02

Demand, Supply and Market

Equilibrium
 Demand

➢The quantity demanded of any goods is the amount of the

good that buyers are willing and able to purchase.
 Law of demand
➢The quantity demanded of a good falls when the price of the goods
rises, other things equal.
REPRESENTING THE LAW OF DEMAND

➢Demand Schedule

➢Demand Curve

➢Demand Equation
 The Demand Schedule
➢A table that shows the relationship between the price of good and the
quantity of demanded.
➢Example: Silva’s demand for Dosai
Price ( per slice) Quantity of Dosai
Rs demanded (QD)

5.00 0
4.00 100
3.00 200
2.00 300
1.00 400
0 500
The Demand Curve
Market demand Versus Individual Demand

➢The quantity demanded in the market is the sum of the

quantities demanded by all the buyers at each price.
➢Suppose Silva and Perera are the only two buyers in the
Dosai market. (Qd = Quantity demanded)
Price Silva’ Qd Perera’s Qd Market Qd
1 10 12 22
2 8 10 18
3 6 8 14
4 4 6 10
5 2 4 6
Demand Function:

➢A demand function is a causal relationship between a dependent

variable (i.e., quantity demanded) and various independent
variables (i.e., factors which are believed to influence quantity
demanded)
Q = f(P)

Q d = a -b P

➢Where Q= quantity and P = price of a good.

Ex: Q = 2 – 4P
CHANGE IN QUANTITY DEMANDED

✓It refers to the increase or decrease in quantity

demanded of the good under consideration in response
to the decrease or increase in the price of that good,
other things remain unchanged
✓Due to the change in the quantity demanded the
demand curve does not move. However points along
the demand curve move
CHANGE IN QUANTITY DEMANDED

Q d
Q 1 Q 2
DEMAND FUNCTION
Qd x = 𝑓 (Px, Y, P 1 ….. P n − 1, T, Pe , S)-----
Demand
✓ Price of the commodity (P x ) ,
✓ Income (Y)
✓ Price of Related Goods ( P 1 ….. P n-1 )
✓ Substitute Goods
✓ Complementary Goods
✓ Tastes and Preferences (T)
✓ Expectations ( P e )
✓ Social factors (S)
Demand curve Shifters
➢The demand curve shows how price affects quantity demanded , other
things being equal.

➢These “other things” are non-price determinants of demand (i.e. things

that determine buyers’ demanded for a good, other then the good’s
price)
Non price Determinants of Household
Demand
➢The income available to the household.

➢The prices of related products available to the

household.
✓ Substitutes- Example: Pizza and hamburgers, Coke
and Pepsi, laptop and desktop
✓ complements- Example: Computer and software
Non price Determinants of Household
Demand
➢The household’s tastes and preferences.

➢The household’s future expectations-

✓Expectations affect consumers buying decisions

▪ Example: If people expect their income rise, their demand for meals at
expensive restaurants may increase now.
DEMAND : Determinants
NORMAL GOODS
Goods for which demand goes up when income is higher and
for which demand goes down when income is lower.

E.G. Cars

INFERIOR GOODS
Goods for which demand tends to fall when income rises.

E.G. Public Transportation

 Shift of Demand Curve

When demand shifts

to the right, demand
increases. This causes
quantity demanded to
be greater than it was
prior to the shift, for
each and every price
level.
 Variables that influence buyers
Variable Change
Price
Income
Price of related goods
Tastes
Expectation
 Variables that influence buyers
Variable Change
Price Causes a movement along the D curve
Income Shifts the demand curve
Price of related goods Shifts the demand curve

Tastes Shifts the demand curve

Expectation Shifts the demand curve
Shift of Demand VS Movement along a Demand Curve

➢Change in price of a good or service leads to Change in

quantity demanded (movement along the demand curve).

➢Change in income, preferences, or prices of other goods or

services leads to Change in demand (shift of the demand
curve).
Shift of Demand VS Movement along a Demand Curve
 Supply
➢ The quantity of supplied of any goods is the amount that sellers are
willing and able to sell.

➢Law of supply: the claim that the quantity supplied of a good rises
when the price of the goods rises, other things equal.
 REPRESENTING THE LAW OF SUPPLY

➢SUPPLY CURVE
A graph illustrating how much of a product a firm will sell at different
prices.

➢SUPPLY SCHEDULE
A table showing how much of a product firms will sell at different
prices.

➢EQUATION

Derive the supply equation Q S = a + b P

SUPPLY FUNCTION
Qs x = 𝑓 Px, Pf, T, E, G, P 1 … . . P n − 1,
✓ Price of the commodity (P x )
✓ Prices of factors of production or inputs ( Pf )
✓ Price of Related Goods ( P 1 ….. P n-1 )
✓ Technologies used in the production (T)
✓ Expectations of the supplier( E )
✓ Government policies (G)
 The supply Schedule
➢A table that shows the relationship between the price of a
good and the quantity supplied.

