Theory of Demand and Supply: Dr. Lê Thanh Hà

Course
Introduction to Economics
Chapter 2
Theory of Demand and Supply
Dr. Lê Thanh Hà
Look for the answers to these questions
• What factors affect buyers’ demand for
goods?
• What factors affect sellers’ supply of goods?
• How do supply and demand determine the
price of a good and the quantity sold?
• How do changes in the factors that affect
demand or supply affect the market price and
quantity of a good?
• How do markets allocate resources?
Chapter 2: Demand-Supply Slide 2
Look for the answers to these questions:
• What are price ceilings and price floors?
What are some examples of each?
• How do price ceilings and price floors affect
market outcomes?
• How do taxes affect market outcomes?
How do the effects depend on whether
the tax is imposed on buyers or sellers?
• What is the incidence of a tax?
What determines the incidence?
Goals
Market
Demand Supply
(Buyers) (Sellers)
Market Equilibrium

Outline
1 2
Demand Supply
3
Market
44
Equilibrium Policies
Market
A market is a group of buyers and sellers of a particular good or
service. The buyers as a group determine the demand for the product,
and the sellers as a group determine the supply of the product.

Price Mechanisms
Through price mechanisms, goods and services are
traded in the market.

1
DEMAND
Demand
The demand of any good is the amount of the
good that buyers are willing and able to purchase,
at each price, in a given period of time, ceteris
paribus.
Q Quantity D Demand
Quantity
P Price Level QD
Demanded

Quantity Demanded
The amount of good that buyers are willing and

able to purchase at a given price, and a given
period of time, ceteris paribus.

Prices of Goods
P
Law of Demand
Other things equal, the
quantity demanded of good
falls when the price of the
good rises.
Changes in prices causes a

move along the demand
curve.
Q

Demand Schedules and Demand Curves
Demand Schedules

Demand Schedules and Demand Curves
Demand Curves

Demand Functions
• Demand function:
𝑄 𝐷= 𝑓 ( 𝑃 )
• A simple case: A linear function
𝑄 𝐷= 𝑎 − 𝑏 𝑃

Individual Demand versus Market
Demand

Individual Demand versus Market
Demand
Assume that the market consists of An and Toan, having demands for
milk. Each month, An buys 6 cans of milks if price is 1$, and 4 cans if it
is 1,5$. Toan buys 4 cans of milks if price is 1$, and 2 cans if it is 1,5$.
Which point lies in the market demand for milk.
A. Q = 2; P = 1,5
B. Q = 4; P = 2,5
C. Q = 10; P = 1
D. Q = 16; P = 2,5

Shifts in Demand Curves
Move along demand Shifts in demand
curves curves

Shifts in Demand Curves
Move along demand Shifts in demand
curves curves
Only by its own prices Other factors.

Income (I)
Normal Goods
Demand increases when
income increases
shift to the right
shift to the left
Inferior Goods
Demand decreases when
income increases
shift to the left
shift to the right

Price of Related Goods (Px,PY)
Substituted Goods
They satisfy similar desires
Shift to the right
Complementary Goods
They are used together
Shift to the left

Number of Buyers (N)
Market Scale
Tshifts to the right

Tastes (T)
Preferences
Depend on
• Ages
• Gender
• Consumption Habit
• Advertisement
Tastes cause demand to

shift to the right

Expectation (E)
Expectation about
Factor impacting
Demand in the future
Expectation about income.
Expectation about price.
Expectation about price of
related goods.

Summary
Moves
along the
demand Its own prices
curve
Income
Prices of Related Goods
Shift in
Demand
Numbers of Buyers
Tastes
Expectations

Demand
When Demand moves and shifts?
1. In rainy days, customers are willing to pay more to buy umbrella.

2. Viettel decreases the calling fee at the weekend that cause amount
of calling to increase.
3. On Woman day, the prices of flowers are often higher than normal
but people still buy lots of flowers.
4. To reduce the amount of private transportation, the government
increase the tax on gasoline.

