ECON 1007 Introduction to Economics

II

IGCSE : Economics
(0455)

Demand, Supply and

Market Equilibrium

©Natalya Brown 2010

LECTURE 3
Demand,
Supply
and
Overview
Equilibrium
Market

• Demand & Supply

• Shifts in a Demand/Supply Curve and
Movements Along a Demand/Supply
Curve.
• Market Equilibrium
• The Four “laws” of Demand and Supply
• Effect of a Sales Tax
• Elasticities of Demand and Supply
LECTURE 3
Demand,
Supply and
Market
Quantity
Equilibriu
m Demanded
• Quantity demanded is the total amount of
any good or service that consumers wish
to purchase in some time period at a
particular price.
• The total amount consumers wish to
purchase may differ from what is actually
purchased.
• Quantity demanded is an example of a
flow variable.
LECTURE 3
Demand,
Supply and
Market
Deman
Equilibriu
m d
• Demand is the quantity of a good or
service that buyers wish to purchase at
each given price.
• Note the distinction between demand and
quantity demanded. Demand describes the
behaviour of buyers at every price, where
as quantity demanded describes behaviour
at a particular price.
LECTURE 3
Demand,
Supply
and
Quantity Demanded and Price
Equilibrium
Market

• The Law of Demand: the basic hypothesis

is that — other things being equal — the price
of a product and the quantity demanded are
negatively related. That is, the lower the price,
the higher the quantity demanded and vice
versa.
• This relationship between price and quantity
demanded is true for most goods in the
economy.
LECTURE
3
Demand Curve and
Demand Schedule
Monthly Demand of Sony VAIO Laptops in Noida, UP,
India.
Demand
Schedule 280
Price ($) Quantity
0
Demande
d 240
0
800 200
Pric

1200 160 200

0
e

1600 120
1800 100
160 Deman
0
d
2000 80
120 Curve
2200 60 0

2400 40 80 40 60 80 100 120 140 160 180 200

0
2800 0 Quantity Demanded
40
LECTURE
3
Graphing Linear Demand Curves
Notice that price is on the y-axis and quantity on the x-axis.
Price
QD = 100 - 2p
50
p1= 50, Q1D =
0 Sometimes it is easier
40 to use the inverse
demand curve – price
30 as a function of
quantity demanded.
20
2p = 100 – QD
10
p2= 0, Q2D =100 p = 50 – (1/2)QD
0
10 20 30 40 50 60 70 80 90 100 110 Quantity

The same method can be used for linear supply curves.

LECTURE 3
Demand,
Supply
and
Changes in Demand
Equilibrium
Market
• Demand curves are drawn assuming that all
factors affecting demand for a commodity other
than the price of the commodity are held
constant. If these other factors change, then we
get a shift of the demand curve, called “a change
• in demand”.
Other factors:
– Consumer incomes and distribution of income
– Tastes and Networks
– The prices of related goods
– Expectations about the future
– Population and Demographic changes.
LECTURE
3

D2 D0 D1
A rightward shift in the
demand curve from D0 to
D1 indicates an increase
in demand.
eci r
P

A leftward shift from D0 to

D2 indicates a decrease
in demand.

0 Quantity Demanded
LECTURE
3
A change in demand is a change in quantity demanded at
every price. That is, a change in demand is a shift of the
entire demand curve.
Change in
A change in quantity quantity
demanded refers to a demanded

eci r
p3

P
movement from one
point on a demand
Change
curve to another p2
in
point, either on the demand
p0
same demand curve D1
or on a new one.
D0

q3 q0 q2 q1
Quantity
LECTURE 3
Demand,
Supply and
Market
Quantity
Equilibriu
m Supplied
• Quantity supplied is the total amount of
any good or service that producers wish to
sell in some time period at a particular
price.
• The total amount producers wish to sell
may differ from what is actually sold.
• Quantity supplied is also an example of a
flow variable.
LECTURE 3
Demand,
Supply
and
Supply
Equilibrium
Market

• Supply is the quantity of a good or service

that producers wish to sell at each given
price.
• The distinction between supply and
quantity supplied is the same as the
distinction between demand and quantity
demanded.
• The Law of Supply: the basic hypothesis is
that — other things being equal — the price of a
product and the quantity supplied are positively
related. That is, the higher the price, the higher
LECTURE
3
Supply Curve and Supply
Schedule
Monthly Supply of VAIO Laptops in Noida, UP, India by
SONY
Supply Suppl
Schedule 280 y
Price ($) Quantit 0 Curve
y
Supplie 240
d 0
Pric

800 0 200
0
1200 0
e

1600 40 160
0
1800 60
120
2000 80 0
2200 100 80 40 60 80 100 120 140 160 180 200
2400 120 0
Quantity Supplied
2800 160 40
LECTURE 3
Demand,
Supply
and
Changes in Supply
Equilibrium
Market
• Supply curves are drawn assuming that all factors
affecting the supply of a commodity other than
the price of the commodity are held constant. If
these other factors change, then we get a shift of
the supply curve, called “a change in supply”.
• Other factors:
– Technology
– Input costs
– Competing Products
– Number of Suppliers
– Expectations about the future
LECTURE
3

A change in supply is a change in quantity supplied at

every price. That is, a change in supply is a shift of the
entire supply curve.

