 After studying this topic, you will be able to:

1. Distinguish between quantity demanded and demand, and explain what determines
demand.
2. Distinguish between quantity supplied and supply, and explain what determines
supply.
3. Understand the nature of Market Equilibrium.
4. Explain how demand and supply determine equilibrium price and equilibrium
quantity in a market, and explain the effects of changes in demand and supply.

 After studying this topic, you are expected to master the followings:
 Understand the basic concepts of demand and supply analysis; explain the key concepts
 Write a simple demand and supply analysis according to the format taught in the course
(please refer to the sample of assignment 1 in your study guide ). Make sure that your
explanation is logical and consistent
 Draw a well-labelled demand and supply diagram for illustration
 Calculate the equilibrium price and equilibrium quantity based on the given demand and
supply equations

BHMH 2002, Introduction to Economics 1

Tutorial exercises
Bring the Topic 2 tutorial and sample of assignment I
along for tutorial. Students are required to complete
the whole set of exercise before attending the tutorial
meeting assigned for this topic.

*** Textbook Reading and Revision Assignment:

 Chapter 4
 Checkpoint 4.1, 4.2, 4.3
 Chapter Summary (Chapter 4)
 The abbreviations of economic terms are
used for quick reference in notes and
teaching only.
 The use of abbreviation in the
assessment answers is NOT accepted.
 Students are required to provide FULL
spelling of terms and short paragraphs
for their explanation in all assessments.

Copyright © 2024 by PolyU-HKCC. Some copyright materials are from Pearson with
BHMH 2002, Introduction to Economics authorization to be posted on the e-learning platform of PolyU-HKCC.
 2.1 COMPETITIVE MARKETS

• Market
 any arrangement that brings buyers and sellers together.
 might be a physical place or a group of buyers and sellers
spread around the world who never meet.

• In Economics, market structure is best defined as the organisational and

other characteristics of a market. There are 4 types of market structure
in Economics. Markets vary in the intensity of competition that buyers
and sellers face.
 Perfectly Competitive Market
 Monopoly
 Monopolistic Competition
 Oligopoly

BHMH 2002, Introduction to Economics 3

 2.1 COMPETITIVE MARKETS

For the demand and supply analysis, perfectly competitive market is usually adopted.

The followings are the assumptions of perfect competition market structure:

there are so many (potential) buyers and sellers;
Products (i.e. goods and services) are the same;
all market buyers and sellers are well-informed;
 there is free entry and exit in the long run;

 Deductively, no individual buyer or seller can influence the price or no one has the
market power. ***

BHMH 2002, Introduction to Economics 4

Demand 2.2 [Planned] Demand, Demand Schedule, and Curve
• comes from the behavior of buyers Quantity demanded
• refers to the whole plan of purchase • It is the amount of a good, service, or resource that
• reflects the relationship between the quantity people are willing and able to buy during a specified
demanded and the price of a good when all other period at a specified price.
influences on buying plans remain the same • The quantity demanded is an amount per unit of time
• is illustrated by a demand schedule or refer to the and represented by a point on a demand curve.
whole a demand curve
The demand curve is asserted to be downward sloping by the Law of Demand. i.e. When the price of the
good rises, the quantity demanded of that good decreases, vice versa, holding other things constant. The
predictions made by the Law of Demand have been consistent with the consumer behavior and observation so far.

Figure 4.1(a)
Demand Schedule & Demand Curve with exact figures Figure 4.1(b)
A downward sloping demand curve with general labels
Usually, we don’t
request our students to
draw the diagram ‘in
scale’. However, you
Sample of a demand
may need to plot the
and supply diagram
critical points on the
requested in this course.
diagram for illustration.

BHMH 2002, Introduction to Economics 5

 Demand: Individual Demand and Market Demand

Market demand is the sum of the demands of all the

buyers in a market.
The market demand curve is the horizontal sum of the
demand curves of all buyers in the market.

