve: Movement
along the demand curve vs shift in the demand curve

• Changes in own- price result in changes in the quantity

demanded;

– This is shown as movement along the demand curve.

• Changes in factors other than own price (income, price of

other goods, taste& preference) result in changes in
demand

– This is shown as a shift in the demand curve.

Shift in demand curve: Income changes
Supply

• The supply of a good or service is defined as

quantities that people are ready to sell at various
prices within some given time period

(Other factors besides price held constant)

Shift and Movement along the demand curve

• Changes in price result in changes in the quantity

supplied

– shown as movement along the supply curve

• Changes in non-price determinants result in changes

in supply

– shown as a shift in the supply curve

Technology; Rainfall; Shift in the supply
curve
Market equilibrium

• Equilibrium price: the price that equates the

quantity demanded with the quantity supplied

• Equilibrium quantity: the amount that people are

willing to buy and sellers are willing to offer at the
equilibrium price level
Market equilibrium: Automatic price-adjustment

Surplus: Price
will fall to bring
back the system
into equilibrium;
Shortage:Demand
is higher than
supply; price will
rise to bring back
the system into
equilibrium.
Comparative statics: Impact on market equilibrium
for a change in demand and supply conditions or both

• a decrease in
supply causes
equilibrium
price to rise and
equilibrium
quantity to fall