UNIT 2:

MARKET DIAGRAM & MARKET

EQUILIBRIUM

1 ECN200 – Principles of Microeconomics

ASSESSMENTS
 Two (2) Discussion Questions – Due in Weeks 5 and 10
o Issued one week before the due date
Total Score: 10 marks

 Two (2) Quizzes – Weeks 6 and 13

 20 – 30 Multiple Choice Questions
 Duration – 1 hour

2
 Total Score: 10 marks

 Mid Semester Assessment (MSA) – Week 7 or 8

 Case study, Short Answers, Problem Solving, Analysis
 Total Score: 20 marks

 Group Presentation (Individual Grading)

 Presentation – 10 marks
 Written Paper – 10 marks
Issued: Week 8
Due: Week 12

•Total Score: 20 marks

 End of Semester Assessment

Total Score: 40 marks
 CONTENT

 Theory of Demand  Theory of Supply

 Definition of quantity demanded
 Individual demand curves and schedules
 Market demand curves and schedules
 Determinants of quantity demanded
 Distinction between changes in demand and
changes in quantity demanded
 Consumer surplus
 Definition of quantity supplied
 Individual supply curves and schedules
 Market supply curves and schedules
 Determinants of quantity supplied
 Distinction between changes in supply and
changes in quantity supplied
 Producer surplus

 Market Equilibrium
 Price and output determination
 Changes in demand and supply
 Price controls
3
OBJECTIVE

 What is a Market
 Is Demand different from Quantity Demanded?

 Is Supply different from Quantity Supplied?

 What is Market Equilibrium and Disequilibrium

 Calculates Equilibrium Price and Quantity

 Equilibrium Analysis

4
READINGS
 Baumol and Blinder
 Chapter 4
 Frank and Bernanke
 Chapters 3 and 10
 Case and Fair
 Chapters 3 and 4

Please
do your readings from EARLY!!
Remember the 2:4 Rule!!
5
THE DEFINITION OF A MARKET
 A market for a good is
comprised of actual and
potential buyers and sellers of
that good.

 Market – a process of regular

exchange
 Need not be in a specific place,
but often is
 Need not take place at a specific
time, but generally there are time
limits 6
THE DEFINITION OF A MARKET
Traditional Markets:
 Barter refers to the exchange of goods for goods or
services.
 Non-monetary exchange

 Problem: Double coincidence of wants

Modern Markets:
 In modern markets goods or services are exchanged for
money.

7
THE DIAGRAM OF A MARKET
There are two main components to a market:
(1) The buyers
(2) The sellers

 Buyers demand goods and services. At each price point,

buyers are willing and able to buy a given quantity

 Sellers supply goods and services. At each price point,

sellers are willing and able to supply a given quantity.

8
DETERMINING PRICE

 The price is the amount of money that has to be given up

to purchase a unit of a good (or service)

 Price is determined in the market based on the

interactions between the demand and supply of goods
and services

9
DEFINITION OF DEMAND
Demand
 Refers to how much of a product or service is desired by
buyers

Quantity Demanded
 This is the amount that a consumer wishes to buy at a
particular price.
 Each possible price has a quantity demanded associated with
it.

10
DETERMINANTS OF DEMAND
Factors that determine demand:
S.I.T.E
 Substitute and Complements

 Income

 Tastes (or Preferences)

 Expectations

11
DETERMINANT OF QUANTITY
DEMANDED (QD)
The ONLY factor that determines Qd:

PRICE
12
THE DIAGRAM OF A MARKET – THE
DEMAND CURVE
 The Demand Schedule
 A demand schedule is a
table showing how much
Price per kilo of Quantity
Rice ($) Demanded (kilos)
of a given product a
household would be
250 20 willing to buy at different
200 40 prices.

170 50
 Demand curves are
90 65 usually derived from
demand schedules.
75 80

13
THE DIAGRAM OF A MARKET – THE
DEMAND CURVE
 The Demand Curve that is drawn from the previous demand schedule
would look like:

Price per kilo ($)

250

200

170 The Demand Curve

for Rice

90

75

0
Quantity
20 40 50 60 85 14
demanded (kilos)
THE DIAGRAM OF A MARKET – THE
DEMAND CURVE
 What do we mean by a Downward Sloping Demand
Curve?

 The law of demand states that there is a negative or

inverse, relationship between the price of a good and the
quantity that is demanded

 Quantity demanded will be higher at lower prices than at

higher prices.
 As price falls, quantity demanded rises.
 As price rises, quantity demanded falls.
15
 SHIFT OF DEMAND VERSUS
MOVEMENT ALONG A DEMAND CURVE
• A change in demand is not
the same as a change in
quantity demanded.
Price
($)
• In this example, a higher price
causes lower quantity
$10
demanded, and a move along
the demand curve.