Figure 4.2
Individual Demand and Market Demand

BHMH 2002, Introduction to Economics 6

 [Planned] Supply: Supply Schedule and Supply Curve
Supply
Quantity supplied
• comes from the behavior of sellers (For simplicity, there is
It is the amount of a good, service,
no difference between sellers and producers.)
or resource that people are willing
• is a plan of production/sales and able to sell during a specified
• is the relationship between the quantity supplied of a good period at a specified price. It is
and the price of the good when all other influences on represented by a point on a supply
selling plans remain the same curve.
• is illustrated by a supply schedule and a supply curve

The supply curve is asserted to be upward sloping by the Law of Supply; i.e. when the price of the
good rises, the quantity supplied of that good increases, vice versa, holding other things constant.

Figure 4.3(a) Figure 4.3(b)

Supply Schedule and supply Curve with exact figures An upward sloping supply curve with general labels

Sample of a demand
and supply diagram
requested in this
course.

BHMH 2002, Introduction to Economics 7

 Supply: Individual Supply and Market Supply

Market supply is the sum of the supplies of all

sellers in a market.
The market supply curve is the horizontal sum of the
supply curves of all the sellers in the market.
Figure 4.3
Individual Supply and Market Supply

BHMH 2002, Introduction to Economics 8

 Checkpoint

BHMH 2002, Introduction to Economics 9

 2.3 Market equilibrium (without government Intervention)
Market equilibrium Figure 4.9 shows the equilibrium price and
occurs when the quantity demanded (Qd) equilibrium quantity.
equals the quantity supplied (Qs).
At market equilibrium, buyers’ and sellers’ plans
are consistent.
Equilibrium price (Pe) is the price at which the
quantity demanded equals the quantity supplied.
Equilibrium quantity (Qe) is the quantity bought
and sold at the equilibrium price.

Illustration: Fig 4.9

1. Graphically, market equilibrium at the intersection
of the demand curve and the supply curve.
2. The equilibrium price is $1 a bottle.

3. The equilibrium quantity is 10 million bottles a day

(at which quantity demanded equals the quantity
supplied).

Though non-linear functions are used for drawing the demand curves in your notes, only the LINEAR demand
functions will be tested in your assessments.

BHMH 2002, Introduction to Economics 10

 Price: A Market’s Automatic Regulator

What would happen if the market price is

above the equilibrium price?

Surplus is the quantity supplied exceeds

the quantity demanded at a current
market price.

Market price falls until the surplus is clear

and the market is in equilibrium. That is
when the quantity demanded equals
quantity supplied at the equilibrium price.

BHMH 2002, Introduction to Economics 11

 Price: A Market’s Automatic Regulator

What would happen if the market price is below

the equilibrium price?

Shortage is the quantity demanded

exceeds the quantity supplied at a current
market price.

Market price rises until the shortage is clear

and the market is in equilibrium. That is
when the quantity demanded equals
quantity supplied at the equilibrium price.

If the market functions well,

• the shortage/surplus lasts temporarily / permanently.
• It will not be a prolong phenomenon.
• No government intervention is needed.

BHMH 2002, Introduction to Economics 12

 Market equilibrium: Checkpoint (1)
Explain with data

The table shows the demand and supply schedules for milk.
 What is the equilibrium price and equilibrium quantity of
milk?
 Describe the situation in the milk market if the price were
$1.75 a carton and explain how the market reaches its new
equilibrium.
Suggested Solution [Sample of written explanation with data support]
 The equilibrium price is the price at which the quantity demanded ____________ the
quantity supplied. The equilibrium price is ___________ a carton and The equilibrium
quantity is _________ cartons a day.
 At $1.75 a carton, the quantity demanded (125 cartons) is _________ than the quantity
supplied (170 cartons), so there is a _______________ of ________ cartons a day
(= __________________________________).
 The market price begins to ______ , and as it does, the quantity demanded
___________ , the quantity supplied ____________ , and the surplus decreases. The
market price will fall until the surplus is clear and the market reaches the equilibrium
again. The equilibrium price is restored at $1.50 a carton and the equilibrium quantity
is 150 cartons a day again.

