NEU Business School

E-BBA & E-BDB Program

Topic 2

DEMAND- SUPPLY and

Market EQUILIBRIUM

Lecturer: Dr. Tran Thi Hong Viet.

TS. Tran Thi Hong Viet- KTQD

 Demand, Supply and Market
Equilibrium
Market

Demand (Law of supply Supply

(Buyers’ behavior) and demand) (Sellers’ behavior)

1. Equilibrium (Price Determination)

2. Disequilibrium- Surplus and Shortages
(Movement to Equilibrium)
3. Change of Equilibrium (shift)

TS. Tran Thi Hong Viet- KTQD

What is Market ?
• A mechanism that:
- Brings buyers and sellers together
- Enables consumers and producers of a
particular product to interact
-
• The terms demand and supply refer to the
actions of participants within a market
– Buyers/consumers determine demand
– Sellers/producers determine supply
TS. Tran Thi Hong Viet- KTQD
Concept of Demand

• The various amounts of a product

that consumers are willing and able to
buy at various prices, in a given
period of time, ceteris paribus

• Demonstrated by demand schedule

and demand curve

TS. Tran Thi Hong Viet- KTQD

 demand schedule
and demand curve
(for Ice-cream)
P
Price (P) Quantity Demanded (Qd)
($/unit) (unit) Downward/ negative
1.4 2500 sloping
Inverse relationship
1.2 5000
1.0 7500
0.8 10000
0.6 12500
0.4 15000
0.2 17500
0
(Ceteris Paribus)
Q
TS. Tran Thi Hong Viet- KTQD
 Law of Demand

• Law of Demand:
– P Qd ; P Qd , Ceteris paribus
(inverse/ negative)

• Law of demand shows inverse relationship

between the price and the quantity
demanded of a good or service during some
period of time
TS. Tran Thi Hong Viet- KTQD
Why LAW of Demand ?

• Based on:
1. Income and substitution effects
2. Diminishing marginal utility
Toy
Store

TS. Tran Thi Hong Viet- KTQD

Income effect
• When price of a good falls, consumers can
buy more

• A decline in price increases the purchasing

power of money (real income)

Qd = I/P (= real income)

TS. Tran Thi Hong Viet- KTQD

 Substitution effect

• When price of a good increases, consumers

move to buy substitute good, so quantity of
the initial good fall

Toy
Store

TS. Tran Thi Hong Viet- KTQD

Demand function

• How to show the relationship between P

and Qd by a demand function/equation ?

Qd= f (P)
P = a-bQd (The linear demand curve)
a: intercept (by vertical axes)
b=  P/Qd= slope of D curve
(negative slope)
Can you write the demand equation for ice-
cream in that example ?
TS. Tran Thi Hong Viet- KTQD
Individual & Market
demand schedules
(for ice-cream)

P($) Q d Nam Qd Binh Qd Trang Q d Market

1.4 2000 500 0 2500

1.2 3000 1000 1000 5000
1.0 4000 1500 2000 7500
0.8 5000 2000 3000 10000
0.6 6000 2500 4000 12500
0.4 7000 3000 5000 15000
0.2 8000 3500 6000 17500
TS. Tran Thi Hong Viet- KTQD
Individual & market
demand curves
(for ice-cream)

P
P P P

d1 d2 d3
0.2
Q
8000 3500 6000 17500
Nam Binh Trang Market

TS. Tran Thi Hong Viet- KTQD

How to determine
market demand?
• Market demand is determined by
horizontally summing individual demand
curves
• Market demand is determined by adding
all the quantities demanded in a demand
schedule which correspond to their prices

TS. Tran Thi Hong Viet- KTQD

Determinants of Demand

• Price factor (other thing’s equal):

– Effect of P causes movement along the D
curve (inverse relationship, change in Qd)

• Non- Price factors (P is constant):

– Effect of Non-price factors cause the shift of
the D curve to the right /left (change in D)

