Basic Elements of Supply and Demand

Demand- refers to the quantity of goods and services that consumers are willing and able to buy at
different levels of price

Law of Demand

 When price increases, quantity demanded decreases. When price decreases, quantity
demanded increases, ceteris paribus

Ceteris Paribus- All other factors held constant

All thing things are equal.

Quantity demanded tends to fall when price rises because:

1. Substitution effect

2. Income effect

Factors Affecting Demand

1. Consumer Income

2. Price of related goods

3. Population

4. Tastes and Preferences

5. Special Influences

Note that:

Models are simplified theories that show the key relationships among variables.

Often, these relationships are expressed in functions.

Function - a mathematical concept that shows how one variable depends on a set of other variables.

 Demand Equation: Movement Along the Demand Curve

Q = 100- 1p

.
 The modern theory generally conceives of the demand function with the quantity as the
dependent variable and price as independent variable.

Movement along the demand Curve Shift in the Demand Curve

 Q = f(P)  Q= f( Pb, Y, PoP, TP, SI)

 Illustrate the law of Demand

 Pb, Y, PoP, TP, and SI can change
 Pb, Y, Pop,TP, and SI are held
constant

Supply

- Quantity of a good and service that producers are willing to sell in a given price.

Law of Supply

 When price increases, quantity supplied increases. when price decreases, quantity supplied
decreases

Factors Affecting the Supply Curve

1. Technology

-Computerized manufacturing lowers costs and increases supply

2. Input Prices

-A reduction in the wage paid to autoworkers lowers production costs

3. Price of Related goods- If truck prices fall, the supply of cars rises.

4. Government Policy

-Removing quotas and tariffs on imported automobiles increases total automobile supply.

5. Special Influences

-Internet shopping and auctions allow consumers t0 compare the prices of different dealers
more easily and drives high-cost sellers out of business.
 Market Equilibrium

Equilibrium condition: Qd= Qs, is known as the equilibrium condition equation. The result is
equilibrium price (Pe) and equilibrium qunatity (Qe).

 Algebraic computation

Given: Qd= 10-P

Qs = 5+ P

Req.

1. Equilibrium Price (Pe)

2. Equilibrium Quantity (Qe)

 Solution: Qd = 10-P

Qs = 5+P

10-P = 5+P

-P+P= 5-10

 Pe = 2.5

Then, substitute 2.5 to the equation;

 10- (2.5) = 5 + (2.5)

Therefore, Qd = Qs = 7.5

 Surplus- a situation in which Qs is greater than Qd.

 Shortage-a situation in which the Qd is greater than Qs.

 The equilibrium price and quantity depend on the position of the supply and demand curves.
When some event shifts one of these curves, the equilibrium in the market changes.

 The analysis of such change is called comparative statics because it involves comparing two
unchanging situations- an initial and a new equilibrium.