A change in quantity supplied refers to a movement from

one point on a supply curve to another point, either on the
same supply curve or on a new one.
LECTURE 3
Demand,
Supply
and
Market Equilibrium
Equilibrium
Market

• market is a set of arrangements where by buyers

and sellers exchange goods and services at various
• prices.
The equilibrium price clears the market, so it is
sometimes called the market-clearing price because
at this price what the producer wants to sell is
exactly matched with what consumer wants to buy.
It is the price at which the quantity demanded equals
• the quantity supplied.
Excess Supply: this exists when the quantity
• supplied exceeds the quantity demanded at the
current price.
LECTURE
3
Market
Equilibrium
The Market for VAIO Laptops in Noida, UP,
India.
Pric Qty. Qty.
e Demande Supplie Excess Suppl
($) d d y
280
800 200 0 0 Supply Curve
1200 160 0 240
0
1600 120 40
Pric

200
1800 100 60 0
e

2000 80 80
160 Deman
2200 60 100 0
Exce Deman d
2400 40 120 Curve
120 ss d
0
2800 0 160
80 40 60 80 100 120 140 160 180 200
0
Quantity
40
LECTURE
3 Changes in Market Prices
There are four “laws” of supply and demand.

D0 D1 S 1. An increase in demand
causes an increase in both
the equilibrium price and
equilibrium quantity.
eci r

E1
P

p1 • 2. A decrease in demand
E0 causes a decrease in both
p0 • equilibrium price and
equilibrium quantity.
q0 q1 Quantity
LECTURE
3

3. An increase in supply
causes a decrease in the D S0 S1
equilibrium price and an
increase in the equilibrium
quantity. E0

eci r
P
p0 •
E1
4. A decrease in supply p1 •
causes an increase in the
equilibrium price and a
decrease in the
q0 q1 Quantity
equilibrium quantity.
LECTURE
3

Exercise
1
• Suppose that the demand function
for some product is given by:
QD = 100 - 4p

And that the supply function for

some product is given by:

QS = p + 20
LECTURE
3
Numerically,
QD = QS implies that
100 – 4p = p = 20
100 - 20 = p + 4p
80 = 5p
p* = 16
Q* = 100 – 4p* =
= 100 – 4 ( 16) =
= 100 – 64 = 36
E = 16 ; 36
LECTURE
3

Price
Graphicall
y:
QS = p +2

40
Equilibrium: QD = QS

30

20

10 QD = 100 - 4p

10 20 30 40 50 60 70 80 100Quantity
Exercise
Let Qd stand for the quantity demanded, Qs stand for the
quantity supplied, and P stand for price. If Qd = 160 - 2P
and Qs = - 80 + 4P, then the equilibrium price and quanity
is ?
The answer
LECTURE
3
Price Elasticity of
•
Demand
Elasticity (stretching) is the effect of changing prices
on the quantity of goods demanded or offered.
• Price elasticity of demand measures the degree of
responsiveness of quantity demanded to a good by
the consumer in response to a change in the price
of that good. It is symbolized by the Greek letter
eta: .
 =
percentage change in quantity
percentage change in
demanded price
LECTURE
3

Exercise
• 2 increases by 3% and
If the price of a commodity
quantity demanded decreases by 6%, then the price
elasticity of demand is 2.
% change in QD
 = 6% = 2
= % change in P 3%

• If the price elasticity of demand for a commodity is 10%

decrease in price leads to a 5% increase in quantity
demanded.
% change in QD
 = 0.5 = 5%
= % change in P 10%
= 0.5
LECTURE 3

Inelastic If the percentage change in quantity demanded

is less than the percentage change in price, then
:
demand is inelastic and 0 <  < 1.

Unit If the percentage change in quantity demanded

Elasti is equal to the percentage change in price, then
demand is unit elastic and  = 1.
c:
Elastic If the percentage change in quantity demanded
: is greater than the percentage change in price,
then demand is elastic and  > 1.

 =0  = 1  = 
LECTURE
3
Price Elasticity of
Supply
• Price elasticity of supply measures the
degree of responsiveness of the quantity
supplied to a change in the product’s own
price. It is denoted by s, and is defined as:

percentage change in quantity supplied

S =
percentage change in price
LECTURE
3
Elasticity of formula in alternative
forms A.Elasticity of demand

Δ Q P1 where d = demand elasticity

d = --- Δ Q = change in quantity
------ . Δ P = change in price
demanded Q1 P = original price
Δ P
Q= original quantity
demanded
B. Elasticity of Supply
Δ Q P1 where s = supply elasticity
s = --- Δ Q = change in
------ . quantity
demanded Q1 Δ P = change in
Δ P price P = original price
Q= original quantity
when the price per unit of an item is Rp 100,000, the
number of goods offered is 50 units; and when the unit
price drops to IDR 50,000, the number of new items offered
becomes 30 units. The value of the elasticity coefficient of
the supply of these goods is ..

Elasticity less than 1 means inelastic

 LECTURE
3
1 When price of a product rises from £60 to £90, demand
contracts from 800 to 600. Calculate Ed, what type of Ed
is this?
2. When price of a product rises from £50 to £60, Supply
contracts from 500 to 400 Calculate Es, what type of Es
is this?
1. Elastic demand occurs when the change in demand is greater than the
change in price. This is indicated by the coefficient (Ed) which is greater
than 1 or Ed>1. Examples of goods whose demand is elastic are tertiary
goods (luxury goods).

2. If the value of the elasticity of demand is below the number 1, then the
amount of demand for goods or services is not influenced by the size of
the price. In this context, the demand for goods or services is said to be
inelastic. Inelastic demand is a condition where consumers are less
sensitive to price changes. For example, even though the price of rice
increases, consumers will still buy it because rice is one of the basic
needs.

3. Occurs when changes in demand are proportional to changes in price.

This means that a change in price of X% is followed by a change in
demand of X% as well. Goods that are unitary elastic are secondary
needs. Examples are electronic goods.
LECTURE
3