MICROECONOMICS

CHAPTER 2:
DEMAND AND SUPPLY
I. DEMAND II. SUPPLY

III. MARKET EQUILIBRIUM

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I. Demand

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I. Demand
1. Definitions
• Demand (D):
The amount of a good or service that buyers are
willing to buy and able to buy at all possible prices during
a certain time period, ceteris paribus.

 Assumption: Ceteris paribus

• QD = f(P) (other things equal/constant)
• Linear relationship
Demand function: QD = aP + b (a < 0)
I. Demand
1. Definitions
• Law of demand:
- Other things equal (=other things stay the same)
- When the price of a good rises, the quantity
demanded of that good falls.
- When the price falls, the quantity demanded rises.
P ↑ → QD ↓
P ↓ → QD ↑

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I. Demand
1. Definitions
• Demand schedule:
Price 100 120
Quantity demanded 640 600

Write down the demand function: QD = aP + b?

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 I. Demand
1. Definitions
• Demand curve: downward-sloping
Price 100 120 Quantity
Quantity demanded 640 600 demanded (QD)
Demand function:
QD = P
⇨P= Demand curve
A (D)
120
Demand: the whole demand curve
B
(Cầu là cả đường cầu) 100
D
Quantity demanded: a single point on
the demand curve (Lượng cầu là tại 1
0 600 640 QD
điểm trên đường cầu) 7
 Demand: The amount of a good or service
I. Demand that buyers are willing to buy and able to
buy at all possible prices during a certain
1. Definitions time period, ceteris paribus.

• Quantity demanded (QD):

The amount of a good or service that buyers are willing to
buy and able to buy at a price during a certain time period,
ceteris paribus.
P Quantity
Demand vs Quantity demanded
demanded?

Demand is the quantity Demand

demanded at all possible prices
D
(Cầu = lượng cầu tại các mức giá)
0 QD
I. Demand
1. Definitions
Quantity demanded:
a single point on the D
Movement along the Demand Curve Curve
P

Price
⇨ Change in the quantity A
Demand: the
changes demanded B
whole D Curve
(a movement along the D curve: D
A → B)
0 QD

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I. Demand
1. Definitions

Shift in the Demand Curve

P
A non-price determinant
of demand changes
⇨ Change in demand
= Change in quantity demanded
at all possible prices
(a shift in the D Curve D
to the right or the left)
0 QD

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I. Demand
1. Definitions

Shift vs. Movement Along Demand Curve

•Movement along a fixed D curve:
- Change in ................................
- Occurs when ................................
• Shift in the D curve:
- Change in ....................................
- Occurs when ...................................
- D Curve shifts right: ................................
- D Curve shifts left: ......................................
I. Demand
2. Market Demand vs Individual Demand
The quantity demanded in the market is the sum of
the quantities demanded by all buyers at each price.

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I. Demand
3. Non-price determinants of demand
• Income (I):
I ↑ → Q D↑
I ↓ → QD ↓ Normal goods

I ↓ → Q D↑
Inferior goods
I ↑ → QD ↓
• Tastes (J):
Change in tastes: changes the demand

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I. Demand
3. Non-price determinants of demand
• Expectations (E): about the future
- Expect an increase in income
▪ Leads to an increase in today’s demand
- Expect higher prices
▪ Leads to an increase in today’s demand
• Number of buyers (N):
Market demand increases

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I. Demand
3. Non-price determinants of demand
• Prices of related goods:
- Substitutes, two goods
▪ An increase in the price of one
▪ Leads to an increase in the demand for the other
- Complements, two goods
▪ An increase in the price of one
▪ Leads to a decrease in the demand for the other

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 Summary: Variables That Influence Buyers

Variable A change in this variable…

Price …..................

Number of buyers ….................

Income …...................
Price of
related goods …....................
Tastes ….......................
Expectations ….....................
ACTIVE LEARNING 1
Demand curve

Draw a demand curve for music downloads.

What happens to it in each of
the following scenarios? Why?
A. The price of iPods
falls
B. The price of music
downloads falls
C. The price of CDs
falls
ACTIVE LEARNING 1
A. Price of iPods falls
ACTIVE LEARNING 1
B. Price of music downloads falls
ACTIVE LEARNING 1
C. Price of CDs falls
II. Supply
1. Definitions
• Supply (S):
The quantity of goods and services that sellers is
willing to sell and able to sell at all possible prices
during a certain time period, ceteris paribus.
• Quantity supplied (QS):
The quantity of goods and services that seller is willing
to sell and able to sell at a price during a certain time
period, ceteris paribus.
• Supply function:
Qs = cP + d (c>0)
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II. Supply
1. Definitions
• Law of supply:
- Other things equal
- When the price of a good rises, the quantity
supplied of that good also rises
- When the price falls, the quantity supplied falls as
well

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II. Supply
1. Definitions
Supply schedule:
Price 100 120
Quantity supplied 500 660
• Supply function:

• Supply curve:

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II. Supply
1. Definitions
Shift vs. Movement along Supply Curve
• Movement along a fixed supply curve:

• Shift in the supply curve

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Price Starbucks Peet’s Market Qs
$0.00 0 + 0 = 0
1.00 3 + 2 = 5
2.00 6 + 4 = 10
3.00 9 + 6 = 15
4.00 12 + 8 = 20
5.00 15 + 10 = 25
6.00 18 + 12 = 30
II. Supply
3. Non-price determinants of supply
• Input prices (Pg)

• Technology (T)

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II. Supply
3. Non-price determinants of supply
• Expectations of sellers (ES)

• Number of sellers (NS)

• Government’s policies

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Summary: Variables that Influence Sellers

