Demand, Supply Dr.

Efi VASILEIOU
and
Market Equilibrium
Part 1 effrosyni.vasileiou@bsb-education.com
The story so far…
Economics is the study of rational choice
By choice we mean people have and face constraints, and must
desires therefore choose

By rational we mean that they choose if the benefit is

greater than the opportunity cost.

This rational cost-benefit analysis is made on the

margin.

In markets, this results in functions called demand and

supply, which explain the prices and quantities traded.
Learning outcomes

MARKET DEMAND

DETERMINATS OF DEMAND

SHIFT AND MOVEMENTS OF DEMAND CURVE

3
 Definitions
Firm: An organisation that transforms resources (inputs) into
products (outputs). These outputs could be goods or services.
Firms are the primary producing units in a market economy.

Entrepreneur: A person who organises, manages and assumes

the risks of a firm, taking a new idea or a new product and
turning it into a successful business.

Households: The consuming units in an economy (families or

unrelated people sharing a house).
 Definitions of 4 markets
Product/output markets: The markets in which goods and services are
exchanged.

Input/factor markets: The markets in which the resources used to

produce goods and services are exchanged.

Labour market: The input/factor market in which households supply work

for wages to firms that demand labour.
Capital market: The input/factor market in which households supply their
savings, for interest or for claims to future profits, to firms that demand
funds to buy capital goods.
Land market: The input/factor market in which households supply land or
other real property in exchange for rent.

5
 Definitions
Factors of production: The inputs into the production process.
The three key factors of production are: land, labour and capital.

Input and output markets are connected through the behaviour

of both firms and households.

Firms determine the quantities and character of outputs produced

and the types and quantities of inputs demanded.

Households determine the types and quantities of products

demanded and the quantities and types of inputs supplied.
 DEMAND

AND

QUANTITY DEMANDED
Decisions about what quantity of a particular output
(product, service) to demand depends on the following factors:

1 • The price of the product in question.

2
• The income available to the household.

• The prices of other products available to the household.

3

• The household’s tastes and preferences.

4

5 • The household’s expectations about future income, wealth & prices

 FACTORS WHICH DETERMINE DEMAND

• THE PRICE OF THE PRODUCT

1

• THE INCOME AVAILABLE AND WEALTH TO THE HOUSEHOLD

2

• THE PRICES OF OTHER PRODUCTS AVAILABLE TO THE

3 HOUSEHOLD

• THE HOUSEHOLD’S TASTES AND PREFERENCES

4

• THE HOUSEHOLD’S EXPECTATIONS ABOUT FUTURE INCOME,

5 WEALTH AND PRICES.
 Demand in Product/Output Market

Quantity demanded is the amount (number of units)

of a product that a household plans to buy in a given period at a
particular price.

It is not necessarily the same as the quantity

actually bought.
Sometimes the quantity demanded
exceeds the amount of goods available, so
the quantity bought is less than the quantity
demanded.
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The Law of Demand

A negative relationship between price and quantity demanded.

• as price rises quantity demanded decreases

• as price falls, quantity demanded increases

during a given period of time

All other things remaining

constant.

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Demand schedule: A table showing how much of a given
product a household would be willing to buy at different prices for a
given time period.

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The relationship between price (P) and quantity demanded (q)
presented graphically is called a demand curve.

Quantity demanded (q) measured along the X-axis, price (P) measured along
the Y-axis. 13
Properties of demand curves
They have negative slope.

They intersect the quantity (X) axis as a result of time

limitations and diminishing marginal utility.

They intersect the price (Y) axis as a result of limited

income and wealth.

The actual shape of an individual household demand curve –

whether it is steep or flat depends on the unique tastes and
preferences of the household and other factors.
 FACTORS WHICH DETERMINE DEMAND

• THE PRICE OF THE PRODUCT

1

• THE INCOME AVAILABLE AND WEALTH TO THE HOUSEHOLD

2

• THE PRICES OF OTHER PRODUCTS AVAILABLE TO THE

3 HOUSEHOLD

• THE HOUSEHOLD’S TASTES AND PREFERENCES

4

• THE HOUSEHOLD’S EXPECTATIONS ABOUT FUTURE INCOME,

5 WEALTH AND PRICES.
 Income: The sum of all a household’s wages, salaries,
profits, interest payments, rents, and other forms of
earnings in a given period of time. It is a flow
measure, needs to specify a time period for it
Income and Wealth

(per month, per year). Normal goods: Goods

for which demand goes
Wealth: The total value of what a household owns up when income is
higher and for which
a stock measure
minus what it owes. It is , demand goes down
measured at a given point in time. when income is lower.

