Demand and Supply

Demand Function
Supply Function
Market Equilibrium
Demand Shift
Supply Shift
Change in Equilibrium
D = 10.98 0.11 P + 0.001 PCI
D=Demand for personal computers (in
0000)
P= Price of personal computer (in $)
PCI = Per capita income ($/year)
Current levels D=10,00,000; P=750
Rameshs Demand of Petrol
Prices (Rs/Lt)

Demand (Lt/Month)

30

35.5

40

33.0

50

30.5

60

28.0

70

25.5

80

23.0

90

20.5

100

18.0

0
10
20
30
40
50
60
70
80
90
100
0 10 20 30 40
P
r
i
c
e
s

(
R
s
/
l
t
)
Quantity of Demand (lt/month)
Rameshs Demand for Petrol
Demand Curve
Relationship between the quantity of a good
that consumers are willing to buy and the price
of the good slopes downwards
Qd = Qd(P)
Ex: Q = a b P
For previous example,
Q =43-.25P
Change in Quantity Demanded
Quantity
Price
P
0

Q
0

P
1

Q
1

An increase in price
causes a decrease in
quantity demanded.
Change in Quantity Demanded
Quantity
Price
P
0

Q
0

P
1

Q
1

A decrease in price
causes an increase in
quantity demanded.
Law of Demand
A decrease in the price of a good, all
other things held constant, will cause an
increase in the quantity demanded of the
good.
An increase in the price of a good, all
other things held constant, will cause a
decrease in the quantity demanded of
the good.
Shift in Rameshs Demand of
Petrol
Prices (Rs/Lt)

Demand (Lt/Month)

30

35.5

40

33.0

50

30.5

60

28.0

70

25.5

80

23.0

90

20.5

100

18.0

Prices

Demand

Demand1

30

35.5

42.5

40

33.0

40.0

50

30.5

37.5

60

28.0

35.0

70

25.5

32.5

80

23.0

30.0

90

20.5

27.5

100

18.0

25.0

Demand Shift
Shift in Demand
0
20
40
60
80
100
120
0.0 10.0 20.0 30.0 40.0 50.0
Qty
P
r
i
c
e
s
Demand
Demand1
Change in Demand
Quantity
Price
P
0

Q
0
Q
1

An increase in demand refers
to a rightward shift in the
market demand curve.
Change in Demand
Quantity
Price
P
0

Q
1
Q
0

A decrease in demand refers
to a leftward shift in the market
demand curve.
Shifts in Demand
Preferences
Number of Consumers in the Market
Consumer Information
Consumers Income
Expectations of Future Prices
Price of related goods
Changes in the quantity demanded and
changes in demand



Prices

Supply



30

25.5

40

28

50

30.5

60

33



70

35.5



80

38

90

40.5



100

43

Supply
0
5
10
15
20
25
30
35
40
45
50
0 50 100 150
P
r
i
c
e
s

(
R
s
/
l
t
)
Supply (billion lt)
Supply of Petrol
Supply Curve
Relationship between the quantity of a good
that producers are willing to sell and the price
of the good slopes upwards
Qs = Qs(P)
Ex: Q = c+ dP
For the previous example the supply curve is
Q=18+ 0.25 P
Change in Quantity Supplied
Quantity
Price
P
0

Q
0

P
1

Q
1

An increase in price
causes an increase in
quantity supplied.
Change in Quantity Supplied
Quantity
Price
P
1

Q
1

P
0

Q
0

A decrease in price
causes a decrease in
quantity supplied.
Law of Supply
A decrease in the price of a good, all
other things held constant, will cause a
decrease in the quantity supplied of the
good.
An increase in the price of a good, all
other things held constant, will cause an
increase in the quantity supplied of the
good.
Prices

Supply

Supply1

30

25.5

32.5

40

28

35

50

30.5

37.5

60

33

40

70

35.5

42.5

80

38

45

90

40.5

47.5

100

43

50

Shifts in Supply
0
20
40
60
80
100
120
0 20 40 60
P
r
i
c
e
s
Qty
Supply1
Supply
Shift in Supply
Change in Supply
Quantity
Price
P
0

