Week 3

ECONOMICS FOR MANAGERS

(ACCT 40302)

Demand, Supply and

Market Equilibrium
Hansani Liyanage
Lecturer In Business
M.A in Economics and Statistics (University of Peradeniya),
B.A in Economics (UoP),
PQ Human Resources Management (IPM),
PgDip in Marketing (SLIM)
Lecture Overview:

- Demand side of the market

- Supply side of the market

- Market equilibrium

Weeks 1 & 2
The Demand Side of the
Market
What is a market?
 The Demand Side of the Market
Consumer Demand?

Various quantities of a particular good which are willing to be

purchased by a consumer at a given prices in the market at a given
time period.

Note: In economics demand is not the same thing as desire or need or

want. Demand is always based on willingness to pay for a product.
 The Demand Side of the Market

 Quantity demanded: The amount of a good or service

that a consumer is willing and able to buy at a given price.
 The Demand Side of the Market

 Demand schedule:
A table showing the relationship between the price of a
product and the quantity of the product demanded.
Price of sugar (1 kg) Demand for sugar (kg)
80 0
60 100
40 200
20 300
0 400
 The Demand Side of the Market

 Demand schedule:
A table showing the relationship between the price of a
product and the quantity of the product demanded.
Price of sugar (1 kg) Demand for sugar (kg)
80 0
Prices of a 60 100 Quantities
product demanded
40 200
20 300
0 400
 The Demand Side of the Market

 Demand curve:
A curve that shows the relationship between the price of a
product and the quantity of the product demanded.
P

400 Price of sugar Demand for

(1 kg) sugar (kg)
300 Demand Curve 80 0
60 100
200
40 200

100
20 300
0 400
0
Q
20 40 60 80
  Demand curve:

The demand curve slopes down

from left to right due to the
negative relationship of price and
quantity demanded.

Quantity on the horizontal axis and price on the vertical

axis.

Weeks 1 & 2
 Demand schedule and demand curve: Demand Schedule
Price Quantity
(dollars per (millions of
Price tablet) tablets per
(dollars per As the price falls, the month)
tablet) quantity of tablets $700 3
demanded increases 600 4
500 5
$700
400 6
600 300 7
500
400
300
Demand

0 3 4 5 6 7 Quantity (millions of
tablets per month)
12
Weeks 1 & 2
The Demand Side of the Market

 Market demand:

The demand by all the consumers of a given good or

service.

Weeks 1 & 2
The Determinants of
Demand
The determinants of the demand

✗ Price of the good concerned Px

✗ Prices of related goods Pn
✗ Consumer income Y
✗ Consumer taste/ preference T
✗ Expected future prices Ex
✗ No of consumers N
✗ Other factors O
THE LAW
OF
DEMAND
 ✗ When all other factors affecting
The Law of demand remain constant, except
the price of the good concern,
Demand there's a negative/ inverse
relationship between Px and
Qdx.
 The Demand Side of the Market

 The law of demand:

The quantity of demand varies inversely with price.

The law of demand says that at higher prices, buyers

will demand less of an economic good. ( P then QD )
At lower prices, buyers will demand higher of an economic good.

( P then QD )
Weeks 1 & 2
Change in Quantity Demanded
and
Change in Demand
Change in Quantity Demanded
Change in Quantity Demanded

✗ When all other factors affecting demand remain

constant, except the price of the good concern, there's a
negative/ inverse relationship between Px and Qdx.
 A change in the quantity demanded refers to a
movement along the demand curve as a result of a
change in the product’s price.

Change in Specific
prices quantity

Note: A change in quantity demanded does not shift the demand curve.
A‘ change in quantity demanded’ is,
Change in Demand
The determinants of the demand

✗ Price of the good concerned Px - Constant

✗ Prices of related goods Pn
✗ Consumer income Y
✗ Consumer taste/ preference T
✗ Expected future prices Ex Changing
✗ No of consumers N
✗ Other factors O
Shift market demand
Shift right
Shift market demand

Shift left
Variables that shift market demand

1. Income.

When income increases, it increases the purchasing power of consumers.

Therefore, it increases the demand for goods and services.

This will cause the demand curve to shift.

Income increases People will buy more Increases the demand

28

Weeks 1 & 2
Variables that shift market demand
1. Change in incomes.

 Normal good: A good for which the demand increases as

income rises and decreases as income falls.
Ex; food, clothes, entertainmnet etc.

 Inferior good: A good for which the demand increases as

income falls and decreases as income rises. Or demand
decrease as income rises.
Ex: Noodles, black & white Tv, radio, Nokia 1100 phone.

Weeks 1 & 2
 Variables that shift market demand
2.Change in the prices of related goods.

a. Substitutes good: Goods or services that can be used for the same or a similar
purpose.

e.g. when the price of a coffee increases, demand for tea increases,

D for the tea shifts right.