. Inferior goods: Goods

for which demand tends
to fall when income rises

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 Income and normal and inferior goods

When income increases,

the demand for inferior goods shifts to the left
and the demand for normal goods shifts to the right.
 FACTORS WHICH DETERMINE DEMAND

• THE PRICE OF THE PRODUCT

1

• THE INCOME AVAILABLE AND WEALTH TO THE HOUSEHOLD

2

• THE PRICES OF OTHER PRODUCTS AVAILABLE TO THE

3 HOUSEHOLD

• THE HOUSEHOLD’S TASTES AND PREFERENCES

4

• THE HOUSEHOLD’S EXPECTATIONS ABOUT FUTURE INCOME,

5 WEALTH AND PRICES.
Prices of other goods
Substitutes: Goods that can
serve as
replacements for
one another; when the
and services

price of one increases, demand

for the other increases and a fall
in the price of one causes decline
in demand of the other (positive
relationship).

Complements,
complementary Perfect substitutes:
goods: Goods that “go Identical products.
together”; a decrease in the
price of one results in an increase
in demand for the other and vice
versa.

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THE PRICES OF OTHER PRODUCTS AVAILABLE TO THE
HOUSEHOLD

If the price of hamburger rises, the quantity of hamburger demanded declines – this is a movement along the
demand curve.
If now the households were buying more chicken. The same price for hamburger would shift the demand for
chicken (a substitute for hamburger) to the right (increase in chicken demand)
and the demand for ketchup (a complement to the hamburger) to the left (decrease in ketchup demand).

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 FACTORS WHICH DETERMINE DEMAND

• THE PRICE OF THE PRODUCT

1

• THE INCOME AVAILABLE AND WEALTH TO THE HOUSEHOLD

2

• THE PRICES OF OTHER PRODUCTS AVAILABLE TO THE

3 HOUSEHOLD

• THE HOUSEHOLD’S TASTES AND PREFERENCES

4

• THE HOUSEHOLD’S EXPECTATIONS ABOUT FUTURE INCOME,

5 WEALTH AND PRICES.
 Tastes and preferences
Preferences shape the demand curve, but
it is difficult to generalise about tastes
and preferences.

First, they are volatile and

idiosyncratic.

Recycling fashion: The town turning

waste into clothes- BBC News - YouTube
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 FACTORS WHICH DETERMINE DEMAND

• THE PRICE OF THE PRODUCT

1

• THE INCOME AVAILABLE AND WEALTH TO THE HOUSEHOLD

2

• THE PRICES OF OTHER PRODUCTS AVAILABLE TO THE

3 HOUSEHOLD

• THE HOUSEHOLD’S TASTES AND PREFERENCES

4

• THE HOUSEHOLD’S EXPECTATIONS ABOUT FUTURE INCOME,

5 WEALTH AND PRICES.
 • What you decide to buy today certainly depends
Expectations

on today’s prices and your current income

and wealth.
• However, it is also affected by your
expectations about what your position will be in
the future or about future changes in prices.

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‘Changes in Quantity Demanded’

‘Changes in Demand’

Similar terms
However
Describe different things
 Changes in Quantity Demanded vs
Changes in Demand

• Changes in the price of a product affect the quantity

demanded per period.

• Changes in any other factor, such as income or

preferences, affect demand.
EXAMPLES
• An increase in the price of Coca-Cola is likely to cause a decrease in the quantity of
Coca-Cola demanded.
• However, we say that an increase in income is likely to cause an increase in demand
for most goods.
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Ready for a Socrative quiz?