BHMH 2002, Introduction to Economics 13

 Market equilibrium: Checkpoint (2)
Economic Applications: Solve the simultaneous equations

Mathematical application is just another way to present your Economic concepts in a

logical way. Still, Economic concepts are needed to support your calculation steps/working.
Marks will be significantly deducted if No Economic concept is applied and units of
measurement are missing.
Assuming that the following information reveals the market condition of orange:
QD = 1,300 – 200P, where QD is the quantity demanded (in thousand units) and
P is the price (in dollar term).
QS = 420 + 240P, where Qs is the quantity supplied (in thousand units).
What is the equilibrium price and equilibrium quantity in the market for orange?
Suggested Solution [Sample of mathematical application with economic concept support]
 At equilibrium, ________________equals _______________. Tips:
 Therefore, 1. State the definition of the Economic
QD = QS concept to support your
= mathematical explanation
= 2. Show workings
3. Unit such as “$” and “thousand
units” should be clearly stated
= 4. Provide your answer in wordings
= finally

 The equilibrium price is ____ and the equilibrium quantity is _____________________.

BHMH 2002, Introduction to Economics 14

 2.4 Change in Quantity Demanded ( in Qd) Vs Change in Demand ( in D)
 A change in the quantity demanded
is a change in the quantity of a good that people plan to buy that results from a change in the price of
the good. Graphically, it represents a movement along the same demand curve, holding other things
constant.
 A change in demand is a change in the quantity that people plan to buy when any factor other than the
price of the good changes. Graphically, it represents a shift of demand curve because at least one factor
affecting the demand condition is not constant. Figure 4.4 illustrates and summarizes the distinction.

Though non-linear functions are used for drawing the demand curves in your notes, only the LINEAR demand functions
will be tested in your assessments.

BHMH 2002, Introduction to Economics 15

 Short Summary
Graphical presentation

D  Qe & Pe D   Qe  & Pe 

BHMH 2002, Introduction to Economics 16

 General factors affecting the plan of purchase (Demand)

The main influences on

buying plans that change demand are
1. Prices of related goods (substitute vs complement)
2. Change in Income (normal good vs inferior good)
3. Expected future prices of goods
4. Expected Change in future income and credit
5. Number of buyers
6. Buyers’ Preferences

Factor 1 and 2 will be used for graphical illustrations.

For the complete demand and supply analysis, students need to make reference to
the sample of assignment 1.

BHMH 2002, Introduction to Economics 17

 General factors affecting demand and predicting the impact on the
equilibrium price and equilibrium quantity of this good
Prices of related goods
 Substitutes
Substitute is a good that can be consumed in place of another good. The demand for
a good increases (decreases), if the price of one of its substitutes rises (falls).
For example, apples and oranges are substitutes. The demand for apples decreases
when the price of oranges decreases.
(Complete the diagram.)

Price Price
Oranges

P1

P2
D

Q1 Q2
Quantity

p.s. Market outcomes refer to the

equilibrium price and equilibrium
quantity.
Quantity
BHMH 2002, Introduction to Economics 18
 General factors affecting demand and predicting the impact on the
equilibrium price and equilibrium quantity of this good
Prices of related goods
 Complements
A complement is a good that is consumed with another good.
The demand for a good increases (decreases), if the price of one of its complement
falls (rises).
 When there is a decline in prices of laser printer, what happens to the market for toner
cartridges? What is their relationship?
(Complete the diagram.)
Price Price

Laser Printer

P1

P2
D
Q1 Q2 Quantity

• The production factor of a product cannot

be treated as its complement. e.g. clay
used to produced bowls
Quantity
BHMH 2002, Introduction to Economics 19
 General factors affecting demand and predicting the impact on the
equilibrium price and equilibrium quantity of this good

Assume that there is an increase in the general income level.

A Change In Income
Having meals in restaurants  A Normal Good
Price
is a good for which the demand
S increases (decreases) when income
increases (decrease).
 income  => D
P2  income  => D

P1  An Inferior Good
is a good for which the demand
decreases (increases) when income
D2 increases (decrease)
D1
 income  => D
Q1 Q2 Quantity  income  => D
What happens to the market for instant noodle when
there is an increase in the general income level?

