Introductory Microeconomics

Lecture 4- Supply and Demand

Dr. Rania Megally
Outline
Demand and supply - 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
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
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
Market Equilibrium
1) The equilibrium price in the figure is
A) $2.
B) $4.
C) $6.
D) $8.
Answer: C
Market Equilibrium
2) The equilibrium quantity in the
above figure is
A) 200 units.
B) 300 units.
C) 400 units.
D) 600 units.
Answer: B
Market Equilibrium
3) At a price of $10 in the above figure,
there is
A) a surplus of 200 units.
B) a shortage of 200 units.
C) a surplus of 400 units.
D) a shortage of 400 units.
Answer: C
Market Equilibrium
4) At a price of $4 in the above figure,
A) the equilibrium quantity is 400 units.
B) there is a surplus of 200 units.
C) the quantity supplied is 400 units.
D) there is a shortage of 200 units.
Answer: D
Market Equilibrium
5) If the good in the above figure is a
normal good and income rises, then the
new equilibrium quantity
A) is less than 300 units.
B) is 300 units.
C) is more than 300 units.
D) could be less than, equal to, or more
than 300 units.
Answer: C
Market Equilibrium
6) The initial supply and demand curves
for a good are illustrated in the above
figure. If there are technological
advances in the production of the good,
then the new equilibrium price for the
good
A) is less than $6.
B) is $6.
C) is more than $6.
D) could be less than, equal to, or more
than $6.
Answer: A
Market Equilibrium
7) The initial supply and demand curves
for a good are illustrated in the above
figure. If there is a rise in the price of a
factor of production used to produce the
good, then the new equilibrium price
A) is less than $6.
B) is $6.
C) is more than $6.
D) could be less than, equal to, or more
than $6.
Answer: C
Market Equilibrium
Supply: qS = 10 + 0.5∙p
Assume
Demand: qD = 100 – 0.4∙p

1. What is the equilibrium price and quantity?

Market Equilibrium
Supply: qS = 10 + 0.5∙p
Assume
Demand: qD = 100 – 0.4∙p

Equilibrium requires that the quantity demanded is the

same as the quantity supplied
qS (p*) = qD (p*)
=> 10 + 0.5∙p* = 100 - 0.4∙p* => p* = 100
Market Equilibrium
Supply: qS = 10 + 0.5∙p
Assume
Demand: qD = 100 – 0.4∙p

=> 10 + 0.5∙p* = 100 - 0.4∙p* => p* = 100

Substituting the equilibrium price into the supply or the
demand function gives the equilibrium quantity.
qS (p*=100) = 10 + 0.5∙100 = 60
qD (p*=100) = 100 - 0.4∙100 = 60
Market Equilibrium
Supply: qS = 10 + 0.5∙p
Assume
Demand: qD = 100 – 0.4∙p

2. Now suppliers must pay a tax of $6 per unit. Find the

new equilibrium price-inclusive price and quantity.
Market Equilibrium
Supply: qS = 10 + 0.5∙p
Assume
Demand: qD = 100 – 0.4∙p
The supply function should be converted to inverse-
supply function to add the taxes to the price as we can
not add taxes to quantity

=> qS = 10 + 0.5∙p
 qS - 10 = 0.5p
2qS – 20 = P
 p = 2qS – 20 + 6
 P = 2qS - 14
Market Equilibrium
Equilibrium requires that the quantity demanded is the
same as the quantity supplied, but we need to convert
the inverse supply function back to the supply function

P = 2qS – 14
=>  P + 14 = 2qS
 qS= 0.5.p + 7
qS (p*) = qD (p*)
0.5.p* + 7 = 100 - 0.4∙p* => p* = 103.33
Market Equilibrium

=> 0.5.p* + 7 = 100 - 0.4∙p* => p* = 103.33

Substituting the equilibrium price into the supply or the

demand function gives the equilibrium quantity.

qS (p*=103.33) = 7 + 0.5∙103.33 = 58.66

qD (p*=103.33) = 100 - 0.4∙103.33 = 58.66
Market Equilibrium
Supply: qS = 10 + 0.5∙p
Assume
Demand: qD = 100 – 0.4∙p

3. Show graphically the change in the equilibrium after

taxes
Readings
•Chapter 4 and 5 in “Stephen L Slavin 2014 Microeconomics 10th
Edition McGraw Hill.