Demand and Supply

2
CHAPTER CHECKLIST
When you have completed your
study of this chapter, you will be able to

1 Understand the difference between quantity demanded

and demand, and explain what determines demand.

2 Understand the difference between quantity supplied and

supply, and explain what determines supply.

3 Explain how demand and supply determine price and

quantity in a market, and explain the effects of changes in
demand and supply.
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COMPETITIVE MARKETS
- A market is any arrangement that brings buyers and
sellers together.

- A market might be a physical place or a group of buyers

and sellers spread around the world who never meet.

- In this chapter, we study a competitive market that has so

many buyers and so many sellers that no individual buyer
or seller can influence the price.

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1. DEMAND

- Demand: refers to how much (quantity) of a

product or service is desired by buyers.
- Quantity Demanded: is the amount of a product
people are willing to buy at a certain price. The
quantity demanded is an amount per unit of time,
such as the amount per day or per month.
- Demand Relationship: the relationship between
Price and Quantity Demanded.

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1. DEMAND

The Law of Demand

• If the price of the good rises, the quantity

demanded of that good decreases.
P + ; QD -
• If the price of the good falls, the quantity
demanded of that good increases.
P - ; QD +

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1. DEMAND

Demand Schedule and Demand Curve

- Demand is the relationship between the Quantity
Demanded and the Price of a good when all other
influences on buying plans remain the same.
- Demand is illustrated by a demand schedule and a
demand curve.

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1. DEMAND

- Demand Schedule is a list of the quantities

demanded at each different price when all the other
influences on buying plans remain the same.
- Demand Curve is a graph of the relationship
between the Quantity Demanded of a good and its Price
when all other influences on buying plans remain the
same.

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1. DEMAND

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1. DEMAND

Changes in Demand
Change in Demand is a change in the quantity that
people plan to buy when any influence other than the
price of the good changes.
A change in demand means that there is a new
demand schedule and a new demand curve.

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 1. DEMAND

This Figure shows

changes in Demand.
1. When demand
decreases, the demand
curve shifts Leftward
from D0 to D1.

2. When demand
increases, the demand
curve shifts Rightward
from D0 to D2.

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1. DEMAND

- The main influences on buying plans that change

demand are
A. Prices of related goods
B. Expected future prices
C. Income
D. Expected future income
E. Number of buyers
F. Preferences

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1. DEMAND

A. Prices of Related Goods

A Substitute is a good that can be consumed in
place of another good.
For example, Pepsi and Coca cola are substitutes.

The demand for a good increases if the price of one

of its substitutes rises.
For example: if the price of Coca cola increases then
the demand on Pepsi will increase because Coca
cola is expensive now.

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1. DEMAND

A Complement is a good that is consumed with

another good.
For example, Car and license are complements.

The demand for a good increases if the price of

one of its complements falls.
For example: if license fee decreases then the
demand on cars will increase.

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1. DEMAND

B. Expected Future Prices

- A rise in the expected future price of a good will
increase the current demand for that good.
- A fall in the expected future price of a good will
decrease current demand for that good.
For example, if the price of a computer is expected to
fall next month, the demand for computers today
decreases.

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1. DEMAND
C. Income
A Normal Good is a good for which the demand
increases if income increases and demand decreases
if income decreases.
An Inferior Good is a good for which the demand
decreases if income increases and demand increases
if income decreases.
Cheaper cars are examples of the inferior goods. Consumers will
generally prefer cheaper cars when their income is constricted. As a
consumer's income increases the demand of the cheap cars will
decrease, while demand of costly cars will increase, so cheap cars are
inferior goods.

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1. DEMAND

D. Expected Future Income

- When income is expected to increase in the future, the
demand for some goods increases.
- When income is expected to decrease in the future,
the demand for some goods decreases.
- Changes in expected future income has the greatest
effect on the demand for big ticket items such as
homes and cars.

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1. DEMAND
E. Number of Buyers
The greater the number of buyers in a market, the larger
is the demand for any good.

F. Preferences

Preferences: a greater liking for one alternative over

another or others.
Preferences change when: People become better
informed; and New goods become available.
When preferences change, the demand for one item
increases and the demand for another item decreases.
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1. DEMAND

Change in Demand Versus Change in

Quantity Demand
A Change in Demand is a change in the quantity that
people plan to buy when any influence other than the
price of the good changes.
A Change in the Quantity Demanded is a change
in the quantity of a good that people plan to buy that
results from a change in the price of the good.

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1. DEMAND

 Elasticity is a term used in economics to describe a

change in the behavior of buyers and sellers in response
to a change in price for a good or service.
 Elasticity can be described as elastic (very responsive)
or Inelastic (not very responsive).
 Elastic Demand indicates that the quantity demand
responds to price changes in greater than proportional
manner.
 An Inelastic Demand is one where a given percentage
change in price will cause a smaller percentage change
in quantity demand.

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1. DEMAND

Price Elasticity of Demand is the ratio of the

percentage change in quantity demanded of a
product to the percentage change in price.
Economists employ it to understand how
demand change when a product’s price
changes. Expressed mathematically, it is:
Price Elasticity of Demand =
Percentage Change in Quantity Demanded ÷
Percentage Change in Price

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1. DEMAND
Figure: illustrates and summarizes the distinction.

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2. SUPPLY
- Supply: represents how much the market can offer.
- Quantity Supplied is the amount of a good, service, or
resource that people are willing and able to sell during a
specified period at a specified price.

