Unit 2

Module
Principles of Microeconomics
Unit 2
SUPPLY AND DEMAND
Phạm Xuân Nam

nampx@neu.edu.vn
Objectives
Markets
Demand Supply
(buyers’ behavior) (sellers’ behavior)
Market Equilibrium
Equilibrium Price Equilibrium Quantity
Unit 2: Supply and Demand Slide 2

Contents
1 2
Demand Supply
3
Market
44
Market
Equilibrium Efficiency
Market
Market is any arrangement that enables buyers and sellers to get
information and to do business with each other.

Market
In a market, the participants (sellers and buyers) make the decisions
themselves based on analyzing their own benefits and opportunity
costs.

1
DEMAND
Demand
Demand is the amount of a good that buyers are willing and able to
purchase across a range of prices, ceteris paribus.
Q Quantity D Demand
P Price QD Quantity Demanded

Quantity Demanded
Quantity demanded is the amount of a good that buyers are willing

and able to purchase at a specific price, ceteris paribus.

Demand Schedule

Demand Curves

Demand Function
• Expression of demand as a mathematical function:
𝑄𝐷 = 𝑓 ( 𝑃 )
• Special Case: Linear demand function:
𝑄 𝐷 =𝑎 − 𝑏 𝑃

Individual Demand and Market Demand

Individual Demand and Market Demand
Suppose Spencer and Kate are the only two demanders of lemonade. Each month, Spencer
buys six glasses of lemonade when the price is $1.00 per glass, and he buys four glasses when
the price is $1.50 per glass. Each month, Kate buys four glasses of lemonade when the price is
$1.00 per glass, and she buys two glasses when the price is $1.50 per glass. Which of the
following points is on the market demand curve?
A. Q = 2; P = 1,5
B. Q = 4; P = 2,5
C. Q = 10; P = 1
D. Q = 16; P = 2,5

Price (P)
P
The Law of Demand
The claim that, other things
being equal, the quantity
demanded of a good falls
when the price of the good
rises.
A change in price cause a

movement along the
demand curve.
Q

Determinants of Demand
A movement along the A shift of the demand
demand curve curve

Determinants of Demand
A movement along the A shift of the demand
demand curve curve
Caused by a change in Caused by a determinants
price. of demand other than the
price of the goods itself.
Change the quantity
demanded at any given
price.

Income (I)
Normal Good
Demand increases when income increases.
shifts to the right
shifts to the left
Inferior Good
Demand decreases when income increases.
shifts to the right
shifts to the left

Prices of Related Goods (Px,PY)
Substitutes
two goods for which an increase in
the price of one leads to an
increase in the demand for the
other
shifts to the right
Hàng hóa bổ sung

two goods for which an increase in
the price of one leads to a
decrease in the demand for the
other
shifts to the left

Number of buyers (N)
Size of the market

market demand depends on how
many of these buyers there are
The number of buyers
increases shifts to the right

Tastes (T)
The personal preference
of consumers for goods
and services
Determinants
• Age
• Gender
• Traditions
• Habits
• Advertisements

Expectations (E)
What people think will

happen in the future
Expectations on future income

Expectations on future prices

Variables That Influence Buyers
Represents a
movement
along the Price of the good itself
demand curve
Income
Prices of related goods
Shifts the
demand curve
Tastes
Expectations
Number of buyers

2
SUPPLY
Supply
Supply is the amount of a good that sellers are willing and able
to sell across a range of prices, ceteris paribus.
Q Quantity S Supply
P Price QS Quantity Supplied

Quantity Supplied
Quantity supplied is the amount of a good that sellers are willing
and able to sell at a specific price, ceteris paribus.
Supply represents the relationship between quantity supplied

and price, ceteris paribus.

Supply Schedule and Supply Curve

Supply Function
• Expression of supply as a mathematical function:
𝑄 𝑆= 𝑓 ( 𝑃 )
• Special Case: Linear supply function:
𝑄 𝑆 =𝑎 +𝑏𝑃

Individual Supply and Market Supply

Individual Supply and Market Supply
Suppose that the market for toothpaste only consists of 2 sellers,
which are PS with the inverse supply function , and CloseUp with
the inverse supply function . Determine the market supply function
for toothpaste.

Price (P)
The Law of Supply
The claim that, other things
being equal, the quantity
supplied of a good rises
when the price of the good
rises
A change in price cause a

movement along the supply
curve.

Determinants of Supply

Technology
Technological advances help

increase productivity and
reduce producers’ costs →
increase in quantity supply
at any prices → the supply
curve shifts to the right.

Input Prices
Directly affects the production
costs
Input Prices increase →
Production Costs increase →
Supply decreases (shifts to
the left)

Number of Sellers
The market supply curve is

the sum of all the individual
sellers’ supply curves. Higher
number of sellers will
increases market supply.

