IQRA BE Demand Supply Equilibrium 2011

7/31/2019 IQRA BE Demand Supply Equilibrium 2011

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Demand, Supply andMarket Equilibrium



• Demand means the willingness and ability to

buy.

• Demand is the amount of a product thatpeople are willing and able to purchase at

each possible price during a given period oftime.

• The quantity demand is the amount of aproduct that people are willing and able topurchase at one, specific price.



• Law of demand – there is an inverserelationship between price andquantity demanded (ceteris paribus).

– Quantity demanded rises as price falls,other things constant.

– Quantity demanded falls as prices rise,other things constant.

– Why?





D 1

Change in quantity demanded(a movement along the curve)

B

0

P r i c e ( p e r u

n i t )

Quantity demanded (per unit of time)100

$2

$1

200

A



D 0

D 1

P r i c e ( p e r u n i t )

Quantity demanded (per unit of time)100

$2

$1

200

B A

Change in demand(a shift of the curve)

250



– Income – The prices of other goods

– Tastes

– Expectations

– Number of Buyers



$3.00

2.50

2.00

1.50

1.00

0.50

21 3 4 5 6 7 8 9 10 1211

Price of

Ice-CreamCone

Quantity of

Ice-CreamCones

0

Increasein demand

An increasein income...

D1 D2



$3.00

2.50

2.00

1.50

1.00

0.50

21 3 4 5 6 7 8 9 10 1211

Price of

Ice-CreamCone

Quantity of

Ice-CreamCones

0

Decreasein demand

An increase

in income...

D1 D2



When a fall in the price of onegood reduces the demand foranother good, the two goods arecalled substitutes.

When a fall in the price of one

good increases the demand foranother good, the two goods arecalled complements.



Consumer Taste

• If there is a change in taste in favor of a

commodity, the demand for thatcommodity will increase and demandcurve will shift to the right, and vice versa.

• A taste can be affected by advertisement

• - Informative Advertisement

• - Persuasive Advertisement



Expectation and Population

If consumer expect that prices will rise in

future, the current demand will increase .

The market demand for a product is also

influenced by changes in the size andcomposition of the population.

Other Factors

- Weather

- Health Scares



• A market demand curve is thehorizontal sum of all individualdemand curves.

– This is determined by adding theindividual demand curves of all thedemanders.



(1)Price percassette

$0.501.001.502.002.50

3.003.504.00

(2) Alice’sdemand

(3)Bruce’sdemand

(2)Cathy’sdemand

(3)Marketdemand

98765

432

65432

100

11000

000

16141197

532

ABCDE

FGH Cathy Bruce Alice

D

A

C

E

F

G

Quantity of cassettes demanded per week

2

$4.00

3.50

3.002.50

2.00

1.50

1.00

0.50

0

P r i c

e p e r c a s s e t t e ( i n d o l l a r s )

4 6 8 10 12 14 16

B

Market demand



Quantity supplied is the amount of

a good that sellers are willingand able to sell.



• There is a direct relationship betweenprice and quantity supplied (ceterisparibus).

– Quantity supplied rises as price rises,other things constant.

– Quantity supplied falls as price falls,other things constant.



$3.00

2.50

2.00

1.50

1.00

0.50

21 3 4 5 6 7 8 9 10 1211

Price of

Ice-CreamCone

Quantity of

Ice-CreamCones

0



• Quantity supplied refers to a specificamount that will be supplied at aspecific price.

• Changes in price causes changes inquantity supplied represented by amovement along a supply curve.

• A movement along a supply curve – thegraphic representation of the effect ofa change in price on the quantitysupplied.



1 5

Price of Ice-CreamCone

Quantity of

Ice-CreamCones0

S

1.00

A

C$3.00 A rise in the price

of ice cream conesresults in a

movement along

the supply curve .



• If the amount supplied is affected byanything other than a change inprice, there will be a shift in supply.

