Introduction to Economics – 11175 Week 2

Demand, Supply and Equilibrium

需求、供给和均衡
Week 2 Lecture
Describe the laws of demand and supply.
描述需求和供给的规律。
Identify the factors that shift the demand and supply curves.
找出改变需求和供给曲线的因素。
Explain how the interaction between demand and supply in the market determines the equilibrium
price level.
解释市场需求和供给之间的相互作用如何决定均衡价格水平。
Understand the concepts of consumer surplus, producer surplus and total economic surplus.
理解消费者剩余、生产者剩余和总经济剩余的概念。
Explain why the market equilibrium outcome is the most efficient.
解释为什么市场均衡结果是最有效的。
Demand side of market
市场需求方
• Quantity demanded: The amount of a good or service that a consumer is willing and able to buy
at a given price.
•需求量:消费者在一定价格下愿意并能够购买的商品或服务的数量。
• A demand curve for a good show the relationship between the price charged and the quantity
demanded.
•一种商品的需求曲线显示了价格与需求量之间的关系。
• The law of demand states that, other things being equal (i.e. ceteris paribus), the quantity
demanded of a good fall when the price of the good rises.
•需求定律指出，在其他条件相同的情况下(即其他条件不变)，当一种商品的价格上涨时，
该商品的需求量就会下降。
Catherine’s demand schedule
凯瑟琳的需求时间表

Price of an ice-cream(一个冰淇凌的价格)

Quantity of ice-cream demanded（冰淇凌的需求量）

Catherine’s (individual) demand curve
凯瑟琳(个体)需求曲线
• Individual demand: the demand by a specific consumer of a given good or service.
•个体需求:特定消费者对给定商品或服务的需求。
• A movement along the demand curve (e.g. C to D) can only be generated by a change in the
price (2.0 to 1.5) of the good.
•沿着需求曲线的移动(例如 C 到 D)只能由商品的价格变化(2.0 到 1.5)产生。

Market demand
市场需求
• Market demand: is the sum of all individual demands (all consumers in a market) for a given
good or service.
•市场需求:是对给定商品或服务的所有个人需求(市场中所有消费者)的总和。

Market demand
市场需求
• Graphically, individual demand curves are summed horizontally to obtain the market demand
curve.
•图形上，个人需求曲线横向求和得到市场需求曲线。
What explains the law of demand?
如何解释需求定律?
• The substitution effect: The change in the quantity demanded of a good that results from a
change in price, making the good more or less expensive relative to other goods that are
substitutes.
•替代效应:由于价格变化导致的某种商品需求量的变化，使得该商品相对于其他替代品的
价格更高或更低。
➢As P↑, Qd↓ consumers substitute away from the dearer good
随着 P↑、Qd↓消费者对较贵商品的替代
➢As P↓, Qd ↑ consumers substitute away from the closer substitutes
随着 P↓、Qd↑消费者对距离较近的替代品的替代
➢This effect is thus always negative (the change in Qd goes in the opposite direction to the
change in price)
此效应始终为负(Qd 变化与价格变化方向相反)
What explains the law of demand?
如何解释需求定律?
• The income effect: The change in the quantity demanded of a good that results from a change in
the good’s price on consumer purchasing power.
•收入效应:由于商品价格对消费者购买力的影响而导致的商品需求量的变化。
➢As P↑, Qd↓ consumers’ purchasing power (buying capacity) ↓
消费者购买力(购买能力)↓
➢ As P↓, Qd↑ consumers’ purchasing power (buying capacity) ↑
消费者购买力(购买能力)↑
➢However, there are goods and services for which Qd↓ as buying capacity ↑, or Qd↑ as buying
capacity ↓. These goods and services are known as inferior goods.
(四)但有 Qd↓为购买能力↑或 Qd↑为购买能力↓的商品和服务。这些商品和服务被称为劣质
商品。
Other determinants of demand (shift factors)
需求的其他决定因素(转移因素)
• Ceteris paribus, changes in one of the following variables/factors will shift the demand curve:
•在其他条件不变的情况下，以下变量/因素之一的变化将使需求曲线偏移:
The prices of related goods
相关商品的价格
Income
收入
Consumer tastes
消费者的口味
Expected future prices
预计未来价格
Population & demographics
人口与人口统计
• Ceteris paribus - This Latin phrase, translated as ‘other things being equal’, is used as a reminder
that all variables other than the ones being studied are assumed to be constant.
Ceteris paribus -这个拉丁短语，翻译为“其他条件相同”，用来提醒人们，除了正在研究
的变量之外，所有变量都被假设为恒定的。
Shifting the demand curve
移动需求曲线

