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Demand Supply Market
Demand Supply Market
MARKET EQUILIBRIUM
Contents
of chapter
Introducing demand, supply and
markets
Learning
Outcome
At the end of the lesson, learners
should be able to explain the meaning
of demand, supply and market
situations
Market Defined
An
institution or mechanism
that brings together buyers
(demanders) and sellers
(suppliers) of goods & services
markets
Local, national & international
Highly personal or face-to-face
Impersonal or remote
Product
exchange
(Output)
Resource market - factors of production
(Input)
Circular Flow
Businesses
Households
Product
Market
Demand Analysis
Price ($ per ton
of wheat in
2005)
$5
$4
$3
$2
$1
9
10
12
15
20
Table 1
Demand Analysis
The
Demand Analysis
The
Law of Demand
Fundamental characteristic of demand
behavior
Other things being constant, as price of a
product increases, the corresponding
quantity demanded falls & vice versa
Inverse relationship between P & Q
demanded
Its called the Law of Demand.
Demand Curve
5
10
15
Quantity of wheat (tons of wheat in the year 2005)
20
Demand Analysis
Downward sloping Demand curve
The inverse relationship between the
price & quantity causes movement
along the demand curve
Price
P1
P2
D0
Q1
Q2
Qty
Law of Demand
Law
0
1
2
3
4
5
6
7
Marginal
utility
(2)
0
10
Hamburgers Total
consumed Utility
per meal
30
20
10
10
8
6
4
2
0
-2
1
2
3
4
5
6
Units consumed per meal
MU
7
0
10
10
TU
30
Total Utility (utils)
0
1
2
3
4
5
6
7
Marginal
utility
(2)
20
10
0
Marginal Utility (utils)
Hamburgers Total
consumed Utility
per meal
10
8
6
4
2
0
-2
1
2
3
4
5
6
Units consumed per meal
MU
0
10
18
10
8
TU
30
Total Utility (utils)
0
1
2
3
4
5
6
7
Marginal
utility
(2)
20
10
0
Marginal Utility (utils)
Hamburgers Total
consumed Utility
per meal
10
8
6
4
2
0
-2
1
2
3
4
5
6
Units consumed per meal
MU
0
10
18
24
10
8
6
TU
30
Total Utility (utils)
0
1
2
3
4
5
6
7
Marginal
utility
(2)
20
10
0
Marginal Utility (utils)
Hamburgers Total
consumed Utility
per meal
10
8
6
4
2
0
-2
1
2
3
4
5
6
Units consumed per meal
MU
0
10
18
24
28
10
8
6
4
TU
30
Total Utility (utils)
0
1
2
3
4
5
6
7
Marginal
utility
(2)
20
10
0
Marginal Utility (utils)
Hamburgers Total
consumed Utility
per meal
10
8
6
4
2
0
-2
1
2
3
4
5
6
Units consumed per meal
MU
0
10
18
24
28
30
10
8
6
4
2
TU
30
Total Utility (utils)
0
1
2
3
4
5
6
7
Marginal
utility
(2)
20
10
0
Marginal Utility (utils)
Hamburgers Total
consumed Utility
per meal
10
8
6
4
2
0
-2
1
2
3
4
5
6
Units consumed per meal
MU
0
10
18
24
28
30
30
10
8
6
4
2
0
TU
30
Total Utility (utils)
0
1
2
3
4
5
6
7
Marginal
utility
(2)
20
10
0
Marginal Utility (utils)
Hamburgers Total
consumed Utility
per meal
10
8
6
4
2
0
-2
1
2
3
4
5
6
Units consumed per meal
MU
0
10
18
24
28
30
30
28
10
8
6
4
2
0
-2
TU
30
Total Utility (utils)
0
1
2
3
4
5
6
7
Marginal
utility
(2)
20
10
0
Marginal Utility (utils)
Hamburgers Total
consumed Utility
per meal
10
8
6
4
2
0
-2
1
2
3
4
5
6
Units consumed per meal
MU
0
10
18
24
28
30
30
28
10
8
6
4
2
0
-2
TU
30
Total Utility (utils)
0
1
2
3
4
5
6
7
Marginal
utility
(2)
20
10
0
Marginal Utility (utils)
Hamburgers Total
consumed Utility
per meal
Observe
Diminishing
Marginal
Utility
10
8
6
4
2
0
-2
1
2
3
4
5
6
Units consumed per meal
MU
Demand Analysis
Other
income
tastes
Number of buyers
Prices of related goods &
Other things beside price
Determinants of demand
Tastes
Determinants of demand
Complementary goods
Film and Camera are
complementary
goods.
If the price of camera , the demand
for camera and thus the demand
for film also (-)
Expectations about the
future prices, product availability &
income shift the demand curve.
Determinants of demand
Price
D2
D1
D0
Qty
Supply Analysis
Supply
Shows
Supply Analysis
Price
($ per tonne in 2005)
Quantity Supplied
(tonnes of wheat)
20
35
50
60
Table 2
Supply Analysis
Law
of supply
It shows direct or positive relationship
between price and quantity supplied
Higher price increases production & sale
direct relationship between price and
quantity supplied
Given production costs, a higher price
means greater profit, thus an incentive to
increase the quantity supplied.
As shown in Figure 6
Supply Analysis
P
P
S2
S0
D
P2
S0
S1
P1
Q1
Q2
Qty
Qty
Figure 7: Shifts of the Supply
Curve
Supply Analysis
The
supply curve
The supply curve is an upward sloping
curve implying that the lower the price,
other things constant, the less units firms
will produce and vice versa.
Determinants of supply
Unlike
Determinants of supply
Taxes
and subsidies
Prices
Equilibrium Analysis
S0
PE
D0
QE
Figure 8: Demand and
Supply Equilibrium
Equilibrium Analysis
Price ($ per
tonne)
Quantity
Demanded
Quantity
Supplied
2000
12000
4000
10000
7000
7000
11000
4000
16000
1000
Equilibrium Analysis
The
Equilibrium Analysis
Table 3 shows combined data of the demand
and supply schedule
Disequilibrium:
Prices above equilibrium excess supply
Prices below equilibrium excess demand
Changes in supply and demand, and equilibrium
Changing demand with supply held constant
equilibrium Q P ; D equilibrium Q P
S equilibrium P Q ; S equilibrium P Q
Equilibrium Analysis
When both supply and demand curves
shift
If S D P , but new equilibrium qty
depends on relative sizes of shifts in
demand and supply
If S D P , but new equilibrium qty
depends again on relative sizes of shifts
in demand and supply
Disequilibrium
The
Disequilibrium
The
A Surplus
D
S
Surplus
B
Supply more
than Demand
4
3
C
2
1
0
S
5
10
13
15
18
20
A Shortage
D
5
4
Demand is greater
than supply
3
2
Shortage
1
0
S
5
10
15
20
Simultaneous Changes in
Both Demand and Supply
1. Increase in Demand and Supply
2. Increase in Demand and Decreased in
Supply
3. Decreased in Demand and Increased in
Supply
4. Decreased in Demand and Supply
D1
S1
P1
P2
Quantity
Increases
D1
S1
Q1
D
Q2
Situation 2 :
Increase in demand = increase in supply
P
Price
Unchanged
D1
S1
Quantity
Increases
P1
D1
S1
Q1
D
Q2
Situation 3 :
Increase in demand is greater
than increase in supply
P
Price
Increases
D1
S1
P2
P1
Quantity
Increases
D1
S1
Q1
D
Q2
Summary
Demand