Supply and Demand

The Market Demand Curve

• Demand Schedule – amounts of the
commodity consumers are willing to buy at
different prices
• Demand function – algebraic expression of
demand schedule
• Demand Curve – graphical representation,
using the inverse demand curve
A Demand Schedule
Corresponding Demand Function
Price of
Ice-Cream Cone
$3.00

2.50

1. A decrease
2.00
in price ...

1.50

1.00

0.50

0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
Copyright © 2004 South-Western
 Alternately…
Demand Function: Qd = 10 – P

Demand Schedule?

Demand Curve?

Individual demand curve and market demand

curve – HORIZONTAL summation

Some Conventions…., P and Q axis, shift vs.

movement along, change in demand vs. change
in quantity demanded
 Demand contd…
• Law of Demand: Quantity demanded decreases as price
increases
– Negative (not necessarily constant) slope
– This is market demand curve = aggregated individual demand
curve

Qd = f (I, T, Pr, E, P)
Ceteris paribus : Qd = f (P; I = i, T = t, Pr = pr, E = e)

• Variables and parameters

• Change in quantity demanded vs. shift in demand
• Examples
/Parameter /Parameter
 Market Supply Curve
• Supply Schedule
• Supply Function
• Individual Supply Curve –> market supply curve
example
– Backward bending supply curve
• Law of supply: ceteris paribus as price rises quantity
supplied rises
• Factors influencing Supply

Qs = f (Te, PI, Es, P)

Ceteris paribus: Qs = f (P, Te = te, PI = pi, Es = es)

Movements (variables) and shifts (parameters) of supply

curve
 Price ($) Quantity (units)
Price of
Ice-Cream 1 1
Cone
$3.00 1.5 2

2.50 2 3
1. An
increase 2.5 4
in price ... 2.00
3 5
1.50

1.00

0.50

0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity of cones supplied.
 Market Equilibrium
• Equilibrium refers to a situation in which the price has
reached the level where quantity supplied equals
quantity demanded.
• Equilibrium Price
– The price that balances quantity supplied and quantity
demanded.
– On a graph, it is the price at which the supply and demand
curves intersect.
• Equilibrium Quantity
– The quantity supplied and the quantity demanded at the
equilibrium price.
– On a graph it is the quantity at which the supply and demand
curves intersect.

• From earlier examples: Qd = 10-P, Qs = P, setting Qd =

Qs = Q*, we get 10-P = P, or P* = 5, Q* = 5
Equilibrium from demand and supply
schedule
Demand Schedule Supply Schedule

At $2.00, the quantity demanded

is equal to the quantity supplied!
• Surplus
– When price > equilibrium price, then quantity supplied
> quantity demanded.
• There is excess supply or a surplus.
• Suppliers will lower the price to increase sales, thereby
moving toward equilibrium.
• Shortage
– When price < equilibrium price, then quantity
demanded > the quantity supplied.
• There is excess demand or a shortage.
• Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward equilibrium.
Figure 9 Markets Not in Equilibrium

Price of
Ice-Cream Supply
Cone

P*= $2.00

1.50
Shortage

Demand

0 4 Q*=7 10 Quantity of
Quantity Quantity Ice-Cream
supplied demanded Cones

Copyright©2003 Southwestern/Thomson Learning

• Shifts in Curves versus Movements along Curves
– A shift in the supply curve is called a change in supply.
– A movement along a fixed supply curve is called a change
in quantity supplied.
– A shift in the demand curve is called a change in demand.
– A movement along a fixed demand curve is called a
change in quantity demanded.
 Demand Curve and Elasticities
• Elasticity varies all along a straight line
demand curve
• Elasticity depends on
– Nature of good
– Short vs. long term
• Income elasticity
• Cross price elasticity
 Welfare and Government
Intervention
• Types of intervention
– Taxes and subsidies
• Unit tax
• Ad valorem tax
– Price floors and ceilings
• Minimum wages
• Rent Ceiling
– Quotas and tariffs
• Deadweight loss positive in all the cases