Introductory Microeconomics

Lecture 3- Supply and Demand

Dr. Rania Megally
Outline
Demand and supply
 Individual demand and the demand function
 Individual supply and the supply function
 The market as an institution of allocation
 Equilibrium in the market and its determinants

Working with the market diagram

 Moving on the demand (supply) curve
 Causes and effects of a shift of the demand curve
 Causes and effects of a shift of the supply curve
Demand
• The demand curve represents the relationship between the quantity of a good (q) that
consumers are willing to buy and the price of this good (p).
• The demand curve is shown in a diagram with the quantity of the good on the horizontal
axis and the price on the vertical axis.
Demand Function
Representation of the demand curve in a market diagram
• Typically the
p demand function
is downward
sloping: the
. higher the price of
. a good, the lower

.
is the quantity
demanded for this
. good.
. • A linear demand
. function can be
written as:
q
qD = a - b∙p
 Demand Function
A price change and demand
When the price in the
p market drops more
consumers are prepared to
buy the good and/or the
same consumers are
p0 prepared to buy more units
of the good. This is
p1 represented by a move on
the demand function. The
location of the demand
curve does not change.

q
q0 q1
Demand
Other determinants of demand for the good:
• income of consumers
• The prices of related goods
• Expected future prices
• Expected future income and credit
• Population
• Preferences
• These variables are called exogenous variables because they are not determined within
the model.
Demand
Demand Determinant Effect on Demand Effect on Demand Curve of good X
Income of consumers Demand on normal goods shifts to the right
Income of consumers Demand on inferior goods Shifts to the left
Price of substitute good Y Demand on good x Shifts to the right
Price of complement good Y Demand on good x Shifts to the left
Expected future prices Demand on good x Shifts to the right
Expected future incomes Demand on good x Shifts to the right
Population Demand on good x Shifts to the right
Preferences Demand on good x Shifts to the right
Demand Function
Demand and a change in an exogenous variable
• When an exogenous variable of
p the demand function changes the
demand curve shifts
• Ceteris paribus the demand
curve shifts to the right when the
household income increases; the
price of a substitute increases;
and the price of a complement
decreases.
• The demand curve shifts to the
left when the household income
decreases; the price of a
q substitute decreases; and the
price of a complement increases.
Supply
• The supply curve represents the relationship between the quantity of a good (q) that
suppliers are willing to produce and the price of this good (p).
• The supply curve is shown in a diagram with the quantity of the good on the horizontal
axis and the price on the vertical axis.
• In addition to the price of the good there are other determinants of supply for the good.
• The most important ones include:
- the cost of production;
- the technology.
• These variables are called exogenous variables because they are not determined within
the model.
Supply Function
Representation of the supply curve in a market diagram
• Typically the
p supply function is
upward sloping:
. the higher the

.
price of a good,
the larger is the
. quantity supplied
. for this good.
• A linear supply
. function can be
. written as:

q qS = c + d∙p
 Supply Function
A price change and supply
When the price in the
p
market increases more
firms are able to supply the
good and/or the same
p1 firms can supply more
units of the good. This is
p0 represented by a move on
the supply function. The
location of the supply
curve does not change.

q
q0 q1
Supply
Other determinants of supply of the good:
•The prices of factors of production
• The prices of related goods produced
• Expected future prices
• The number of suppliers
• Technology
• The state of nature
These variables are called exogenous variables because they are not determined within
the model.
Supply
Supply Determinant
prices of factors of production
Price of substitute good Y
Price of complement good Y
Expected future prices
The number of suppliers
Technology
The state of nature
Effect on Supply Effect on Supply Curve of good X
Supply on good x shifts to the left
Supply on good x Shifts to the left
Supply on good x Shifts to the right
Supply on good x Shifts to the left
Supply on good x Shifts to the right
Supply on good x Shifts to the right
Supply on good x Shifts to the right
Supply Function
Supply and a change in wages
• When wages increase the supply
p at any given level of prices
decreases. Thus, the supply
curve shifts

• Ceteris Paribas a decrease in

wages shifts the supply curve to
the right.

q
 Market Equilibrium
Supply and a change in an wages
At p0 supply is larger than demand.
p Some firms start reducing the price
Surplus qS to sell their production.
Competition makes other firms do
p0 the same or leave the market
(marginal firms).
With the price decreasing
p* demanders are prepared to buy
more. The market converges to
equilibrium.
qD
q
q*
 Market Equilibrium
Supply and a change in an wages
At p0 demand is larger than supply.
p Some buyers start bidding up the
qS price to get the product.
Competition makes other buyers do
the same or leave the market.
With the price increasing firms are
able to supply more. The market
p* converges to equilibrium.

p0
qD
Shortage
q
q*
Readings
•Chapter 4 and 5 in “Stephen L Slavin 2014 Microeconomics 10th
Edition McGraw Hill.