$5
D2
 Changes in determinants of
demand, other than price,
D1 cause a change in demand, or
a shift of the entire demand
100 150 16
curve, from D1 to D2
Quantity Demanded
DEFINITION OF SUPPLY
Supply
 Refers to how much products or services firms are
willing and able to supply

Quantity Supplied
 This is the amount that a firm wishes to sell at a
particular price.
 Each possible price has a quantity supplied associated with it.

17
DETERMINANTS OF SUPPLY
Factors that determine supply:
 C.T.W.G

1. The Cost of producing the good, which in turn depends

on:
• The price of required inputs (labour, capital, and land),

2. Weather conditions.

3. The Technology use to develop the product

18
DETERMINANT OF QUANTITY
SUPPLIED
The ONLY factor that determines Qs:

PRICE
19
THE DIAGRAM OF A MARKET – THE
SUPPLY CURVE
 The Supply Schedule

Price per kilo of Quantity

Sugar ($) Supplied
(kilos)
• A supply schedule is a table
250 95
showing how much of a
product firms will supply at
200 70
different prices.
170 55

90 35

45 18
20
THE DIAGRAM OF A MARKET – THE
SUPPLY CURVE

 The Supply Curve may be drawn from the Supply Schedule.

Price per kilo ($)

250

200

170 The Supply

Curve for Sugar
90

45

0 Quantity Supplied
18 35 55 70 95 (Kilos)
21
THE DIAGRAM OF A MARKET – THE
SUPPLY CURVE
• What do we mean by an Upward Sloping Supply Curve?

 The law of supply states that there is a positive relationship between

the price of a good and the quantity of the good supplied.

• This means that if the price of the good increases, then the quantity
supplied also increases.

• If the price of the good falls, then the quantity supplied will also
fall.

• This is because suppliers will always want to sell more at a higher

price.
22
 SHIFT OF SUPPLY VERSUS
MOVEMENT ALONG A SUPPLY CURVE
• A change in supply is not the
same as a change in quantity
S1
supplied.
$4 S2
Price of Rice

• In this example, a higher price

causes higher quantity
supplied, and a move along the
$3
supply curve.

• Changes in the determinants of

supply, other than price, cause
an increase in supply, or a
300 400
shift of the entire supply curve,
Quantity of Rice from S1 to S2. 23
THE CONCEPT OF EQUILIBRIUM
An equilibrium is where there is no need or any likelihood of
there being a change.

In the context of markets;

 Market Equilibrium: This is where the quantity demanded by
the buyers and the quantity supplied by the sellers are equal at
a specific price.

 The Market Equilibrium is characterized by an equilibrium

price (P*) and an equilibrium quantity (Q*).

24
 THE CONCEPT OF EQUILIBRIUM
Price ($)
 Only in equilibrium is
quantity supplied equal to
quantity demanded.
S1
 The equilibrium price is $2
$3
and the equilibrium quantity
is 150.
$2
 At any price level other than
$2, the wishes of buyers
D1 and sellers do not coincide.

100 150 200 25

Quantity Bought and Sold

 MARKET DISEQUILIBRIUM
 Excess demand, or shortage, is
the condition that exists when the
Price ($) price is below equilibrium and the
quantity demanded exceeds
quantity supplied (D>S).
S1

$3  The shortage in the market would

drive up prices as some
$2
consumers are prepared to pay
more.
$1
Shortage
D1  The price will continue to rise until
the shortage has been competed
100 150 200 away and a new equilibrium 26

Quantity Bought and Sold (000s) position has been reached.

 MARKET DISEQUILIBRIUM
 Excess supply, or surplus, is the
condition that exists when price
Price ($) above equilibrium and the
quantity supplied exceeds
quantity demanded (S>D).
S1

$3
 In an attempt to get rid of surplus
Surplus stock, producers will accept lower
prices. Lower prices in turn
$2 attract some consumers to buy.

 The process continues until the

D1 surplus disappears and
equilibrium is once again
100 150 200 reached. 27

Quantity Bought and Sold

CALCULATING EQUILIBRIUM
QUANTITY AND PRICE

 Now the demand curve is: QD  100  0.75 P

 The supply curve is given by: QS  80  0.25 P

Find the equilibrium price and quantity.

