Demand & Supply

Hasan Gilani

MARKETS DEFINED

POTENTIAL BUYERS

POTENTIAL SELLERS

MARKETS

The Market Forces of Supply and Demand

Supply and demand are the two words that economists use most often. Supply and demand are the forces that make market economies work. Modern microeconomics is about supply, demand, and market equilibrium.

Markets
A market is a group of buyers and sellers of a particular good or service. The terms supply and demand refer to the behavior of people . . . as they interact with one another in markets.

Markets
Buyers determine demand.

Sellers determine supply.

Market Type: A Competitive Market

A competitive market is a market. . .
with many buyers and sellers.
that is not controlled by any one person.

in which a narrow range of prices are established that buyers and sellers act upon.

Competition: Perfect and Otherwise

Perfect Competition
Products are the same Numerous buyers and sellers so that each has no influence over price Buyers and Sellers are price takers

Competition: Perfect and Otherwise

Monopoly
One

seller, and seller controls price

Oligopoly
Few

sellers Not always aggressive competition

Competition: Perfect and Otherwise

Monopoly
One

seller, and seller controls price

Oligopoly
Few

sellers Not always aggressive competition

Competition: Perfect and Otherwise

Monopolistic Competition
Many

sellers Slightly differentiated products Each seller may set price for its own product

Markets and Competition

Other market Structures Monopoly - single Seller, also entry is barred Oligopoly - few sellers - characterized by strategic interdependence, entry difficult, barriers may exist Monopolistic Competition, differentiated products, brand preference, but entry is NOT barred

Demand
Quantity demanded is the amount of a good that buyers are willing and able to purchase.

Determinants of Demand
Market price Consumer income Prices of related goods Tastes Expectations

Law of Demand
The law of demand states that there is an inverse relationship between price and quantity demanded.

Demand Schedule
The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.

DEMAND DEFINED
P QD $5 10 4 20 3 35 2 55 1 80
A schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices.

LAW OF DEMAND

An inverse relationship exists between price and quantity demanded

As Price Falls Quantity Demanded Rises As Price Rises Quantity Demanded Falls

Ceteris Paribus
Ceteris paribus is a Latin phrase that
means all variables other than the ones being studied are assumed to be constant. Literally, ceteris paribus means other things being equal.
The demand curve slopes downward because, ceteris paribus, lower prices imply a greater quantity demanded!

LAW OF DEMAND
Diminishing Marginal Utility

LAW OF DEMAND
Diminishing Marginal Utility Income Effect

LAW OF DEMAND
Diminishing Marginal Utility Income Effect Substitution Effect

LAW OF DEMAND
Diminishing Marginal Utility Income Effect Substitution Effect Demand Curve Individual and Market Demand
http://www.investopedia.com/video/play/law-ofdiminishing-marginal-utility/#axzz2AiTkfdIh

GRAPHING DEMAND
Price of Corn

P
CORN

$5

P $5 4 3 2 1

QD 10 20 35 55 80

Plot the Points

10 20 30 40 50 60 70 80 Quantity of Corn

GRAPHING DEMAND
Price of Corn

P
CORN

$5

P $5 4 3 2 1

QD 10 20 35 55 80

Plot the Points

10 20 30 40 5055 60 70 80 Quantity of Corn

GRAPHING DEMAND
Price of Corn

P
CORN

$5

P $5 4 3 2 1

QD 10 20 35 55 80

Plot the Points

10 20 30 40 50 60 70 80 35 Quantity of Corn

GRAPHING DEMAND
Price of Corn

P
CORN

$5

P $5 4 3 2 1

QD 10 20 35 55 80

Plot the Points

10 20 30 40 50 60 70 80 Quantity of Corn

GRAPHING DEMAND
Price of Corn

P
CORN

$5

P $5 4 3 2 1

QD 10 20 35 55 80

Plot the Points

10 20 30 40 50 60 70 80 Quantity of Corn

GRAPHING DEMAND
Price of Corn

P
CORN

$5

P $5 4 3 2 1

QD 10 20 35 55 80

Connect the Points

D
10 20 30 40 50 60 70 80 Quantity of Corn

GRAPHING DEMAND
Price of Corn

P
CORN

$5

P $5 4 3 2 1

QD 10 20 35 55 80

What if Demand Increases?