The prices of related goods

相关商品的价格
• Substitutes: Goods or services that can be used for the same or a similar purpose.
•替代品:可用于相同或类似目的的商品或服务。
• Complements: Goods and services that are used together.
•补语:一起使用的商品和服务。
The prices of related goods
相关商品的价格
An increase in the price of a substitute good, shifts the demand curve to right because consumers
buy less of the substitute good and more of this good.
[Increase in demand]
替代品价格的上涨会使需求曲线向右平移因为消费者购买的替代品变少了，而这种商品变
多了。
Income
收入
An increase in income (and the good is normal) shifts the demand curve to the right because
consumers spend more of their higher income on the good.
收入的增加(商品是正常的)使需求曲线向右平移，因为消费者将更多的收入花在了商品上。
[Increase in demand]

Income
An increase in income (and the good is inferior) shifts the demand curve to the left because
consumers spend less of their higher income on the good.
收入的增加(而商品是劣等的)使需求曲线向左平移，因为消费者将其较高收入中的较少部
分用于购买商品。
[Decrease in demand]
Consumer tastes

An increase in the taste for the good shifts the demand curve to right because consumers are
willing to buy a larger quantity of the good at every price.

[Increase in demand]

Population
An increase in population will shift the demand curve to the right because additional consumers
result in a greater quantity demanded at every price.
[Increase in demand]

A change in demand versus a change in the quantity demanded.

How to reduce quantity of smoking demanded?
• Two ways policy can attempt to achieve this goal:
➢Shift the demand curve for cigarettes and other tobacco products to the left [through public
service announcements; health warnings on cigarette packets; prohibition of cigarette
advertising.... etc.]
➢Raise the price of cigarettes [for example through government taxes on cigarette
manufacturers].
Shifts in the demand curve versus movements along the demand curve

Quantity supplied.
• Quantity supplied: is the amount of a good or service that a firm is willing and able to supply at a
given price.
• Supply curve: is a curve that shows the relationship between price and quantity supplied.
• The law of supply states that, ceteris paribus, the quantity supplied of a good rises when the price
of the good rises.
Tony’s supply
• An individual firm’ supply curve: the amount of a good or service a firm is willing and able to
supply at a given price.
Firm supply versus market supply
• Market supply: supply by all firms of a given good or service

Firm supply versus market supply

• Graphically, Individual supply curves are summed horizontally to obtain the market supply
curve.
What explains the law of supply?
• The profit motive: when the market price rises, ceteris paribus, it becomes more profitable for
firms to increase their output Qs
➢ as P↑, QS ↑ : suppliers allocate more resources to the production of the more profitable good
• Increasing marginal cost: when output expands, a firm’s production cost increases and a higher
price is required to cover the higher cost of producing that extra output
➢ as Qs ↑ suppliers have to use less productive (less suited) resources (inputs) so their MC ↑ and
a higher P is needed to cover this.
• New entry: a higher market price creates an incentive for new firms or other pre-established
firms to enter (or re-enter) the market and so output Qs increases through a mass effect.
Other determinants of supply (shift factors)
• Ceteris paribus, change in one of the following factors will shift the supply curve:
➢Prices of inputs
➢Technological change
➢Number of firms in the market
➢Price of substitutes in production
➢Expected future prices
Shifting the supply curve

Price of inputs
An input is anything used in the production of a good or service.
An increase in the price of an input, shifts the supply curve to left because cost of producing the
good rises.
Technological change
A technological change that increases productivity shifts the supply curve to right because cost of
producing the good falls.
Number of firms
An increase in the number of firms shifts the supply curve to right because additional firms result
in greater quantity supplied at every price.
Price of substitutes in prod.
• Substitutes in production are alternative products a firm can produce with the same resources.
An increase in the price of a substitute in production shifts the supply curve to left because more
of the substitute is produced and less of the good.
Expected future price
An increase in the expected future price of the product shifts the supply curve to left because less
of the good will be offered for sale today
A change in supply versus a change in the quantity supplied

Market Equilibrium
Market equilibrium: a situation in which quantity demanded equals quantity supplied.
Competitive market equilibrium: a market equilibrium with many buyers and many sellers.
Market equilibrium

Market equilibrium
• Surplus: A situation in which the quantity supplied is greater than the quantity demanded.
• Shortage: A situation in which the quantity demanded is greater than the quantity supplied.
The effect of surpluses and shortages on the market
What Changes the Equilibrium in a market?
Shift in demand curve
Shift in supply curve
Simultaneous shift in both demand & supply.

What Changes the Equilibrium in a market?

• Consider the butter market. How is the equilibrium in the butter market affected when:
i. Price of margarine rises.
ii. Price of bread rises.
iii. Price of milk rises.
Equilibrium in the butter market before any change
Effect of rise in the price of margarine on butter market

Effect of rise in the price of Milk on butter market

Do free markets allocate resources efficiently?