TS. Tran Thi Hong Viet- KTQD

 Demand for milk Ice cream

Price of Income of Number of

Price of Milk Orange Ice Consumer Consumers
Ice cream cream s

PRICE FACTOR Tastes or Expectation

Preference
P

NON- PRICE FACTOR

Q
TS. Tran Thi Hong Viet- KTQD
 Effects of Price factors
(other thing’s equal)
P5
D1

4 Movement along
Price ($ per unit)

a demand curve
3

Change in
2
quantity demanded

1
D1

0 10 20 30 40 50 60 70 80
Quantity demanded
Q

TS. Tran Thi Hong Viet- KTQD

Effects of Non-Price factors

• Income of consumers
– Normal or superior goods—demand varies directly
with income
– Inferior goods—demand varies inversely with
income

• Prices of related goods

- Substitute goods: Orange IC (X ) with Milk IC (Y): Py , Qx

- Complementary goods: motorbike (X) and petrol (Y): Py , Qx

• Tastes or preferences of consumers: tiktok, live stream,

celebrates (the trend)
• The number ofTS.consumers
• Expectations
Tran Thi Hong Viet- KTQD
Effects of Non-Price factors-
Increase in Demand (P is constant):
D D2
P 1 5

4
Price ($ per unit)

3
Increase in
Demand
2

D2
1
D1

0 10 20 30 40 50 60 70 80
Quantity demanded
Q

TS. Tran Thi Hong Viet- KTQD

Effects of Non-Price factors-
Decrease in Demand
P 5 D1
D3
4
Price ($ per unit)

Decrease in
3
Demand

1
D1
D3
0 10 20 30 40 50 60 70 80
Q
Quantity demanded

TS. Tran Thi Hong Viet- KTQD

Check your understanding ???
Differences :
• Demand vs. Needs
• Demand vs. Quantity Demanded
•Individual Demand vs. Market
Demand
• Movement along vs. Shift
(Effect of P vs. Effect of non- P,
change in Qd vs. change in D)
TS. Tran Thi Hong Viet- KTQD
Concept of supply

• The various amounts of a product

that producers are willing and able
to supply at various prices during
some specific period (ceteris
paribus)
• Demonstrated by the supply
schedule and supply curve
TS. Tran Thi Hong Viet- KTQD
 Supply schedule and
supply curve
(of Ice-cream)
Price (P) Quantity Supplied (Qs)
($/unit) (unit) P
1,4 17500
1,2 15000
1,0 12500
Upward/positive
0,8 10000 sloping
0,6 7500 Direct
0,4 5000 relationship

0,2 2500
Q
(Ceteris Paribus)
TS. Tran Thi Hong Viet- KTQD
 Law of supply
• Law of Supply:
– P Qs ; P Qs , Ceteris paribus
(direct/ positive)

• The direct relationship between the price

and the quantity supplied of a good or
service during some period of time

TS. Tran Thi Hong Viet- KTQD

Why LAW of supply ?

• Based on: Profit attraction

P increase, Increase revenue, increase
profit (Other thing’s equal)

TS. Tran Thi Hong Viet- KTQD

Supply function

• How to show the relationship between P

and Qs by a supply function/equation ?

Qs= f (P)
P = c+dQs (The linear supply curve)
c: intercept (by vertical axes)
d=  P/Qs= slope of S curve
(positive slope)
Can you write down the supply equation for
ice-cream inTS. that example
Tran Thi Hong Viet- KTQD
?
Individual & Market
supply schedules
(of ice-cream)
Price Qs A Qs B Qs C Qs Market
($) (Units) (Units) (Units) (Units)
1.4 8000 3500 6000 17500
1.2 7000 3000 5000 15000
1.0 6000 2500 4000 12500
0.8 5000 2000 3000 10000
0.6 4000 1500 2000 7500
0.4 3000 1000 1000 5000
0.2 2000 500 - 2500
TS. Tran Thi Hong Viet- KTQD
Individual & market
supply curve
(of ice-cream)
P ($) P ($) P ($) P ($)

1.4
S

s1 s2 s3
0.2
2000 8000 3500 Q 2500
6000 17500
Producer A Producer B Producer C Market

TS. Tran Thi Hong Viet- KTQD

How to determine
market supply ?