Taxes and Subsidies
Changes in the level of taxes

and subsidies directly affect
the firms’ production cost,
therefore shifting the supply
curve.
Taxes and subsidues are

used by the government to
regulate the behaviors of the
sellers.

Taxes and Subsidies
Suppose that the market demand function for toothbrushes is .
a. The government imposes a tax of $5/toothbrush. Determine the new demand
function.
b. The government imposes a subsidy of $5/toothbrush. Determine the new
demand function.

Expectations (E)
What people think will

happen in the future
Expectations on market demand

Expactations on policy changes

Variables That Influence Sellers
Represents a
movement along Price of the good itself
the supply curve
Input Prices
Technology
Shifts the supply
curve
Taxes and Subsidies
Number of Sellers
Expectations

3
MARKET EQUILIBRIUM
Market Equilibrium
Surplus
Shortage

Market Equilibrium
Market equilibrium is a situation in which the market price has
reached the level at which the quantity supplied equals the
quantity demanded
Equilibrium price is the price that balances the quantity supplied

and the quantity demanded
Equilibrium quantity is the quantity supplied and the quantity

demanded at the equilibrium price
Market Equilibrium
Invisible The price of any good adjusts to bring the quantity supplied and
Hand
the quantity demanded of that good into balance

Market Equilibrium
Surplus
A situation in which the

quantity supplied is
greater than the quantity
demanded
A surplus will create

pressure to lower the
market price.

Market Equilibrium
Shortage
A situation in which the

quantity demanded is
greater than the quantity
supplied
A shortage will create

pressure to raise the
market price.

Market Equilibrium
There are 100 identical sellers and 80 identical buyers in a

certain market. The sellers all have their individual supply
functions as and the buyers all have their individual
demand function as .
1. Determine the market demand and market supply functions.
2. Determine the equilibrium price and quantity of the market.

Analyxing Changes in Equilibrium
1 Decide if the event shifts the supply or demand curve (or

perhaps both).
2 Decide in which direction the curve shifts.
3 Use a supply-and-demand diagram to see how the shift

changes the equilibrium price and quantity.

1 There is an article in Kenh14.vn praising the health

benefits of eating salmon.


2 Prolonged draught reduces the reprodutive rate of

salmon both in the wild and in aquaculture farms.


3 Both events (1) and (2) happen at the same time.




4
MARKET EFFICIENCY
Welfare Economics
• The study of how the allocation of resources affects
economic well-being
• The equilibrium of supply and demand in competitive
markets maximizes the total benefits received by all
buyers and sellers combined

Price and the Willingness to Pay
• WTP is the maximum amount that a buyer will pay for a
good
• Measures how much buyer values the good
• Price < Willingness to pay: Buyer would be eager to buy
• Price > Willingness to pay: Buyer would refuse to buy
• Price = Willingness to pay: Buyer would be indifferent about
buying

The Willingness to Pay of Four Possible Buyers
Buyer Willingness to Pay
Whitney $1,000
Ella 800
Mariah 700
Karen 500

Consumer Surplus
• Amount a buyer is willing to pay for a good minus
amount the buyer actually pays
• Measures the benefit buyers receive from participating in
a market
• Closely related to the demand curve

Using the Demand Curve to Measure Consumer Surplus
• At any quantity, the price given by the demand curve

shows the willingness to pay of the marginal buyer
• Marginal buyer
• The buyer who would leave the market first if the price were any
higher
• Total consumer surplus
• Area below the demand curve and above the price
• Measures the consumer surplus in a market

Price Buyers Quantity Demanded

More than $1,000 None 0
$800 to $1,000 Whitney 1
$700 to $800 Whitney, Ella 2
$500 to $700 Whitney, Ella, Mariah 3
$500 or less Whitney, Ella, Mariah, Karen 4



What Does Consumer Surplus Measure?
• Consumer surplus
• Measures the benefit that buyers derive from a market as the
buyers themselves perceive it
• Good measure of economic well-being if policymakers want to
satisfy buyers’ preferences

Cost and the Willingness to Sell
• Cost is the value of everything a seller must give up to
produce a good including opportunity cost
• Measure of willingness to sell
• Price > Cost: Seller would be eager to sell
• Price < Cost: Seller would refuse to sell
• Price = Willingness to sell: Seller would be indifferent about
selling

The Costs of Four Possible Sellers
Seller Cost
Vincent $3,600
Claude 3,200
Pablo 2,400
Andy 2,000

Producer Surplus
• Amount a seller is paid for a good minus the seller’s cost
of providing it
• Measures the benefit sellers receive from participating in
a market
• Closely related to the supply curve

Using the Supply Curve to Measure Producer Surplus
• Supply curve
• Reflects sellers’ costs
• Used to measure producer surplus
• Total producer surplus
• Area below the price and above the supply curve
• Measures the producer surplus in a market