D
10 20 30 40 50 60 70 80 Quantity of Corn

GRAPHING DEMAND
Price of Corn

P
CORN

$5

P $5 4 3 2 1

QD 4 30 10 40 3 20 60 35 Increase 2 80 55 in 80+ 1 Demand

o

Increase in Quantity Demanded

D D Q

10 20 30 40 50 60 70 80 Quantity of Corn

GRAPHING DEMAND
Price of Corn

P
CORN

$5

P $5 4 3 2 1

QD 10 20 35 55 80

What if Demand Decreases?

D
10 20 30 40 50 60 70 80 Quantity of Corn

GRAPHING DEMAND
Price of Corn

P
CORN

$5

P $5 4 3 2 1

QD 4 -10 10 3 20 20 35 40 2 Decrease 55 60 80 in
1

Decrease in Quantity Demanded

Demand o
10 20 30 40 50 60 70 80 Quantity of Corn

D D Q

DETERMINANTS OF DEMAND Tastes Number of Buyers Income

Normal (Superior) & Inferior Goods

Prices of Related Goods

Substitutes & Complements Unrelated Goods

Expectations

SUPPLY DEFINED
CORN

P QS
Supply is a schedule or a curve showing the amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices.

$1 2 3 4 5

5 20 35 50 60

LAW OF SUPPLY
A direct relationship exists between price and quantity supplied
As Price Rises
Quantity Supplied Rises

As Price Falls
Quantity Supplied Falls

GRAPHING SUPPLY
Price of Corn

Plot the Points

CORN

$5

P QS $5 4 3 2 1
20 30 40 50 60 70 80 Quantity of Corn

60 50 35 20 5

o 5 10

GRAPHING SUPPLY
Price of Corn

Plot the Points

CORN

$5

P QS $5 4 3 2 1
10 20 30 40 50 60 70 80 Quantity of Corn

60 50 35 20 5

GRAPHING SUPPLY
Price of Corn

Plot the Points

CORN

$5

P QS $5 4 3 2 1
10 20 3035 40 50 60 70 80 Quantity of Corn

60 50 35 20 5

GRAPHING SUPPLY
Price of Corn

Plot the Points

CORN

$5

P QS $5 4 3 2 1
10 20 30 40 50 60 70 80 Quantity of Corn

60 50 35 20 5

GRAPHING SUPPLY
Price of Corn

Plot the Points

CORN

$5

P QS $5 4 3 2 1
10 20 30 40 50 60 70 80 Quantity of Corn

60 50 35 20 5

GRAPHING SUPPLY
Price of Corn

$5

CORN

P QS $5 4 3 2 1 60 50 35 20 5

Connect the Points

10 20 30 40 50 60 70 80 Quantity of Corn

GRAPHING SUPPLY
Price of Corn

$5

CORN

What if Supply Increases?

10 20 30 40 50 60 70 80 Quantity of Corn

P QS $5 4 3 2 1
Q

60 50 35 20 5

GRAPHING SUPPLY
Price of Corn

$5

Increase in Supply

S
CORN

in Quantity Supplied
10 20 30 40 50 60 70 80 Quantity of Corn

P QS 80 $5 60 70 4 50 60 3 35 45 2 20 Increase 30 1 5
Q

GRAPHING SUPPLY
Price of Corn

$5

CORN

What if Supply Decreases?

10 20 30 40 50 60 70 80 Quantity of Corn

P QS $5 4 3 2 1
Q

60 50 35 20 5

GRAPHING SUPPLY
Price of Corn Decrease

$5

in Supply

S S
CORN

P QS 45 $5 60 30 4 50 20 3 35 Decrease 2 200 in Quantity 1 5-Supplied

Q

10 20 30 40 50 60 70 80 Quantity of Corn

DETERMINANTS OF SUPPLY Resource Prices Technology Taxes & Subsidies Prices of Other Goods Price Expectations Number of Sellers

DETERMINANTS OF SUPPLY Resource Prices Technology Combining Taxes & with Subsidies Prices Demand of Other Goods Price Expectations Number of Sellers