 The Law of Supply

•If the price of a good rises, the Quantity Supplied of that
good increases. P + ; QS +
- This means that producers are willing to offer more of a
product for sale on the market at higher prices by increasing
production as a way of increasing profits. In other words, a
higher price means greater profits and thus an incentive to
increase the quantity supplied. Price and quantity supplied are
directly related.

•If the price of a good falls, the Quantity Supplied of that

good decreases. P - ; QS -

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2. SUPPLY

Supply Schedule and Supply Curve

- Supply is the relationship between the Quantity
Supplied of a good and the Price of the good when all
other influences on selling plans remain the same.
- Supply is illustrated by a supply schedule and a supply
curve.

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2. SUPPLY

- A Supply Schedule is a list of the quantities

supplied at each different price when all other
influences on selling plans remain the same.

- A Supply Curve is a graph of the relationship

between the Quantity Supplied and the Price of the
good when all other influences on selling plans
remain the same.

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2. SUPPLY

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2. SUPPLY

Changes in Supply
- A Change in Supply is a change in the quantity that
suppliers plan to sell when any influence on selling
plans other than the price of the good changes.
- A change in supply means that there is a new supply
schedule and a new supply curve.

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 2. SUPPLY
4.2 SUPPLY

This Figure shows

changes in supply.

1. When supply
decreases, the supply
curve shifts Leftward
from S0 to S1.

2. When supply increases,

the supply curve shifts
Rightward from S0 to S2.

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2. SUPPLY

- The main influences on selling plans that change

supply are:

A. Prices of related goods

B. Prices of resources and other inputs
C. Expected future prices
D. Number of sellers
E. Productivity

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2. SUPPLY

A. Prices of Related Goods

A change in the price of one good can bring a change
in the supply of another good.
- A Substitute in Production is a good that can be
produced in place of another good.

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2. SUPPLY

For example, Toyota and Mitsubishi are

substitutes in production in an auto Japanese
factory.
If price of substitute good (Toyota) increases in the
market, then the supply of (Mitsubishi) may decrease
because the firm will shift its recourses like labor to
produce (Toyota) car and it will decrease the supply of
(Mitsubishi) car.
• The supply of a good increases if the Price of
one of its substitutes in production falls. S+ ; P-
• The supply of a good decreases if the Price of
one of its substitutes in production rises. S- ; P+
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2. SUPPLY

- A Complement in Production is a good that is

produced along with another good.
For example, cream is a complement in production of
skim milk in a dairy.
• The supply of a good increases if the Price of one
of its complements in production rises. S+ ; P+
• The supply a good decreases if the Price of one of
its complements in production falls. S- ; P-

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2. SUPPLY

B. Prices of Resources and Other Inputs

Resource and input prices influence the cost of
production. The more it costs to produce a good, the
smaller is the quantity supplied of that good.
C. Expected Future Prices
Expectations about future prices influence supply.
Expectations of future prices of resources also
influence supply.

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2. SUPPLY
D. Number of Sellers
The greater the number of sellers in a market, the
larger is supply.
E. Productivity: a measure of the efficiency of a
person, machine, factory, system, etc., in converting
inputs into useful outputs.
- An increase in productivity lowers costs and
increases supply. For example, an advance in
technology increases supply.
- A decrease in productivity raises costs and
decreases supply.
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2. SUPPLY

Change in Supply Versus Change in Quantity

Supply
- A change in supply is a change in the quantity that
suppliers plan to sell when any influence on selling
plans other than the price of the good changes.
- A Change in Quantity Supplied is a change in the
quantity of a good that suppliers plan to sell that results
from a change in the price of the good.

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2. SUPPLY

The Elasticity of Supply measures how much

the quantity supplied of a good or service
changes when there is a price change .

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2. SUPPLY

Price Elasticity of Supply is the ratio of the percentage

change in quantity supplied of a product to the percentage
change in price. Economists employ it to understand how
supply change when a product’s price changes. Expressed
mathematically, it is:
Price Elasticity of Supply =
Percentage Change in Quantity Supplied ÷ Percentage
Change in Price

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2. SUPPLY
The following Figure illustrates and summarizes the distinction.

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3. MARKET EQUILIBRIUM

- Market Equilibrium occurs when the Quantity

Demanded equals the Quantity Supplied.

At market equilibrium, buyers’ and sellers’ plans are

consistent.

- Equilibrium Price is the price at which the Quantity

Demanded equals the Quantity Supplied.

- Equilibrium Quantity is the quantity bought and

sold at the Equilibrium Price.

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 3. MARKET EQUILIBRIUM
This Figure shows the
Market Equilibrium,
Equilibrium Price and
Equilibrium Quantity.
1. Market Equilibrium at
the intersection of
the Demand curve and
the Supply curve.
2. The Equilibrium
Price is $1 a bottle.

3. The Equilibrium
Quantity is 10 million
bottles a day.
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3. MARKET EQUILIBRIUM

Price: A Market’s Automatic Regulator

Shortage: there is not enough of something that is
needed. It occurs when the Quantity Demanded
exceeds the Quantity Supplied.
Surplus: an excess of production or supply. It occurs
when the Quantity Supplied exceeds the Quantity
Demanded.

Law of Market Forces

• When there is a shortage, the Price rises.
• When there is a surplus, the Price falls.
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3. MARKET EQUILIBRIUM

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