Are markets the best way of organising economic activities?
Is the market equilibrium outcome the most efficient?
What can we say about the total benefit to society under market outcome?
Consumer Surplus (CS)
Consumer surplus: The difference between the highest price a consumer is willing to pay (WTP)
and the price the consumer actually pays.
What does Consumer Surplus Measure?
➢The net benefit to consumers from participating in a market.
Marginal benefit (MB)
•The additional benefit to a consumer from consuming one more unit of a good or service. We
measure a consumer’s marginal benefit by her willingness to pay (WTP).
• WTP for a product at various prices is given by the height of the demand curve.
Producer Surplus (PS)
• Producer surplus: The difference between the price a firm actually receives and the lowest price
it would have been willing to accept (WTA).
• What does Producer Surplus Measure?
➢ The net benefit to producers from participating in a market.
Marginal cost (MC)
• Marginal cost: The additional cost to a firm of producing one more unit of a good or service.
• The marginal cost corresponds to the minimum price a producer is ‘willing to accept’ to produce
one more unit of a good.
• The height of the supply curve shows willingness to accept at various prices.
Tony’s supply of tea

Total surplus in equilibrium

• In equilibrium, consumer surplus is the area below the demand curve and above the equilibrium
price.
• Producer surplus is the area below the equilibrium price and above the supply curve.
• Total surplus is the sum of these two areas.
Total Surplus in market equilibrium
Do free markets allocate resources efficiently?
• In equilibrium, a competitive market allocates production and consumption efficiently to buyers
and sellers.
➢allocates the supply of goods to the buyers who value them most highly
➢allocates the demand for goods to the sellers who can produce them at lowest cost
Produces the quantity of goods that maximises the sum of consumer and producer surplus.
Policy makers cannot improve on the outcomes of a competitive market, in terms of the total
surplus created.
Do free markets allocate resources efficiently?
• At the equilibrium quantity, the value to the marginal buyer (i.e. marginal benefit) is exactly
equal to the cost of the marginal seller (i.e. marginal cost).
• At any quantity below the equilibrium quantity, the value to the marginal buyer is greater than
the cost of the marginal seller.
• At any quantity above the equilibrium quantity, the value to the marginal buyer is less than the
cost of the marginal seller.
Do free markets allocate resources efficiently?

Deadweight Loss

• Deadweight loss: The reduction in economic surplus resulting from a market not being in
competitive equilibrium.
➢ Example: If the price of tea was set at $2.20 a cup instead of $2.00 – see following graph.
Deadweight Loss

Lecture Revision Questions

1. The law of demand implies, holding everything else constant, that as the price of ice cream
increases, the demand for ice cream will increase.
increases, the quantity of ice cream demanded will increase.
decreases, the quantity of ice cream demanded will increase.
decreases, the demand for ice cream will increase.
Lecture Revision Questions
2. If, in response to an increase in the price of chocolate, the quantity of chocolate demanded
decreases, economists would describe this as
a decrease in demand.
a decrease in quantity demanded.
a change in consumer income.
a decrease in consumers' taste for chocolate.
Lecture Revision Questions
3. A change in all of the following variables will change the market demand for a product except
A, the price of the product.
B, Population and demographics.
C. income.
D. tastes.
Lecture Revision Questions
4. Which of the following is the correct way to describe equilibrium in a market?
At equilibrium, demand equals supply.
At equilibrium, quantity demanded equals quantity supplied.
At equilibrium, market forces no longer apply.
At equilibrium, scarcity is eliminated.
Lecture Revision Questions
5. Which of the following is evidence of a surplus of bananas?
Firms raise the price of bananas.
The price of bananas is lowered in order to increase sales.
The equilibrium price of bananas rises due to an increase in demand.
The quantity demanded of bananas is greater than the quantity supplied.
Lecture Revision Questions
6. When two goods, X and Y, are complements, which of the following occurs?
An increase in the price of good X leads to an increase in the price of good Y.
An increase in the price of good X leads to decrease in the quantity demanded of good Y.
An increase in the price of good X leads to a decrease in demand for good Y.
An increase in the price of good X leads to an increase in demand for good Y.
Lecture Revision Questions
7. Refer to the figure below. The graph shows an individual’s demand curve for tea. At a price of
two dollars, the consumer is willing to buy five cups of tea per week. More precisely, what does
this mean?

It means that marginal benefit equals marginal cost when five cups are consumed.
It means that the total cost of consuming five cups is $2.00.
It means that the marginal cost of producing five cups is $2.00.
It means that the marginal benefit of consuming the fifth cup is $2.00.
Lecture Revision Questions
8. Refer to the graph below. To achieve economic efficiency, which output level should be
produced?

A. 14,000 cups per month, because at this level of output, marginal benefit is greater than
marginal cost.
B. 15,000 cups per month, because at this level of output, marginal benefit is equal to marginal
cost.
C. 16,000 cups per month, because at this level of output, marginal benefit is less than marginal
cost.
D. Any of the output levels above is efficient.