Weeks 1 & 2
 Variables that shift market demand
2.Change in the prices of related goods.

b. Complementary good: Goods and services that are used together.

e.g. when the price of a cars falls, demand for petrol increases.
e.g. when the price of a bread falls, demand for butter increases.

Weeks 1 & 2
Variables that shift market demand

3. Tastes.

Changes in consumer taste impact on the demand for goods and

services.

Ex: consumer preference reduces for milk powder, therefore, demand for
milk powder has reduced.

Demand curve shifted to the left side.

32

Weeks 1 & 2
Variables that shift market demand

4. Population size.

Changes in the size of the population can affect the demand for
housing, nursing, medicine and many other goods. Each of these
changes in demand will be shown as a shift in the demand curve.
ex: A society with relatively more children, will have a greater demand for goods and
services like tricycles and daycare facilities.

Ex: A society with relatively more elderly persons, has a higher demand for nursing homes
and hearing aids.

33

Weeks 1 & 2
Variables that shift market demand

5. Expected future prices.

If consumers are expecting prices of goods increase or reduced in future,

there current demand will change accordingly.

34

Weeks 1 & 2
 An increase in demand
Price

Move right

Demand 1 Demand 2

0 Q1 Q2 Quantity
Weeks 1 & 2
 A decrease in demand
Price

Move left
P

Demand 1
Demand 3

0 Q3 Q1 Quantity
Weeks 1 & 2
A ‘change in demand’ is,

 A change in demand refers to a shift in the demand

curve (change in the quantity demanded at all
given/unchanged prices in the demand schedule).
The Supply
Side of the
Market
The Supply Side of the Market
What is Supply?

Different quantities of a good that sellers are willing and

able to sell (produce) at different prices.

Supply is the willingness and ability of producers to create goods and

services to take them to market.
The Supply Side of the Market

Quantity supplied: The amount of a good or service that a

firm is willing and able to supply at a given price.

- The quantity of products that sellers are prepared to sell at any

given price over a period of time.
The Supply Side of the Market

 Supply schedule: A table showing the relationship between

the price of a product and the quantity of the product supplied.
The Supply Side of the Market

 Supply curve: A curve that shows the relationship

between the price of a product and the quantity of the
product supplied.

quantity of
Price of a the product
product supplied
The Supply Side of the Market

Supply Curve: It’s a graphical representation (line showing) of

the relationship between the price of a product and the quantity
supplied.
 The Supply Side of the Market
Supply curve is drawn as a slope rising upward from
left to right.

Upward sloping
supply curve
The Supply Side of the Market

 Market supply: The supply by all the firms of a given

good or service. – Sum of the supplies of all sellers.
Firm/seller 1 + Firm/ seller 2 = Market Supply
The Supply Side of the Market
The Determinants
of Supply
The determinants of Supply

✗ Price of a good the good concerned Px

✗ Cost of inputs C
✗ Technological changes T
✗ Number of firms N
✗ Expected future prices Ex
✗ Other factors O
The Law of
Supply
 ✗ When all other factors affecting

The Law of supply remain constant, except the

Supply price of the good concerned,
there's a positive/ direct
relationship between Px and the
QSx.
The Supply Side of the Market

 The law of supply: The quantity supplied varies directly with

price.

-When the price of a product decreases, the quantity supplied

of that product decreases.

Price Supply
The Supply Side of the Market

 The law of supply: The quantity supplied varies directly with

price.

-When the price of a product increases, the quantity supplied

of that product increases.

Price Supply
 The Supply Side of the Market

 The law of supply: The quantity supplied varies directly with price.

- When the price of a product increases, the quantity supplied of that

product increases.

- When the price of a product decreases, the quantity supplied of that

product decreases.

The law
So, There’s a positive or direct relationship between
of
price and quantity supply.
supply
Change in Quantity
Supplied
and
Change in Supplied
Change in Quantity
Supplied
A ‘change in quantity supplied’

 A change in the quantity supplied refers to a movement

along the supply curve as a result of a change in the product’s
price.

Movement
Change in along the
the product supply
prices curve
 A ‘change in quantity supplied’
 A change in the quantity supplied refers to a movement along the supply
curve as a result of a change in the product’s price.

A
Change in Supplied
A ‘change in supply’

 A change in supply refers to a shift in the supply curve (quantity

supplied changes at all price points).

Occurs due to a change in the variables, other than the product’s

own price, that affect supply

change in shift in the

the supply
variables curve
Variables that shift supply (determinants of supply)
The determinants of Supply

✗ Price of a good the good concerned Px – Constant

✗ Cost of inputs C
✗ Technological changes T
✗ Number of firms N
✗ Expected future prices Ex Changing
✗ Other factors O
Variables that shift supply (determinants of supply)
1. Prices of inputs.

- Wage cost
Land – rent
- Raw materials cost Labour- wage/salary
- Transportation cost capital- raw material cost

- Licensing fees

Weeks 1 & 2
Variables that shift supply (determinants of supply)
1. Change in the costs of production.
 An input is anything used in the production of a good or service.

