2.

Demand,
Supply,
and Market
Equilibrium
2.1. Demand
Quantity

  demanded (Qd)demand
 Demand Need

The quantity demanded is the amount of a good or service

consumers are willing & able to purchase during a given
period of time
 General Demand Function:
 Variables (factors) that influence Qd:
 Price of good or service (P);
 Incomes of consumers (I);
 Prices of related goods & services (PR);
 Anticipations regarding the price of product (A);
 Number of consumers on the market (N);
 The preferences / tastes of the consumers (T);
 The general demand function is:
Qd= f(P, I, PR, A, N, T)
Direct Demand Function
 Thedirect demand function, or simply demand function,
shows how quantity demanded (Qd) is related to the price (P),
when all other variables are considered constant
 Qd = f(P, M, PR, A, N, T )

constant
 Law of Demand
 Qd increases when P decreases;
 Qd decreases when P rises
 all other factors being constant
 Qd/P is usually negative
Inverse Demand Function
 traditionally,price (P) is plotted on the vertical
axis, and the quantity demanded (Qd) is plotted on
the horizontal axis;
 the equation plotted is the inverse demand
function, P = f(Qd), even if „the cause” is the
price and „the effect” is the quantity;
The graph of the demand curve (1)
 usually, the demand function is a descending one
(related to the price);
 a point on a direct demand curve shows either:
 The maximum amount of a good that will be purchased
for a given price
OR
 The maximum price consumers will pay for a specific
amount of the good
OTHER FACTORS BEING CONSTANT
The graph of the demand curve(2)
Price When price
changes, other
things being
500
400
constant, there is a
300 change in the
200
100 Demand
quantity
10 20 30 40 50 Qantity
demanded (a
movement along
the demand
curve).
The graph of the demand curve(3)
Price

- a change in demand occurs when

500
one of the other factors /
400
 
determinants of demand changes
(price is constant);
 

300 

200
- the demand curve shifts to the
D1
right (increasing) or to the left
 

100
D 2 D0
5 10 15 20 25 30 35 40 45 50 55 Quantity (decreasing);
- a demand is higher and higher if
the quantity demanded is higher
and higher for the same price.
The substitution effect
The income effect
 Example: the price increases
2.2. Supply
the

  quantity supplied(Qs)
 supply production
 the quantity supplied(Qs)is the amount of a good or service
offered for sale during a given period of time
 General Supply Function:
 Variables that influence Qs
 Price of good or service (P)
 Input prices / production costs (PC)
 Prices of goods related in production (Pr)
 Technology (T)
 Anticipations regarding the price of product (A)
 Number of firms producing product (N)
 Taxes and subsidies

 The general supply function is:

Qd= f(P, PC, PR, T, A, N, TS)
 Thedirect supply function, or simply supply,
shows how quantity supplied, Qs , is related to
product price, P, when all other variables are
considered constant
 Qs = f(P, PC, PR, T, A, N, TS)
constant
Inverse Supply Function
 traditionally,price (P) is plotted on the vertical
axis, and the supplied quantity (Qs) is plotted on
the horizontal axis;
 the equation plotted is the inverse supply function,
P = f(Qd), even if „the cause” is the price and
„the effect” is the quantity;
The graph of the supply curve (1)
 A point on a direct supply curve shows either:
 A maximum amount of a good that will be offered for
sale at a given price
OR
 A minimum price necessary to induce producers to
voluntarily offer a particular quantity for sale
OTHER FACTORS BEING CONSTANT
The graph of the supply curve (2)
Price
When price
 
changes, other
 
 
Supply
things being
500
  constant, there is
400
300
 

 
a change in the
200
supplied quantity
(a movement
100
10 20 30 40 50 Quantity

along the supply

curve).
 The graph of the supply curve (3)

Price
- a change in supply occurs when
 
one of the other factors /
 
S2 S0 S1 determinants of the supply
  changes (price is constant);
500
  - the supply curve shifts to the right
400
300
 
 
 

(increasing) or to the left

(decreasing);
 
 
 
 

200 
 
 
 

- a supply is higher and higher if

100
10 20 30 40 50 60 Quantity the quantity supplied is higher
and higher for the same price.
3. Market Equilibrium
 equilibrium prevails when economic forces
balance so that economic variablesneither increase
nor decrease;
 market equilibrium: attained when the price of a
good adjusts so that the quantity buyers are willing
/ able to purchase at that price is just equal to the
quantity sellers are willing / able to supply;
Graphic depiction of market
equilibrium - market equilibrium: Qd = Qs for a single
price;
- If the price is lower than the
Price equilibrium price, there is a shortage
 
on the market (Excess of demand =
Supply
  quantity demanded exceeds quantity
500
 
supplied);
  - If the price is higher than the
400
equilibrium price, there is a surplus on
 
 
 

300
the market (excess of supply = quantity
 
 
 

200
Demand
supplied exceeds quantity demanded)
 
 
 
 

100
10 20 30 40 50 - the equilibrium quantity is the highest
Quantity

quantity sold on the market

Changes in equilibrium
Price Equilibrium changes
 
when market forces
S1 S0 S2
  change.
  Example: demand and
500
 
supply simultaneously
400
300
 

increase
 
 
 

200 
D2
D0
 

D1
 

100
10 20 30 40 50 Quantity
Thank you!