Room: VASILEIOU8338
For a review …

• Video on Change in Demand vs. Change in Quantity

Demanded

• Change in Demand vs. Change in Quantity Demanded |

Marginal Revolution University (mru.org)
 ACTIVE LEARNING 1
Changes in Quantity Demanded vs Changes in Demand

Brand X of cars
Car dealerships slash prices by 10%.
Price
The price of gasoline increases.

Prices of public transportation goes down.

The state lowers vehicle registration fees.

A reccession leads to falling household

D incomes.

quantity Consumers expect new car prices to rise

next year.
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 Demand in Product/Output Market

Changes in Quantity Demanded vs Changes in Demand

Brand X of cars
Car dealerships slash prices by 10%. Δ Quantity Demanded
Price Δ Demand
The price of gasoline increases. Things that,
Δ Demand regardless
Prices of public transportation goes down. where we are
on the curve,
The state lowers vehicle registration fees. Δ Demand will affect
people’s
A reccession leads to falling household Δ Demand general
D incomes. demand, will
shift the entire
quantity Consumers expect new car prices to rise curve – change
Δ Demand
in demand.
next year.
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From household demand to market demand

Total demand is the

sum of all individual
demand curves – that
is, the sum of all the
individual
quantities
demanded at each
price.

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 ACTIVE LEARNING 2

Which of the following might lead to an increase in the demand of a product?

An increase in the price of a

substitute.

An increase in the price of a

complement.

An increase in income for an

inferior good.

An increase in income for a luxury

good.

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 ACTIVE LEARNING 2

Which of the following might lead to an increase in the demand of a product?

An increase in the price of a Yes; consumers will demand more of

substitute. the product.

An increase in the price of a No; consumers will buy less of the

complement. complement and less of the product.

An increase in income for an No; with more income available consumers

would buy less of an inferior good.
inferior good.

An increase in income for a luxury Yes; with more income available consumers
good. would buy more of a luxury good.

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ACTIVE LEARNING 3

35
EXERCISESA C T I V E LEARNING 3

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ACTIVE LEARNING 4
Sasha Kyle

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ACTIVE LEARNING 4

Sasha Kyle

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EXERCISESA C T I V E LEARNING 5

Most plasma TVs sold in the US are imported from Japan. If the US government reduces the number of
plasma TVs that can be imported into the US, ceteris paribus, what would happen?
A) The price of plasma TVs and the quantity demanded of DVDs would decrease.
B) The price of plasma TVs would decrease, and the quantity demanded of DVDs would increase.
C) The price of plasma TVs would increase, and the quantity demanded of DVDs would decrease.
D) The price of plasma TVs and the quantity demanded of DVDs would increase.

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EXERCISESA C T I V E LEARNING 5

Most plasma TVs sold in the US are imported from Japan. If the US government reduces the number of plasma TVs
that can be imported into the US, ceteris paribus, what would happen?
A) The price of plasma TVs and the quantity demanded of DVDs would decrease.
B) The price of plasma TVs would decrease, and the quantity demanded of DVDs would increase.
C) The price of plasma TVs would increase, and the quantity demanded of DVDs would decrease.
D) The price of plasma TVs and the quantity demanded of DVDs would increase.

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EXRCISES ACTIVE LEARNING 6
SCENARIO: In order for policy makers to reduce the number of people smoking they decided on two different
approaches. A) Adopt an anti-smoking policy and B) Impose a new tax on cigarettes. What is the impact of either
policies on the demand curve?

A) Adopt an anti-smoking policy B) Impose new tax on cigarettes

Adoption of an anti-
Price per smoking policy will shift Price per A tax imposed will lead
cigarrete the demand curve to the cigarrete to increase in the price of
package left. Price remains the package cigarettes and thus,
($) same. ($) C movement along the
4.00 demand curve

B
A A
2.00 2.00
D1 D1

0 70 100 0 80 100
Number of Number of
cigarettes cigarettes
smoked per day smoked per day

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 In today’s meeting...

Demand Curve Law of Demand

Determinants of Properties of
demand Demand Curves

Demand, Supply
& Market
Market Demand
Market Equilibrium
Equilibrium
COMING NEXT:
Supply and market
equilibrium