Chapter 2

Demand and Supply

 Lecture 2: Demand

 Lecture 3: Supply and Market Mechanism

Motivation
Pig Epidemic Pushes Vietnamese Farmers Toward Cows and Ostriches
Bloomberg news (5, 2019)
The terms supply and demand refer to the
behavior of people as they interact with
one another in competitive markets.

Market: is a group of buyers and sellers of a

particular good or service.
2.1. Demand

2.1.1. Key definitions

2.1.2. The Law of demand
2.1.3. Illustrating demand
2.1.4. Determinants of demand
2.1.5. Distinguishing the
movement along and shift of the
demand curve
2.1.1 Key definitions
 Demand: is the amount of a good that buyers are
willing and able to purchase at different prices in a
particular period of time, ceteris parabus

 Quantity demanded: is the amount of a good that

buyers are willing and able to purchase at a particular
price in a particular period of time, ceteris parabus

 Individual demand vs Market demand

2.1.2 The law of demand

Price ↓ → Demand ↑
Price ↑ → Demand ↓

Law of Demand
 There is an inverse relationship
between price and quantity.
 When the price increases the quantity
demanded decreases, and vice versa,
other things equal (ceteris paribus).
 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!
2.1.3 Illustrating demand: Demand
equation
The equation relates price and quantity demanded

Qd = a – bP
Qd: Quantity demanded
P: Price
b : coefficient (b ≥ 0 )
a : constant

Demand function: Qd=f(P)

Increase Price → Decrease in Qd
Decrease Price → Increase in Qd
2.1.3 Illustrating demand: Demand
Schedule
The curve relates price and quantity demanded

Unit price of ice- Quantity

cream (US Dollar) demanded of
ice-cream
0.5 10
1 8
1.5 6
2 4
2.5 2
3 0
2.1.3 Ilustrating demand: Demand Curve
The curve relating price and quantity demanded
Price of
Ice-Cream
Cone
$3.00

2.50

2.00

1.50

1.00

0.50

Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Market Demand

Market demand refers to the sum

of all individual demands for a
particular good or service.
Graphically, individual demand
curves are summed horizontally to
obtain the market demand curve.
Market Demand
2.1.4. Distinguishing the movement along
and shift of the demand curve:
Two Simple Rules for Movements vs. Shifts

 Rule One
 When an independent variable changes
and that variable does not appear on the
graph, the curve on the graph will shift.
 Rule Two
 When an independent variable does
appear on the graph, the curve on the
graph will not shift, instead a movement
along the existing curve will occur.
 Change in Quantity Demanded
versus Change in Demand

Change in Quantity Demanded

Movement along the demand curve.

Caused by a change in the price of the product.

 Changes in Quantity Demanded
Price of
Cigarettes
per Pack
A tax on producers that
raises the price of
C cigarettes results in a
$4.00
movement along the
demand curve.

2.00 A

D1

0 12 20 Number of Cigarettes
Smoked per Day
 Change in Quantity Demanded
versus Change in Demand

Change in Demand
A shift in the demand curve, either to the left or right.

Caused by a change in a determinant other than the price.

2.1.5.Determinants of Demand

Market price (Px) :

Consumer income (I)
Prices of related goods (Py)
Tastes (T)
Expectations (E)
Number of buyers (N)
Change in Quantity Demanded versus
Change in Demand
Variables that A Change in
Affect Quantity
Demanded This Variable . . .
Price Represents a movement
along the demand curve
Income Shifts the demand curve
Prices of related Shifts the demand curve
goods
Tastes Shifts the demand curve
Expectations Shifts the demand curve
Number of Shifts the demand curve
buyers
 Consumer Income
Normal Good
Price of
Ice-Cream
Cone
$3.00 An increase
2.50 in income...
Increase
2.00 in demand

1.50

1.00

0.50 D2
D1
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Consumer Income
Inferior Good
Price of
Ice-Cream
Cone
$3.00

2.50 An increase
2.00
in income...
Decrease
1.50 in demand
1.00

0.50
D2 D1
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Consumer Income
Normal Good & Inferior Good

If the demand for a good falls when

income falls, the good is called a normal
good.

If the demand for a good rises when

income falls, the good is called an inferior
good.
Prices of Related Goods
Substitutes : Plant-based food
 Prices of Related Goods
Complements: Sugar and Coffee
 Prices of Related Goods
Substitutes & Complements

When a fall in the price of one good

reduces the demand for another good,
the two goods are called substitutes.

When a fall in the price of one good

increases the demand for another good,
the two goods are called complements.
When oil markets might be headed for the big
crash?
 There are more than one billion cars on the road
worldwide today, and only one tenth of one
percent of them have a plug.
 By 2020, some electric cars will be faster, safer,
cheaper, and more convenient than their
gasoline counterparts.
 What if people just stop buying oil?

Source : In the first episode of our animated series, Sooner Than You Think,
Bloomberg's Tom Randall does the math on when oil markets might be headed
for the big crash.
2.2. Supply

2.2.1. Key definitions

2.2.2. The Law of supply
2.2.3. Illustrating supply
2.2.4. Determinants of supply
2.2.5. Distinguishing the movement along and
shift of the supply curve
2.2.1 Key definitions

Quantity supplied is the amount of a good

that sellers are willing and able to sell
at a particular price in a particular
period of time ceteris parabus
2.2.1 Key definitions

Supply is the amount of a good that

sellers are willing and able to sell at
different prices in a particular period
of time ceteris parabus
2.2.2 Law of Supply

The law of supply states that there is

a direct (positive) relationship
between price and quantity supplied.

