Micro - Topic 1

Topic 1
Demand and Supply
Dr. Mina Sami Ayad

Outline
1. Introduction
2. Demand
1. Demand Law
2. Demand Curve
3. Change in Demand
3. Supply
1. Supply Law
2. Supply Curve
3. Change in Supply
4. Market Equilibrium
2
Introduction
This study has two main hypothesis:
• A competitive market :is a market that has many buyers

and many sellers so no single buyer or seller can influence the
price.
• Price is expressed in terms of Money.
3
Demand
• Demand something means:

❑ Want it.
❑ Plan afford it.
❑ Plan to buy it.
• Quantity demanded: is the amount that consumers plan to

buy during a given time period at a particular price.
• Quantity demanded is not the Quantity bought
4
Demand
1. Demand Law
❑ Other things remaining the same, the higher the price of a

good, the smaller is the quantity demanded.
Why a higher price reduce quantity?
❑ Substitution effect: when the relative price (opportunity cost) of

a good or service rises, people seek substitutes for it, so the
quantity demanded decreases.
❑ Income effect: when the price of a good or service rises relative

to income, people cannot afford all the things they previously
bought, so the quantity demanded decreases.
5
Demand
1. Demand Curve
• The term demand refers to the entire relationship between

the price of the good and quantity demanded of the good.
A demand curve is also a willingness-and-ability-

to-pay curve: The smaller the quantity available ⇒
the higher is the price that someone is willing to
pay for another unit (marginal benefit).
6
Demand
3. Change in Demand
• When any factor that influences buying plans other than the price
of the good changes, there is a change in demand for that good.
• When demand increases, the quantity that people plan to buy

increases at each and every price so the demand curve shifts
rightward. This is may be due to:
• The prices of related goods. Expected future
prices.
• Income
• Expected future income and credit. Population.
• Preferences.
7
Demand
3. Change in Demand
Price Of Related Goods:
A substitute is a good that can be used in place of another good

(e.g. bus and Train- Beef and Chicken)
A complement is a good that is used in conjunction with another

good (e.g. Printers-ink, Petrol-cars).
8
Demand
3. Change in Demand
When price of bus ↑⇒ demand on train ↑ (positive relation with substituted

goods). When price of Petrol ↓⇒ demand on Car ↑ (negative relation with
complementary goods).
9
Demand
3. Change in Demand
Change in Income
We distinguish two types of goods:

Normal goods: Income ↑⇒ Demand ↑
Inferior goods: Income ↑⇒ Demand ↓
Expected Future Prices:

If the expected future price of a good ↑⇒, people buy more of it
before the price rises ⇒ demand ↑ ⇒ future demand will ↓
(positive relation)
10
Demand
3. Change in Demand
Population
When population ↑⇒ demand ↑
Preferences
Preferences toward greater health ↑⇒ demand ↑ on gym. (Positive
relation)
11
Supply
If a firm supplies a good or service, then the firm:

❑Has the resources and the technology to produce it,
❑Can profit form producing it.
❑Has made a definite plan to produce and sell it.
The quantity supplied of a good or service is the amount

that producers plan to sell during a given time period at
a particular price.
12
Supply
1. Supply Curve
13
Supply
2. Supply Law
• Other things remaining the same, the higher the price of a

good, the greater is the quantity supplied.
• All else held constant, including the costs of production

inputs, the supplier will be able to increase his return per
unit of a good or service as the price for the item
increases.
• The difference between the price and the cost of the good
or service being sold increases.
14
Supply
3. Change in Supply
It changes due to:

❑Prices of factors of production.
❑Prices of related goods produced.
❑Expected future prices.
❑The number of suppliers.
❑Technology.
❑The state of nature.
15
Supply
3. Change in Supply
Prices of Factor of Production

if ↑⇒ lowest price that a seller accept ↑⇒ supply ↓.
Prices of Related Goods

Substitutes: Products can be produced with same resources.
Negative relation. I will shift to another product.
Complements: If I Produce Ink and Printers.
Positive relation.
16
Supply
3. Change in Supply
• Expected future prices. (positive)
• The number of suppliers. (positive)
• Technology. (positive)
• The state of nature. (e.g. good weather...).
17
Supply
3. Change in Supply
18
Market Equilibrium
• Equilibrium is a situation in which opposing forces balance

each other. Equilibrium in a market occurs when the price
balances the plans of buyers and sellers.
• The equilibrium price is the price at which the

quantity demanded equals the quantity supplied.
• The equilibrium quantity is the quantity bought and

sold at the equilibrium price.
19
Market Equilibrium
What is Shortage and

Surplus?
20

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Topic 1

Demand and Supply

Dr. Mina Sami Ayad

This study has two main hypothesis:

• A competitive market :is a market that has many buyers

• Price is expressed in terms of Money.

• Demand something means:

• Quantity demanded: is the amount that consumers plan to

• Quantity demanded is not the Quantity bought

❑ Other things remaining the same, the higher the price of a

Why a higher price reduce quantity?

❑ Substitution effect: when the relative price (opportunity cost) of

❑ Income effect: when the price of a good or service rises relative

• The term demand refers to the entire relationship between

A demand curve is also a willingness-and-ability-

• When demand increases, the quantity that people plan to buy

Price Of Related Goods:

A substitute is a good that can be used in place of another good

A complement is a good that is used in conjunction with another

When price of bus ↑⇒ demand on train ↑ (positive relation with substituted

We distinguish two types of goods:

Expected Future Prices:

When population ↑⇒ demand ↑

If a firm supplies a good or service, then the firm:

The quantity supplied of a good or service is the amount

• Other things remaining the same, the higher the price of a

• All else held constant, including the costs of production

It changes due to:

Prices of Factor of Production

Prices of Related Goods

• Expected future prices. (positive)

• The number of suppliers. (positive)

• The state of nature. (e.g. good weather...).

• Equilibrium is a situation in which opposing forces balance

• The equilibrium price is the price at which the

• The equilibrium quantity is the quantity bought and

What is Shortage and

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