Demand and Supply: Basics

September 9, 2009

Demand

In a market economy, the price of a good is determined by the interaction of demand and supply.

Demand

Demand is the relationship between the price of a good and the quantity of the good demanded at each price. The various combinations of price and

quantity demanded can be reported in a demand schedule.

Each individual in a market has a demand schedule since each person has different preference over the products.

Demand

The law of demand: The greater the price the lower the quantity demanded, other things being equal.

Demand

Market Demand: the total quantity demanded in the market equals the sum of the quantities demanded by each person in the market at a given price.

The law of demand also holds for market demand.

Demand

Demand schedules in the Market for Chewing Gum

PriceQuantity Demanded by Total

Quantity Demanded

Person 1 Person 2 Person 3 Person 4

$0.01 10 17 13 20 60

$0.10 7 16 10 17 50

$0.20 5 15 5 15 40

$0.30 4 8 4 14 30

$0.40 2 6 3 9 20

$0.50 1 3 1 5 10

Demand

A simple demand curve

Supply

Supply is the relationship between the price of a good and the quantity supplied by producers.

A market supply is found by adding up individual producer supply schedules. Summing the quantity supplied at each price by each producer (horizontal summing of the individual supply curves) derives the market supply curve.

Supply

The law of supply: The higher the price of a good, the greater the quantity supplied, other things being equal.

The law of supply is the result of the law of increasing cost.

Supply

Supply Schedules in the Market for Chewing Gum

PriceQuantity Supplied by Total

Quantity Supplied

Firm 1 Firm 2 Firm 3

$0.01 10 15 0 25

$0.10 20 25 5 50

$0.20 30 35 10 75

$0.30 40 45 15 100

$0.40 50 55 20 125

$0.50 60 65 25 150

Supply

A simple supply curve

Supply

A change in supply indicates a shift of the supply curve.

A change in the quantity supplied is represented by the movement long the supply curve, when there is a change of the own price.

Supply

Determinants of Supply (other than own price) The prices of factors of production The price of related goods: substitutes and

complements in the production process. Expected future prices Number of suppliers Technology Taxes and subsidies The state of nature

Demand and Supply

Market Equilibrium In the supply and demand model,

the equilibrium occurs when there is neither a shortage nor a surplus in the market.

Demand and Supply

Supply and demand diagram

SurplusSurplus

Shortage

Shortage

Demand and Supply

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.

Demand and Supply

Changes in demand and Supply does not change Increase in demand leads to a rise in the

equilibrium price and quantity. Decrease in demand leads to a fall in

the equilibrium price and quantity.

Demand and Supply

Changes in supply and demand does not change Increase in supply leads to a fall of

equilibrium price and quantity. Decrease in supply leads to a rise of

equilibrium price and quantity.