Q
1
Q
0

An increase in supply refers to a
rightward shift in the market
supply curve.
Shift in Supply
Technology
Number of Firms in the Market
Input Prices
Expectation of futures prices
Government, taxes, subsidies,
regulations
Market Equilibrium
Market equilibrium is determined at the
intersection of the market demand curve
and the market supply curve.
The equilibrium price causes quantity
demanded to be equal to quantity
supplied.
0
5
10
15
20
25
30
35
40
45
50
0 50 100 150
P
r
i
c
e
s

(
R
s
/
l
t
)
Quantity (Billion lt)
Demand
Supply
Market Demand and Supply
Market Equilibrium
Quantity
Price
P
Q
D
S
0
20
40
60
80
100
120
0 20 40 60
P
r
i
c
e
Qty
Demand
Supply
Supply1
Change in Market Equilibrium
Market Equilibrium
Quantity
Price
P
0

Q
0

D
0

S
0

Q
1

P
1

D
1

An increase in demand will
cause the market
equilibrium price and
quantity to increase.
Market Equilibrium
Quantity
Price
P
1

Q
1

S
0

Q
0

P
0

D
0
D
1

A decrease in demand will
cause the market
equilibrium price and
quantity to decrease.
Market Equilibrium
Quantity
Price
P
0

Q
0

D
0

S
0

Q
1

P
1

An increase in
supply will
cause the
market
equilibrium
price to
decrease and
quantity to
increase.
S
1

Market Equilibrium
Quantity
Price
P
1

Q
1

D
0

Q
0

P
0

A decrease in
supply will
cause the
market
equilibrium
price to
increase and
quantity to
decrease.
S
1
S
0

0
20
40
60
80
100
120
0 20 40 60
P
r
i
c
e
Qty
Demand
Demand1
Supply
Supply1
Changes in Market Equilibrium
Demand-Supply Analysis
D-S analysis can be applied to a variety of
interesting and important problems
Impact of changing world economic conditions on
market price and production
Assessing impact of government policies
Price controls
Minimum wages
Price supports
Production incentives
Taxes, subsidies
Tariffs and import quotas
Market Mechanism: D-S
S1
P1
P2
Q1 Q3
Quantity
Price
D1
Q2
P3
Market Mechanism: D-S
S1
P1
P3
Q1 Q3
Qty/
Time
Price
D1
Q2
P2
P4
P5
P6
P7
T1 T2
T3
T4
T5
T6
T7
Market Equilibrium
S1
S2
P1
P2
Q1 Q2
Quantity
Price
D1
D2
D3
P3
Q3
P4
Market Mechanism
Market Mechanism: Tendency in a free
market for price to change until the
market clears
Equilibrium Price: Price that equates the
quantity supplied to the quantity
demanded
Shifts in demand and supply changes
prices
PowerPoint Slides
Prepared by Robert F.
Brooker, Ph.D.
Slide 39
PowerPoint Slides
Prepared by Robert F.
Brooker, Ph.D.
Slide 40
PowerPoint Slides
Prepared by Robert F.
Brooker, Ph.D.
Slide 41
PowerPoint Slides
Prepared by Robert F.
Brooker, Ph.D.
Slide 42
PowerPoint Slides
Prepared by Robert F.
Brooker, Ph.D.
Slide 43
PowerPoint Slides
Prepared by Robert F.
Brooker, Ph.D.
Slide 44
Problems
Demand for Oil is Q = 18- 3P
Supply of Oil Q = -6+ 9 P
Find equilibrium price and quantity

Supply of Gas Q= 140+ 4 Pg + 0.5 Po
Demand for Gas Q= -3 Pg + 14.5 Po
Po is Rs 30
Problems
When the price of vegetable fiber is Rs
1200/kg the demand was 16,000 kg and
supply was 8000 kg. As price increased to
Rs 1800/kg the demand decreased to
4000 kg and supply increased to 12000 kg
Construct linear demand and supply curve
and find out the equilibrium price and
quantity.