• Market supply is determined by

horizontally summing individual
supply curves
• Market supply is determined by
adding all the quantities supplied in
a supply schedule which correspond
to their prices
TS. Tran Thi Hong Viet- KTQD
Determinants of supply

• Price factor- (Other thing’s equal):

– Effect of P causes movement along the S
curve (direct relationship, change in Qs)

• Non- Price factors- (P is constant):

– Effect of Non-price factors cause the shift of
the S curve to the right /left (change in S)

TS. Tran Thi Hong Viet- KTQD

Effects of Price factors
(Other thing’s equal)
P
5
S1
4
Price ($ per unit)

Movement along
2
a supply curve

1
S1
0 Q
2 4 6 8 10 12 14 16
Quantity supplied (000/week)

TS. Tran Thi Hong Viet- KTQD

Effects of Non-Price
factors
• Input prices: P input increase, supply decrease
• Technology
• Government policies
– Taxes: G imposes a tax for goods/services
sold, decrease S
– Subsidy: G subsidizes for producers,
increase S

• The number of producers

• Expectations
TS. Tran Thi Hong Viet- KTQD
 Effects of Non-Price factors-
Increase in Supply
S1
5 P S2

4
Price ($ per unit)

1
S1
S2
0 Q
2 4 6 8 10 12 14 16
Quantity supplied (000/week)

TS. Tran Thi Hong Viet- KTQD

Effects of Non-Price factors-
Decrease in Supply
S3 S1
P 5

4
Price ($ per unit)

2 S3

1
S1
0 Q
2 4 6 8 10 12 14 16
Quantity supplied (000/week)

TS. Tran Thi Hong Viet- KTQD

Market Equilibrium
(For Ice- Cream)

E: Equilibrium point
PE= 0,8 (equilibrium price)
QE= 10000= Qd=Qs (equilibrium
quantity)

TS. Tran Thi Hong Viet- KTQD

Market Equilibrium
and price determination
• Occurs when the buying decisions of
households and the selling decisions of
producers are equated
• Determines the equilibrium price and
equilibrium quantity bought and sold in the
market
So:
the most important implication of D &S theory is
the explanation of how the price is determined !
TS. Tran Thi Hong Viet- KTQD
DISEquilibrium-
Surplus and shortages
(Movement along)
P

S
Surplus = 10,000 Shortage =Excess demand
1.2
Surplus = Excess supply

0.8 E
0.6 Tendency of market:
Shortage
= 5000
D
- Surplus pushes P down
- Shortage pulls P up
5000 7500 12,000 15,000 Q

TS. Tran Thi Hong Viet- KTQD

Change in Equilibrium-
Shift
P
P
S
S
E S’ PE’ E’
PE PE E
PE’ E’ D’

D D

QE QE’ Q QE QE’ Q

TS. Tran Thi Hong Viet- KTQD

 Change in Equilibrium-
P
Shift
P
S’
S
E’ S PE E
PE’ PE’ E’
PE E D

D D’

QE’ QE Q QE’ QE Q

TS. Tran Thi Hong Viet- KTQD

 Change in Equilibrium-
Shift
P
P
S’
Depend S
S
Depend on S’
on
E’ PE E E’
PE E D’

D D
D’
QE’ QE Q QE QE’ Q

TS. Tran Thi Hong Viet- KTQD

 Change in Equilibrium-
Shift
P
P
S’
S
S E
PE S’
PE’ E’
E’ D
E
PE PE’
D’ D’
D
QE Q QE Q
Depend on Depend on

TS. Tran Thi Hong Viet- KTQD

Thank you for your attention !

TS. Tran Thi Hong Viet- KTQD