28
CALCULATING EQUILIBRIUM
QUANTITY AND PRICE

 There is an inverse relationship between quantity

demanded and price
 so the negative (-) sign in the first equation tells you it is the
equation for the demand curve.

 There is a positive relationship between price and

quantity supplied.
 The positive (+) sign thus tells you that the second equation
is the one for the supply curve.

29
THE DIAGRAM OF THE MARKET AND
EQUILIBRIUM ANALYSIS

 This is simply the comparison of two equilibrium states, before

and after a change in one of the factors that affect demand
and/or supply.

 So the main idea is that we are looking at how the diagram of

the market changes when we adjust the factors that impact the
market.
 Examples of such factors include the price of the good, the price of
other goods, income etc.

30
THE DIAGRAM OF THE MARKET AND
EQUILIBRIUM ANALYSIS

Process of economic analysis analysis

 Begin by assuming that the model is in equilibrium.
 Introduce a change in the model (For example, assume that
there is a change income). In so doing, a condition of
disequilibrium is created.
 Find the new point at which equilibrium is restored.
 Compare the new equilibrium point with the original one.

31
THE DIAGRAM OF THE MARKET AND
EQUILIBRIUM ANALYSIS
 Change in Demand/Supply VS Change in Quantity
Demanded/Supplied

 A change in demand or supply refers to a shift of the

demand or the supply curve.
 There are many factors which cause a shift of the demand and
supply curves.

 A change in quantity demanded or quantity supplied,

refers to a movement along the demand or the supply
curves.
 A movement along the demand and supply curves of a good 32
occurs ONLY when the price of that good changes.
EQUILIBRIUM ANALYSIS– THE DEMAND
CURVE
 Factors that shift the demand curve

(1) Price of a complement.

Complements are goods that are consumed together, i.e. you can
consider a good and its complement as one entity.
 An example of complements is milk and coffee, bun and cheese.

(2) Price of a substitute.

Substitutes are goods that can be used in place of each other.
 Example: butter and margarine.

33
 EQUILIBRIUM ANALYSIS– THE DEMAND
CURVE

(3) Income
(for a normal good).
A normal good is one whose demand increases when income
increases and vice versa.
 An example of a normal good is a car.

( for an inferior good).

An inferior good is one whose demand decreases as income
increases and vice versa.
 An example of an inferior good is public transportation.

34
EQUILIBRIUM ANALYSIS – THE DEMAND
CURVE

(4) Preference by demanders for the good.

The good may decline in popularity among users, for example VCRs.

(5) Expectations

35
 IMPACT OF A CHANGE IN DEMAND
ON EQUILIBRIUM
Price of Sugar ($)  When demand
increases (curve
shifts right), the
S1
market moves to a
E2 new equilibrium point
$3 (E1toE2).
E1
$2 D2
 In this case, the result
is a higher price and
D1 larger output.
150 200 36
Quantity of Sugar Bought and Sold
 IMPACT OF A CHANGE IN DEMAND
ON EQUILIBRIUM
Price ($)
 When demand
decreases (curve
S1 shifts left), the
E1 market moves to a
$3
new equilibrium point
E2 (E1toE2).
$2 D1
 In this case, the
result is a lower
D2
price and smaller
150 200
output. 37
Quantity of Sugar Bought and Sold
EQUILIBRIUM ANALYSIS – THE SUPPLY CURVE

 Factors that shift the supply curve

(1) Cost of inputs used in production of the good/service.

(2) Technological progress.

(3) Weather conditions - In the case of the Caribbean, hurricanes tend to

damage crops and reduce their supplies on the market.

(4) Government Policies.

38
 IMPACT OF A CHANGE IN SUPPLY ON
EQUILIBRIUM
Price ($)  When supply increases
(curve shifts), the market
moves to a new
S1 equilibrium point
(E1toE2).
E1 S2
$2  In this case, the result is
E2
a lower price and
$1
larger output.
D1

150 200 39
Quantity of Sugar Bought and Sold
 IMPACT OF A CHANGE IN SUPPLY ON
EQUILIBRIUM
Price ($)  When supply
decreases (curve shifts
left), the market moves
S2 to a new equilibrium
point (E1toE2).
E2 S1
$3  In this case, the result is
E1
a higher price and
$1
smaller output.
D1

150 200 40
Quantity of Sugar Bought and Sold
THE DIAGRAM OF THE MARKET AND
EQUILIBRIUM ANALYSIS

 So to summarize: Shifts in Demand and Supply

 D  P*,  Q *  S  P*,  Q *

 D  P*,  Q *  S  P*,  Q *
41
END OF PRESENTATION

42