Variable A change in this variable…

Price …

Input Prices …
Technology …
Number of Sellers …
Expectations …
Gvt’s policies …
ACTIVE LEARNING 2
Supply curve

Draw a supply curve for tax

return preparation software.
What happens to it in each
of the following scenarios?
A. Retailers cut the price of
the software.
B. A technological advance
© v777999/Shutterstock.com

allows the software to be

produced at lower cost.
C. Professional tax return preparers raise the price
of the services they provide.
ACTIVE LEARNING 2
A. Fall in price of tax return software
ACTIVE LEARNING 2
B. Fall in cost of producing software
ACTIVE LEARNING 2
C. Professional preparers raise their price
 III. Market equilibrium
Buyers (Demand) Sellers (Supply)
QD = QS =

Bên mua (cầu) – Bên bán (cung) giao dịch

(Thị trường là gì?)
- Điều kiện cân bằng thị trường (Market equilibrium)
- Trạng thái dư thừa or thiếu hụt (Shortage or surplus)
- Kiểm soát giá của chính phủ: giá trần or giá sàn (price
ceilings or price floors)
- Thay đổi điểm cân bằng thị trường (Changes in market
equilibrium)
III. Market equilibrium

Buyers (Demand) Sellers (Supply)

QD = QS =
Market Equilibrium (E): QD = QS= QE
E (PE và QE)
Intersection of S and D curves
 Shortage (a.k.a. excess demand):
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Example:
If P = 50,
$5.00
then
$4.00 QD =
$3.00 and
QS =
$2.00
resulting in a
$1.00 shortage of
$0.00 Shortage Q
0 5 10 15 20 25 30 35
 Shortage (a.k.a. excess demand):
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Facing a shortage,
sellers raise the price,
$5.00
causing QD to fall
$4.00 and QS to rise,
$3.00 …which reduces the
$2.00 shortage.
$1.00
Shortage
$0.00 Q
0 5 10 15 20 25 30 35
 Shortage (a.k.a. excess demand):
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Facing a shortage,
sellers raise the price,
$5.00
causing QD to fall
$4.00 and QS to rise.
$3.00 Prices continue to rise
$2.00 until market reaches
equilibrium.
$1.00
Shortage
$0.00 Q
0 5 10 15 20 25 30 35
 Surplus (a.k.a. excess supply):
when quantity supplied is greater than
quantity demanded
P Example:
$6.00 D Surplus S
If P = 150,
$5.00
then
$4.00 QD =
$3.00 and
$2.00
Q S =
resulting in a
$1.00
surplus of
$0.00 Q
0 5 10 15 20 25 30 35
 Surplus (a.k.a. excess supply):
when quantity supplied is greater than
quantity demanded
P
$6.00 D Surplus S Facing a surplus,
sellers try to increase sales
$5.00
by cutting price.
$4.00 This causes
$3.00 QD to rise and QS to fall…
$2.00 …which reduces the
$1.00
surplus.

$0.00 Q
0 5 10 15 20 25 30 35
 Surplus (a.k.a. excess supply):
when quantity supplied is greater than
quantity demanded
P
$6.00 D Surplus S Facing a surplus,
sellers try to increase sales
$5.00
by cutting price.
$4.00 This causes
$3.00 QD to rise and QS to fall.
$2.00 Prices continue to fall
until market reaches
$1.00
equilibrium.
$0.00 Q
0 5 10 15 20 25 30 35
 III. Market equilibrium
Shortage Surplus
P1 < P E P2 > P E
What happens? What happens?

Price tends to fall or rise? Price tends to fall or rise?

Price is above or below Price is above or below

equilibrium price? equilibrium price?

Chức năng điều chỉnh giá của thị trường đối với 1 hàng hóa?
 III. Market equilibrium
Price controls - Government
Price ceiling Price floor
When? When

What happens? What happens?

Example? Example?

Above or below equilibrium Above or below equilibrium

price? price?
Change in market equilibrium
Ví dụ
Case 1: An increase in demand –
No change in supply
• Nguyên nhân cầu tăng? Vẽ đồ thị

 Kết luận PE và QE
Case 2: A decrease in demand –
No change in supply
• Nguyên nhân cầu giảm? Vẽ đồ thị

 Kết luận PE và QE
Case 3: An increase in Supply –
No change in demand
• Nguyên nhân cung tăng? Vẽ đồ thị

 Kết luận PE và QE
Case 4: A decrease in supply –
No change in demand
• Nguyên nhân cung giảm? Vẽ đồ thị

 Kết luận PE và QE
Case 5: An increase in demand –
An increase in supply
• Nguyên nhân? Vẽ đồ thị

 Kết luận PE và QE
Case 6: An increase in demand –
A decrease in supply
• Nguyên nhân? Vẽ đồ thị

 Kết luận PE và QE
Case 7: A decrease in demand –
An increase in supply
• Nguyên nhân? Vẽ đồ thị

 Kết luận PE và QE
Case 8: A decrease in demand –
A decrease in supply
• Nguyên nhân? Vẽ đồ thị

 Kết luận PE và QE
 Supply and Demand Together

• Three steps to analyzing changes in equilibrium

1. Decide whether the event shifts the supply
curve, the demand curve, or, in some cases,
both curves
2. Decide whether the curve shifts to the right or
to the left
3. Use the supply-and-demand diagram
• Compare the initial and the new equilibrium
• Effects on equilibrium price and quantity
 Supply and Demand Together

• One summer, very hot weather

– Effect on the market for ice cream?

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 Supply and Demand Together

• One summer, a hurricane destroys part of the

sugarcane crop: higher price of sugar
– Effect on the market for ice cream?

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 Supply and Demand Together

• One summer: hurricane and heat wave

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