 An increase in the cost of an input increases the cost of

production. The firm supplies less.
Increases in cost of inputs, increases the cost of production,
therefore supply decreases.

 A decrease in the cost of an input decreases the cost of

production at every price. The firm supplies more at
every price.
Deceases in cost of inputs, decreases the cost of production,
Weeks 1 & 2 therefore supply increases.
Variables that shift supply

2.Improvements in technology.
Technological improvement allows the firm to
Increases
produce more outputs with the same amount of inputs, so supply
costs per item of production falls, the profit margin
increases at all given prices, S increases.

 Productivity: The output produced per unit of input.

Technological improvement, increases production, cost of

production falls, therefore supply increases.

Weeks 1 & 2
Variables that shift supply

3. Number of firms in the market.

Increases
supply

When new firms enter the market, supply

increases.
Decreases
supply

When firms exit the market, supply decreases.

Weeks 1 & 2
 Variables that shift supply (determinants of supply)

4. Expected future prices.

For example, if your firm produces mp3 players and you hear that Apple will soon introduce a
new iPod that has more memory and longer battery life, you (producers) may decide to hurry up
and sell your players to stores before the new iPod comes out.

When people decide to increase production/sales today, they are increasing the current
supply for mp3 players because of what they EXPECT to happen in the future.

Weeks 1 & 2
 A decrease in supply
Price
Supply2 Supply1
Supply decreases
Supply curve shift to left side

0 Q2 Q1 Quantity
Weeks 1 & 2
 An increase in supply

Price Supply1 Supply3

Supply increases
Supply curve shift to Right side
P

0 Q1 Q3 Quantity
Weeks 1 & 2
Market
Equilibrium
 Market Equilibrium
What is a market?

Any convent set of arraignments or organization in which buyers

and sellers exchange their goods and services.
Market Equilibrium

Market equilibrium: A situation in which quantity demanded

equals quantity supplied

quantity demanded quantity supplied

 Market Equilibrium
Market equilibrium: A situation in which quantity demanded
equals quantity supplied

Quantity Demanded
=
Quantity Supplied
Market Equilibrium

Equilibrium price:
The price at which the quantity demanded equals the quantity supplied.

At P* = DEMAND

At P* = SUPPLY
Market Equilibrium

Equilibrium quantity: The quantity where quantity demanded

equals the quantity supplied.

At Q* = DEMAND

At Q* = SUPPLY
 Market equilibrium: Figure 3.7
Price (dollars
per tablet)
Supply

$500 Market equilibrium

Equilibrium
price

Equilibrium
quantity Demand
0 5 Quantity (millions of
tablets per month)
Weeks 1 & 2
 Shortage

 Shortage below Ep: At prices below Ep, D>S and

consumers faced with a shortage outbid each other. As
price increases, D decreases, S increases until D+S are
equal at the Ep.
At prices below Equl. Price (Maximum Price),
Shortage =
Scarcity Demand>Supply

15 Ep Consumers faced with a shortage

10
As price increases,
Demand decreases,
Supply Increases,
Until D = S are equal at the Ep.
10 20 50
 Surplus

 Surplus above Ep: At prices above Ep, S>D and

producers faced with unsold stocks reduce prices. As
price fall, D increases, S decreases until D+S are equal
at the Ep.

Surplus = At prices above Equl. Price (Minimum Price),

Excess
Supply > Demand
15
Producers faced with unsold stocks
Ep 10
As price falls,
Demand increases,
Supply decreases,
Until D = S are equal at the Ep.
10 20 50
 The effect of surpluses and shortages on the market
Price (dollars Surplus of 2 million
per tablet) tablets resulting from
price above Supply
equilibrium.

$600

500 Shortage of 4 million

tablets resulting from
price below
equilibrium.
300

Demand

0 3 4 5 6 7 Quantity (millions of
tablets per month)
Weeks 1 & 2
 The effect of an
increase in supply
on equilibrium
 The effect of an increase in supply on equilibrium

Price (dollars
per tablet) Supply1
Supply2

1. As Toshiba enters the

market for tablet
computers, the supply
P1 curve shifts to the right …
P2
3. …and increasing the
2. …decreasing equilibrium quantity.
the equilibrium
price…
Demand
0 Q1 Q2 Quantity (millions of
tablets per month)
Weeks 1 & 2
 The effect of an increase in demand on equilibrium

Price (dollars 1. As population and

per tablet) income grow, the
demand curve shifts to
the right …
Supply

P2 3. …and also
P1 increasing the
equilibrium quantity.

2. …increasing
the equilibrium
price… Demand2
Demand1
0 Q1 Quantity (millions of
Q2
tablets per month)
Weeks 1 & 2
Note: when two variables change one outcome will be “indeterminate “
 E.g. both demand and supply increase:

P D1 D2 S1
S2 Equilibrium
quantity rises and
price rises
are uncertain
P2

D2
S1 D1
S2
0 Q1 Q2 Q

Weeks 1 & 2
The End!!!