Example:
➢ Star foods’ supply of Dosai
SUPPLY SCHEDULE

➢ Market supply for Dosai

Price ( per slice)- Rs Qs

5 500
4 400
3 300
2 200
1 100
0 0
Star foods’ supply curve

➢The quantity supplied in the market is the sum of the quantities

supplied by all sellers at each price.
CHANGE IN QUANTITY SUPPLIED
P

P2 B

P1 A

S1 S2 Qs
Supply curve shifters
➢The supply curve shows how price affects quantity supplied, other
things being equal.
➢These “other things” are non-price determinants of supply
➢A graph illustrating how much of a product a firm will sell at different
prices.

➢Change in them shift the supply curve

Supply curve shifters
Non price Determinants of Supply
All factors other than price cause a shift of the supply
curve and is called a change in supply
 Non price Determinants of Supply
➢Input prices ( wages, price of raw materials)
➢Technological progress.
➢Prices of other goods or services.
➢Future expectations among the sellers
➢Weather conditions.
➢Number of sellers.
• Draw a supply curve for accounting software. What
happens to it in each of the following scenarios?
• Retailers cut the price of the software.
• A technological advance allows the software to be
produced quickly
• Professional developers of the software increased the
price of the services provided by them
Supply curve:Shift of Supply VS Movement along a Supply
Curve

➢MOVEMENT ALONG A SUPPLY CURVE

The change in quantity supplied brought about by a change in price.

➢SHIFT OF A SUPPLY CURVE

The change that takes place in a supply curve corresponding to a new
relationship between quantity supplied of a good and the price of that
good. The shift is brought about by a change in the original conditions.

➢Change in income, preferences, or prices of other goods or

services leads to Change in supply (shift of a supply curve).
Supply and Demand Together
➢Equilibrium : Price has reached the level where quantity supplied
equals quantity demanded.

➢Equilibrium price: The price that equates quantity supplied equals

quantity demanded.

➢Equilibrium quantity: The quantity supplied and quantity demanded

at the equilibrium price.
Market Equilibrium
EQUILIBRIUM
The condition that exists
when quantity supplied
and quantity demanded
are equal.
Supply and Demand Together
Demand Schedule Supply Schedule

Price Quantity Price Quantity

Rs 0 19 Rs 0 0
0.50 16 0.50 0
1.00 13 1.00 1
1.50 10 1.50 4
2.00 7 2.00 7
2.50 4 2.50 10
3.00 1 3.00 13

At Rs.2.00, the quantity demanded is

equal to the quantity supplied!
Supply and demand for Ice-cream Cones
P (Rs.) Qd Qs
7 0 600
6 100 500
5 200 400
4 300 300
3 400 200
2 500 100
1 600 0
0 700 0
Supply and Demand Curves for Ice-cream
Cones
Surplus ( excess supply)
➢When quantity supplied is greater than quantity demanded.
CONSUMER SURPLUS
➢The difference between the maximum price that the consumer is
willing to pay and actually paying for a particular good.
PRODUCER SURPLUS
➢The difference between the price at which the producer is willing to
supply and the price at which the producer actually supply
TOTAL SURPLUS
 Three Steps To Analyzing Changes in
Equilibrium
➢Decide whether the event shifts supply curve (S) ,
demand curve (D), or both.
➢Decide in which direction curve shifts
➢Examine how the shift affects equilibrium price
and quantity.
How an Increase in Demand Affects the
Equilibrium
Price of 1. Hot weather increases
Ice-Cream the demand for ice cream...
Cone

Supply

Rs.2.50 New equilibrium

2.00
2. ...resulting Initial
in a higher equilibrium
price...
D2

D1
0 7 10 Quantity of
3. ...and a higher Ice-Cream Cones
quantity sold.
How a Decrease in Supply Affects the Equilibrium
Price of
Ice-Cream 1. Shortage of milk reduces
Cone the supply of ice cream...
S2
S1

New
Rs.2.50 equilibrium

2.00 Initial equilibrium

2. ...resulting
in a higher
price...
Demand

0 1 2 3 4 7 8 9 10 11 12 13 Quantity of
3. ...and a lower Ice-Cream Cones
quantity sold.
A shifts in both supply and demand

CHANGE IN THE EQUILIBRIUM

Important Definitions
➢Equilibrium Price: The price that equates the quantity demanded
with the quantity supplied.
➢Equilibrium quantity: The amount that people are willing to buy and
sellers are willing to offer at the equilibrium price level.
➢Shortage: A market situation in which the quantity demanded
exceeds the quantity supplied
➢Surplus: A market situation in which the quantity supplied exceeds
the quantity demanded.
Review Questions
01. Considering following supply and demand curves for a
certain product.
Qs= 25,000p
Qd= 50000-10,000p

What are the equilibrium price / output level ?

Review Questions
02. Considering following supply and demand curves for a
certain product.
Qs= -100+100p
Qd= 700-100p

What are the equilibrium price / output level ?