BHMH 2002, Introduction to Economics 20

 Factors lead to an increase in demand of a good (Summary) D  Qe & Pe
1. Price of related good: • The demand for a
 The demand for a good increases if the price of one of its substitutes rises good increases
 The demand for a good increases if the price of one of its complements
falls • Graphically, its
demand curve
2. Change in income:
shifts to the right
 A rise in income brings an increase in demand for a normal good
 A fall in income brings an increase in demand for an inferior good • Both the
3. Expected future price of a good: equilibrium price
A rise in the expected future price of a good increases the current demand and equilibrium
for that good quantity will
increase in this
4. Expected future income and credit:
good market.
When income expected to increase in the future, or when credit is easy to
get and the cost of borrowing is low, the demand for some good increase

5. Number of buyers:
When the number of buyers increases in a market, the demand for a good
increases.
6. Consumers’ preferences:
If there is a favorable change in consumers’ preference of a good, the
demand for this good increases

BHMH 2002, Introduction to Economics 21

 Factors lead to a decrease in demand of a good (Summary) D  Qe & Pe
1. Price of related good: • The demand for a
• The demand for a good decreases if the price of one of its substitutes falls good decreases
• The demand for a good decreases if the price of one of its complements
rises • Graphically, its
demand curve
2. Expected future price of a good: shifts to the left
A fall in the expected future price of a good decreases the current demand
for that good • Both the
equilibrium price
3. Change in income: and equilibrium
• A fall in income brings a decrease in demand for a normal good
quantity will
• A rise in income brings a decrease in demand for an inferior good
decrease in this
4. Expected future income and credit: good market.
When income expected to decrease in the future, or when credit is difficult
to get and the cost of borrowing is high, the demand for some good a
decreases.
5. Number of buyers:
When the number of buyers decreases in a market, the demand for a good
decreases.
6. Consumers’ preferences:
If there is an unfavorable change in consumers’ preference of a good, the
demand for this good decreases.

BHMH 2002, Introduction to Economics 22

 Checkpoint
1. In the market for mobile phones, when the price of a mobile phone falls, the
quantity of mobile phones demanded ________ and the demand for mobile
phone ______.
A. is unchanged; increases
B. decreases; is unchanged
C. decrease; decreases
D. increases; is unchanged

2. In the market for mobile phones, when the price of a mobile phone is expected
to fall next year, ________
A. the demand for mobile phones today decreases
B. the quantity of mobile phones demanded today increases
C. the demand for mobile phones today increases
D. the quantity of mobile phones demanded today decreases

BHMH 2002, Introduction to Economics 23

 2.5 Change in Quantity Supplied ( in Qs) Vs Change in Supply ( in S)
A change in quantity supplied is a change in the quantity of a good that suppliers plan to sell that
results from a change in the price of the good. Graphically, it represents a movement along the same
supply curve, holding other things constant.
A change in supply is a change in the quantity that suppliers plan to sell when any influence on selling
plans other than the price of the good changes. Graphically, it represents a shift of supply curve
because at least one factor affecting the supply condition is not constant.
Figure 4.8 illustrates and summarizes the distinction.

BHMH 2002, Introduction to Economics 24

 Short Summary
Graphical presentation

S  Qe & Pe S   Qe  & Pe 

BHMH 2002, Introduction to Economics 25

 General factors affecting supply  the plan of sales/production
1. Prices of related goods
2. Prices of resources and other production factors/inputs
3. Expected future prices
4. Number of sellers
5. Advancement of technology or enhancement of Productivity
Prices of Related Goods
 A substitute in production is a good that can be produced in place of another good.
(Usually, they use the same set of resources and compete for it.)
For example, skinny jeans are substitute in production for boot cut jeans in a
garment factory.
 The supply of a good increases (decreases) if the price of one of its substitutes
in production falls (rises).

 A complement in production is a good that is produced along with another good.

(You can associate this economic concept with by-product.)
For example, cream is a complement in production of skimmed milk in a dairy.
 The supply of a good increases (decreases) if the price of one of its
complements in production rises (falls).