Price Sellers Quantity Supplied

$3,600 or more Vincent, Claude, Pablo, Andy 4
$3,200 to $3,600 Claude, Pablo, Andy 3
$2,400 to $3,200 Pablo, Andy 2
$2,000 to $2,400 Andy 1
Less than $2,000 None 0



Benevolent Social Planners
• Benevolent social planners
• Hypothetical committee: all-knowing, all-powerful, well-
intentioned
• Want to maximize the economic well-being of everyone in
society
• Total surplus is a natural variable to consider when
judging a market’s allocation of resources
• Total surplus = Value to buyers − Cost to sellers
Maximizing Total Surplus
• If an allocation of resources maximizes total surplus, the
allocation exhibits efficiency
• Efficiency
• Property regarding a resource allocation of maximizing the total surplus
received by all members of society
• Equality
• Property of distributing economic prosperity uniformly among the
members of society

Consumer and Producer Surplus in the Market Equilibrium
Total surplus—the sum of

consumer and producer
surplus—is the area
between the supply and
demand curves up to the
equilibrium quantity.

Evaluating the Market Equilibrium
• The equilibrium outcome is an efficient allocation of
resources
1. Competitive markets allocate the supply of goods to the buyers
who value them most, as measured by their willingness to pay
2. Competitive markets allocate the demand for goods to the
sellers who can produce them at the lowest cost
3. Competitive markets produce the quantity of goods that
maximizes the sum of consumer and producer surplus

The Efficiency of the Equilibrium Quantity
• At quantities less than the equilibrium

quantity, such as Q1, the value to buyers
exceeds the cost to sellers.
• At quantities greater than the
equilibrium quantity, such as Q2, the cost
to sellers exceeds the value to buyers.
• Therefore, the market equilibrium
maximizes the sum of producer and
consumer surplus.

Markets are Efficient
• To conclude that markets are efficient, assumptions were
made about how markets work
• Assumptions
1. Markets are perfectly competitive
2. Outcome in a market matters only to the buyers and sellers in
that market

Are Markets Perfectly Competitive?
• Competition is far from perfect
• Ability to influence prices is called market power
• Market power can make markets inefficient by keeping
price and quantity away from equilibrium

Do Outcomes Matter only to the Buyers and Sellers?
• Decisions of buyers and seller affect bystanders
• Externalities
• The welfare implications of market activity depend on more
than just the value realized by buyers and the cost incurred by
sellers
• If externalities are ignored, the equilibrium in a market can be
inefficient from the standpoint of society as a whole

Market Failures
• The inability of some unregulated markets to allocate
resources efficiently
• When markets fail, public policy can potentially remedy the
problem and enhance economic efficiency

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Module

Phạm Xuân Nam

Equilibrium Price Equilibrium Quantity

Unit 2: Supply and Demand Slide 2

Unit 2: Supply and Demand Slide 4

Unit 2: Supply and Demand Slide 5

P Price QD Quantity Demanded

Unit 2: Supply and Demand Slide 7

Quantity demanded is the amount of a good that buyers are willing

Unit 2: Supply and Demand Slide 8

Unit 2: Supply and Demand Slide 9

Unit 2: Supply and Demand Slide 10

Unit 2: Supply and Demand Slide 11

Unit 2: Supply and Demand Slide 12

Unit 2: Supply and Demand Slide 13

A change in price cause a

Unit 2: Supply and Demand Slide 14

Unit 2: Supply and Demand Slide 15

Unit 2: Supply and Demand Slide 16

Unit 2: Supply and Demand Slide 17

Hàng hóa bổ sung

Unit 2: Supply and Demand Slide 18

Size of the market

Unit 2: Supply and Demand Slide 19

Unit 2: Supply and Demand Slide 20

What people think will

Expectations on future income

Unit 2: Supply and Demand Slide 21

Unit 2: Supply and Demand Slide 22

P Price QS Quantity Supplied

Unit 2: Supply and Demand Slide 24

Supply represents the relationship between quantity supplied

Unit 2: Supply and Demand Slide 25

Unit 2: Supply and Demand Slide 26

Unit 2: Supply and Demand Slide 27

Unit 2: Supply and Demand Slide 28

Unit 2: Supply and Demand Slide 29

A change in price cause a

Unit 2: Supply and Demand Slide 30

Unit 2: Supply and Demand Slide 31

Technological advances help

Unit 2: Supply and Demand Slide 32

Unit 2: Supply and Demand Slide 33

The market supply curve is

Unit 2: Supply and Demand Slide 34

Changes in the level of taxes

Taxes and subsidues are

Unit 2: Supply and Demand Slide 35

Unit 2: Supply and Demand Slide 36

What people think will

Expectations on market demand

Unit 2: Supply and Demand Slide 37

Unit 2: Supply and Demand Slide 38

Unit 2: Supply and Demand Slide 40

Equilibrium price is the price that balances the quantity supplied

Equilibrium quantity is the quantity supplied and the quantity

Unit 2: Supply and Demand Slide 42

A situation in which the

A surplus will create