P↑ → Qs↑
P↓ → Qs↓
2.2.3 Illustrating supply:
Supply Schedule
The table relates price and quantity supplied
Unit price of ice- Quantity supplied of
cream (US Dollar) ice-cream

0.5 0
1 1
1.5 2
2 3
2.5 4
3 5
2.1.3 Illustrating supply: Supply equation
The equation relates price and quantity supplied

Qs = a + bP
Qs: Quantity supplied
P : Price
b : coefficient (b ≥ 0)
a : constant (other things equal)

Supply function: Qs=f(P)

2.2.3 Illustrating supply: Supply Curve
The curve relates price and quantity supplied
Price of
Ice-Cream
Cone
$3.00

2.50

2.00

1.50

1.00

0.50

Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Change in Quantity Supplied

Price of
Ice-Cream S
Cone

C
$3.00 A rise in the price
of ice cream cones
results in a
movement along
the supply curve.
A
1.00

Quantity of
0 1 5 Ice-Cream
Cones
 Market Supply

Market supply refers to the sum of all

individual supplies for all sellers of a
particular good or service.
Graphically, individual supply curves
are summed horizontally to obtain
the market supply curve.
2.2.4. Determinants of Supply

Market price
Input prices
Technology
Expectations
Number of producers
What are some examples?
Change in Quantity Supplied versus
Change in Supply
Variables that
Affect Quantity Supplied A Change in This Variable . . .
Price Represents a movement along
the supply curve
Input prices Shifts the supply curve
Technology Shifts the supply curve
Expectations Shifts the supply curve
Number of sellers Shifts the supply curve
 Change in Supply
S3
Price of
Ice-Cream S1
S2
Cone

Decrease in
Supply

Increase in
Supply

Quantity of
0 Ice-Cream
Cones
2.3. The market mechanism
2.3.1. Market Equilibrium
2.3.2. Surplus and shortage
2.3.3. Price control
 2.3.1 Equilibrium of Supply and
Price of
Demand
Ice-Cream
Cone
Supply
$3.00

2.50 Equilibrium

2.00

1.50

1.00

0.50 Demand
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
2.3.1 Equilibrium of Supply and
Demand

Qd = Qs
Equilibrium(Pe,Qe) = E(2,7)
 2.3.2. Excess Supply
Price of
Ice-Cream
Cone
Supply
$3.00 Surplus

2.50

2.00

1.50

1.00

0.50 Demand
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Excess Demand
Price of
Ice-Cream
Cone

Supply

$2.00

$1.50

Shortage Demand

0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of
Ice-Cream Cones
Three Steps
To Analyzing Changes in Equilibrium

Decide whether the event shifts the supply or demand curve (or
both).
Decide whether the curve(s) shift(s) to the left or to the right.
Examine how the shift affects equilibrium price and quantity.
 Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

How an Increase in Demand Affects

the Equilibrium
Price of 1. Hot weather increases
Ice-Cream the demand for ice cream...
Cone

Supply

$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 Chocolate is an input of icecream
Cone production, price of chocolate
S2 increases…..
S1

New
$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.
 Exercise

Many pineapple farmers in Tien Giang

Province’s Tan Phuoc District, the largest
pineapple planting area in the Cuu Long
(Mekong) Delta, are taking losses because of
fluctuating prices caused by an oversupply
(June2018)
2.3.3. Price control
Price controls are usually enacted when
policymakers believe that the market price
of a good or service is unfair to buyers or
sellers:

• Price ceiling
• Price floor
Price ceiling : is a legal maximum on the
price at which a good can be sold
Figure: A Market with a Price Ceiling

Price of
Houses
(VND bl)
Supply

Equilibrium
price

2 Price
Shortage ceiling

Demand

0 75 125 Quantity of
Quantity Quantity Houses
supplied demanded
Example:
Affordable housing for low
income citizens
A price floor is a legal minimum on the
price at which a good can be sold.
Example: Miminum wages
Figure How the Minimum Wage Affects the Labor Market

Wage

Labor
Supply

Equilibrium
wage

Labor
demand
0 Equilibrium Quantity of
employment Labor
Figure How the Minimum Wage Affects the Labor Market

Wage

Labor
Labor surplus Supply
(unemployment)
Minimum
wage

Labor
demand
0 Quantity Quantity Quantity of
demanded supplied Labor
Summary

 The government will attempt to provide equity and

security for people. So instead of the market deciding
the price, the government issues a price.
 Policymakers issue price controls.
 Two types:
 1) price ceiling causes surplus
 2) price floor causes shortage
1. The demand for books is: Qd = 160 - 2P
The supply of books is: Qs = 20 + 5P
What is the equilibrium price of books?
A) 5
B) 10
C) 15
D) 20

2. Refer to Question 1. What is the equilibrium quantity of books sold?

A) 25
B) 50
C) 75
D) 120