DEMAND, SUPPLY AND

MARKET EKUILIBRIUM

Learning Objective :

1. Understand The Roles Of Firms, Enterpreneurs And Housholds In The Market

2. Understand The Role Of Households As Both Suppliers To Firms And Buyers Of What Firms
Produce

3. Understand What Determines The Position And Shape Of The Demand Curve And What Factors
Move You Along A Demand Curve And What Factors Shift The Demand Curve.

4. Be Able To Distinguish Between Forces That Shift A Supply Curve And Changes That Cause A
Movement Along A Supply Curve
THE CIRCULAR FLOW : INPUT AND OUTPUT
MARKET

 Real goods and services flow from firms to households

through output—or product—markets.
 Labor services flow from households to firms through
input markets.
 Payment (most often in money form) for goods and
services flows in the opposite direction. 
DEMAND IN OUTPUT MARKETS

1. The price of the product in question.

2. The income available to the household.
3. The household’s amount of accumulated wealth.
4. The prices of other products available to the household.
5. The household’s tastes and preferences.
6. The household’s expectations about future income, wealth, and prices
THE LAW OF DEMAND

Price
1. The negative relationship between price and

quantity demanded; 
7
2. Ceteris paribus, as price rises, quantity
5
demanded decreases; as price falls, quantity
2
demanded increases (all other things remaining
0 1 5 10 Quantitiy
constant)
 OTHER DETERMINANTS OF HOUSHOLD
DEMAND
• Income and Wealth (Normal and Inferior Goods)
• Price of Other Goods (Subtitute and Complement Goods)
• Taste and Preference
• Expectation
SHIFT VS MOVEMENT ALONG THE DEMAND
CURVE
Price
D1
D0  Change in price of a good or service, leads to
10 change in quantity of demanded =

7 Movement Along the Curve

 Change in income, preferences or prices of
other goods, leads to change in demand =
5
Shift of a Demand Curve

0 1 5 6 8 10 15 Quantitiy
 CASE 1

INCOME RISES PRICE OF HUMBERGURE RISES

FROM HOUSHOLD DEMAND TO MARKET
DEMAND

Total demand in the marketplace

is the sum of all the individual
quantities demanded at each
price
SUPPLY IN PRODUCT/OUTPUT MARKET
• Profit, the difference between total revenue and total cost
• Price
• Cost of production
THE LAW OF SUPPLY

Price
• The positive relationship between price and
quantity of a good supplied: 7
• An increase in market price, ceteris paribus,
will lead to an increase in quantity supplied, 5
and 2
• A decrease in market price will lead to a
decrease in quantity supplied.
0 5 7 10 Quantitiy
OTHER DETERMINANTS OF SUPPLY
• Production Cost = Techonology, the price of input / factor production
• The price of related product
SHIFT VS MOVEMENT ALONG THE SUPPLY
CURVE
Price

S0
 Change in price of a good or service, leads to
10 S1
change in quantity of supplied = Movement

7 Along the Curve

 Change in cost, input prices or technology
leads to change in supplied = Shift of a
5
Supplied Curve

0 5 8 15 16 20 Quantitiy
FROM INDIVIDUAL TO MARKET SUPPLY
 MARKET EKULIBRIUM

Ekuilibrium => Quantitiy of Supply = Quantity of Demand

Excess Demand => Quantity of Demand > Quantity of Supply
Excess Supply => Quantity of Supply > Quantitiy of Demand
EXCESS DEMAND

1. When quantity demanded exceeds quantity supplied, price tends to

rise;
2. When the price in a market rises, quantity demanded falls and quantity
supplied rises until an equilibrium is reached at which quantity
demanded and quantity supplied are equal.
EXCESS SUPPLY

1. When quantity supplied exceeds quantity demanded at the current

price, the price tends to fall.

2. When price falls, quantity supplied is likely to decrease and quantity

demanded is likely to increase until an equilibrium price is reached