• Shift in supply – the graphicrepresentation of the effect of achange in a factor other than price on

supply



Price of Ice-CreamCone

Quantity of

Ice-CreamCones0

S1 S2 S3

Increase inSupply

Decrease inSupply



• Other factors besides price affect

how much will be supplied:

– Prices of Resources

– Prices of Other Goods – Technology

– Suppliers’ expectations

– Government Regulations – Number of Suppliers



QuantitiesSupplied

AB C D E

F G H I

(1)

Price(per DVD)

(2)

Ann'sSupply

(5)

MarketSupply

(4)

Charlie'sSupply

$0.000.501.001.502.00

2.503.003.504.00

0 12 3 4

5 6 7 8

0 0 12 3

4 5 5 5

0 0 0 0 0

0 0 2 2

0 13 5 7

9 1114 15

(3)

Barry'sSupply



1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

P r i c e p e r D V D

Charlie Barry Ann

Quantity of DVDs supplied (per week)

$4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0

I

H

G

F

E

D

C

B A

Market Supply

C A



• Equilibrium is a concept in which

opposing dynamic forces cancel eachother out.

• In a free market, the forces of supply

and demand interact to determineequilibrium quantity and equilibriumprice.

• When the market is not in equilibrium,you get either excess supply or excessdemand, and a tendency for price tochange.



• Excess supply – a surplus, the

quantity supplied is greater thanquantity demanded

• Prices tend to fall.

• Excess demand – a shortage, thequantity demanded is greater thanquantity supplied

• Prices tend to rise.



• The greater the difference between

quantity supplied and quantitydemanded, the more pressure thereis for prices to rise or fall.

• When quantity demanded equalsquantity supplied, prices have no

tendency to change.



Price (perDVD) QuantitySupplied QuantityDemanded Surplus (+)Shortage (-)

$3.50 7 3 +4

$2.50 5 5 0

$1.50 3 7 -4



A

P r i c e p e r D V D

$5.00

4.00

3.50

3.00

2.50

2.00

1.501.00

S

D

Quantity of DVDs supplied and demanded

C

Excess demand

1 2 3 4 5 6 7 8 9 10 11 12

Excess supply

E



• Shifts in either supply or demand

change equilibrium price andquantity.

•An increase in demand createsexcess demand at the originalequilibrium price.

• The excess demand pushes priceupward until a new higher price andquantity are reached.



A

S 0

Quantity of DVDs (per week)

$2.502.25

0 98 10

Excess demand

D 1 D 0

B



• A decrease in supply creates excess

demand at the original equilibriumprice.

• The excess demand pushes priceupward until a new higher price andlower quantity are reached.



A

Quantity of DVDs (per week)

$2.502.25

0 98 10

D 0

S 1 S 0

C

B Excess demand







A general equation representing the demandcurve

Qxd = f(Px , PY , M, H)Qxd = quantity demand of good X.

Px = price of good X.

PY = price of a related good Y.Substitute good.

Complement good.

M = income.

Normal good.

Inferior good.

H = any other variable affecting demand.



Price as a function of quantity demanded.Example:

Demand Function

Qxd = 10 – 2PxInverse Demand Function:

2Px = 10 – Qxd

Px = 5 – 0.5Qxd



An equation representing the supply curve:

Qxs = f(Px , PR ,W, H,)

QxS = quantity supplied of good X.

Px = price of good X.

PR = price of a production substitute.W = price of inputs (e.g., wages).

H = other variable affecting supply.



Price as a function of quantity supplied.

Example:

Supply Function

Qxs= -10 + 2Px

Inverse Supply Function:

2Px = 10 + Qxs

Px = 5 + 0.5Qxs



Demand FunctionQ = 10 – 2P

Supply Function

Q = -5 + 3P

What is Equilibrium P and Q ?



Demand FunctionQd = 10 – 2P

Supply Function

Qs = -5 + 3P

Equilibrium P and Q ?

P = 3 and Q = 4

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IQRA BE Demand Supply Equilibrium 2011