BHMH 2002, Introduction to Economics 26

 General factors affecting supply  the plan of sales/production
[6 steps approach]
 What happens to the market for new houses
when there is a decrease in the wage rate of  Written Analysis (6 steps approach)
carpenters? 1. There is a decrease in the wage rate of
(Hints: What is the relationship between new carpenters
house & carpenter?) 2. As carpenter is a factor of production of
Price new houses, a decline in their wage rate
reduces the price of production factor
Market for New Houses of new houses and the production cost
D S1 of new houses decreases.
S2 3. The supply of new houses increases.
4. Its supply curve shifts to the right.
P1 5. The equilibrium price of new houses
drops
P2 6. Its equilibrium quantity increases.

Make sure your analysis is complete and clear.

Don’t forget to indicate the key product in your
analysis.
Your graphical presentation should match with
your written explanation. Refer to “sample
Q1 Q2 Quantity assignment 1” for details.

BHMH 2002, Introduction to Economics 27

 General factors lead to an increase in supply of a good S  Qe & Pe
1. Price of related good: • The supply of a
 The supply of a good increases if the price of one of its substitutes in good increases
production falls
 The supply of a good increases if the price of one of its complements • Graphically, its
in production increases supply curve
shifts to the right

2. Prices of resources and other production factors/inputs: • The equilibrium

 The supply of a good increases if the price of one of its resources or price will
production factor decreases, as cost of production decreases. decrease but the
equilibrium
3. Expected future price of a good: quantity will
A fall in the expected future price of a good increases the current increase in this
supply of that good good market.

4. Number of sellers:
When the number of sellers/producers increases in a market, the supply
of a good increases.

5. Advancement of technology or enhancement of Productivity:

Productivity is output per unit of input. An advance in technology will
enhance productivity, reduce cost of production and increases supply.

BHMH 2002, Introduction to Economics 28

 General factors lead to a decrease in supply of a good S  Qe & Pe
1. Price of related good: • The supply of a
 The supply of a good decreases if the price of one of its substitutes in good decreases
production increases
 The supply of a good decreases if the price of one of its complements • Graphically, its
in production decreases supply curve
shifts to the left

2. Prices of resources and other production factors/inputs: • The equilibrium

 The supply of a good decreases if the price of one of its resources or price will
production factor increases, as cost of production increases. increase but the
equilibrium
3. Expected future price of a good: quantity will
An increase in the expected future price of a good decreases the decrease in this
current supply of that good good market.

4. Number of sellers:
When the number of sellers/producers decreases in a market, the
supply of a good decreases.
5. Productivity:
A decrease in productivity, increase cost of production and decreases
the supply of a good.

BHMH 2002, Introduction to Economics 29

 Checkpoint
1. The price of leather used to produce shoes rises, so the supply of leather _________
and the supply of shoes ________ .
A. decrease; decreases B. increases; is unchanged
C. increases; increases D. is unchanged; decreases

2. The table 1 shows the demand and

supply schedules for milk.
The quantity supplied decreases by 45
cartons a day at each price. At the initial
equilibrium price, there is a ________ of
milk. The price _______ and the
quantity demanded _______ as the
market moves to its new equilibrium.

A. surplus; rises; decreases

B. surplus; falls; increases
C. shortage; rises; decreases
D. shortage; falls; decreases

BHMH 2002, Introduction to Economics 30

 2.6 Change in Demand and
Supply simultaneously

Students should make

reference to Sample
Assignment 1 for
explanations and practice .

BHMH 2002, Introduction to Economics 31

Lecture Activity - Completion
of Sample Assignment ONE
1. BHMH2002 VIDEO WATCHING
2. COMPLETE SAMPLE ASSIGNMENT ONE (ESSENTIAL
REVISION MATERIAL FOR ASSIGNMENT ONE)
 The importance of ‘ceteris paribus’ assumption in Economics
(Reference)

Ceteris paribus is a Latin phrase meaning "other things equal".

English translations of the phrase include
"all other things being equal" or "other things held constant" or "all else unchanged".

When using ceteris paribus in economics, one assumes that all other variables except those
under immediate consideration are held constant.

For example, it can be predicted that if the price of apple increases—ceteris paribus —the
quantity of apple demanded by buyers will decrease.

This operational description intentionally ignores both known and unknown factors that may
also influence the relationship between price and quantity demanded. Thus, to assume ceteris
paribus is to assume away any interference with the given example.

BHMH 2002, Introduction to Economics 33