MARKET DEMAND & SUPPLY

BUSHELS OF CORN

P $5 4 3 2 1

QD 10 20 35 55 80

MARKET

BUSHELS OF CORN

200 DEMAND B 2,000 U 4,000 Y

P QS $5 4 3 2 1 60 50 35 20 5

MARKET

200 SUPPLY S 12,000 E 10,000 L

x 7,000
E
S

x 7,000
4,000 E 1,000
R S

11,000 R 16,000

EQUILIBRIUM

MARKET DEMAND & SUPPLY

Price of Corn CORN MARKET

$5

CORN MARKET

P QD 2,000 $5 4,000 4 7,000 3 11,000 2 16,000 1

PQ
4 3

Market S $5 12,000 Clearing 4 Equilibrium10,000

3 7,000 2 4,000 1 1,000

Q

D
2 4 6

78

10 12 14 16

Quantity of Corn

MARKET DEMAND & SUPPLY

Price of Corn CORN MARKET

$5

P QD 2,000 $5 4,000 4 7,000 3 11,000 2 16,000 1

Surplus

S
At a $4 price

CORN MARKET

PQ

S 12,000 more is being$5

4 supplied than 10,000

demanded

3 7,000 2 4,000 1 1,000

D Q

78

10 12 14 16

Quantity of Corn

MARKET DEMAND & SUPPLY

Price of Corn CORN MARKET

$5

S
At a $2 price

CORN MARKET

P QD 2,000 $5 4,000 4 7,000 3 11,000 2 16,000 1

PQ

S 12,000 more is being $5

4 10,000 demanded than 3 7,000 supplied 2 4,000 1 1,000 Shortage

D
2 4 6

78

101112 14 16

Quantity of Corn

MARKET DEMAND & SUPPLY

Price of Corn CORN MARKET

$5

P QD 2,000 $5 4,000 4 7,000 3 11,000 2 16,000 1

Surplus

CORN MARKET

PQ
S $5 12,000 4 10,000 3 7,000 2 4,000 1 1,000

Shortage
2 4 6

D
78
101112 14 16

Quantity of Corn

MARKET EQUILIBRIUM
Equilibrium Price & Quantity Rationing Function of Prices Changes in Demand Changes in Quantity Demanded Changes in Supply Changes in Quantity Supplied http://www.youtube.com/watch?v=0yWs OZgsTSY

Multiple Shifts

Complex Cases

Supply Increases; Demand Decreases

Supply Decreases; Demand Increases

Prices Decrease Quantity Indeterminate

Price Increases Quantity Indeterminate

Multiple Shifts

Complex Cases

Supply Increases; Demand Increases

Supply Decreases; Demand Decreases

Prices Indeterminate Quantity Increases

Price Indeterminate Quantity Decreases

Government Set Prices Price Ceilings

Shortages Rationing Problem Black Markets Rent Controls

Price Floors
Surpluses

Price Ceiling
A maximum price that sellers may charge for a good, usually set by government.

Excess Demand (Shortage) Created by a Price Ceiling

Price ceiling
Price Rationing :The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied. Ration coupons Tickets or coupons that entitle individuals to purchase a certain amount of a given product per month. Black market A market in which illegal trading takes place at market-determined prices.

PRICE FLOORS Price floor A minimum price below which exchange is not permitted. Minimum wage A price floor set under the price of labor. Agricultural Products

Summary
Economists use the model of supply and demand to analyze competitive markets. The demand curve shows how the quantity of a good depends upon the price.

Summary
According to the law of demand, as the price of a good rises, the quantity demanded falls. In addition to price, other determinants of quantity demanded include income, tastes, expectations, and the prices of complements and substitutes.

Summary
The supply curve shows how the quantity of a good supplied depends upon the price. According to the law of supply, as the price of a good rises, the quantity supplied rises.

Summary
In addition to price, other determinants of quantity supplied include input prices, technology, and expectations. Market equilibrium is determined by the intersection of the supply and demand curves.

Summary
Supply and demand together determine the prices of the economys goods and services. In market economies, prices are the signals that guide the allocation of resources.