2
SUPPLY
Supply
Supply is the amount of good that seller are willing

and able to sell at different prices, a given period
of time, ceteris paribus.
Q Quantity S Supply
Quantity
P Price QS
supplied

Quantity Supplied
Supply is the amount of good that seller are willing

and able to sell at a given price, a given period of
time, ceteris paribus.
Demand depicts the relationship between price

and quantity supplied, ceteris paribus.

Supply Schedules and Supply Curves
Supply Schedule

Supply Schedules and Supply Curves
Supply Curves

Supply Function
• Supply function
𝑄 𝑆= 𝑓 ( 𝑃 )
• A simple case: a linear function
𝑄 𝑆 =𝑎+ 𝑏𝑃

Individual Supply and Market Supply

Individual Supply and Market Supply
Assignment
Assume that there two branches of tooth brush in the
market: PS and Close-up with the supply function , ,
respectively. What is Market Supply?

Price(P)
Law of Supply
Other things equal, the
quantity supplied of a good
rises when the price of the
good rises.
Changes in prices cause a

move along the supply
curve.

Shifts in Supply Curve

Technology
Technology Improvements
will increase productivity,
and reduce firm’s
costsincrease quantity
supplied at each price.

Input Prices
Directly affect the costs of
production.
Input price increases→ Cost
of production increases →
Supply decrease(shift to the
left)

Number of Sellers
An increase in number of
sellers cause supple to
increase.

Tax and Subsidy Policy
Tax (subsidy) policy directly
impacts the cost of
production, then cause
supply curve shift to the left
(right)
Government’s tool to
control the market.

Assignment
S.
a. If the government imposes 5$/product, what happen to the
supply curve?
b. If the government subsidies 5$/product, what happen to the
supply curve?
Tax burden on consumers/producer

After imposing the tax, the supply curver?
Supply function P=f(Q)=0.5Q+15
New supply function P’=P+t=0.5Q+15+5

Expectation (E)
Expectations about factor
impacting the supply in the
future.
Expectation about demand.

Expectation about changes in
policies.

Summary
Moving
along the
supply Its own price
curve
Technology
Input Prices
Shifts in
Supply Government’s Policies
curve
Number of Sellers
Expectation

Supply
Describe each situation: the supply curve will move or
shift?
1. When people increase their demands for the real estate, others
decide to sell more.
2. Many farmers want to sell more oranges, when the price tends
to increase.

3
MARKET EQUILIBRIUM
Market Equilibrium
Surplus
Shortage

Market Equilibrium
Market Equilibrium is a situation in which the
market price has reached the level at which
quantity supplied equals quantity demanded.
Equilibrium price is the price that balances

quantity supplied and quantity demanded.
Equilibrium quantity is the quantity supplied and

quantity demanded at the equilibrium price.
The invisible hand
in a free market economy, self-interested individuals operate
Invisible
Hand through a system of mutual interdependence to promote the
general benefit of society at large

Market Equilibrium
Surplus
A situation in which
quantity supplied is
greater than quantity
demanded.
A pressure causes price to

decrease.

Market Equilibrium
Shortage
A situation in which
quantity demanded is
greater than quantity
supplied.
A pressure causes price to

increase.

Market Equilibrium
Demand function: Supply function:
𝑃 = 𝑎 −𝑏 𝑄 𝐷 𝑃 =𝑐 + 𝑑 𝑄𝑆
Market Equilibrium:
∗
𝑄 𝐷=𝑄 𝑆 =𝑄

Market Equilibrium
Assignment
In market, there 100 sellers and 80 buyers. Individual supply and
demand functions are and ̀.
1. What are market demand and market supply?
2. What are market prices and market quantity at the equilibrium?

Market Equilibrium
1 Decide that the demand or supply, or both curves shift
2 Shift to the left or to the right
3 What happens to the price and quantity equilibrium

Changes in Market Equilibrium
1 Salmon is good for the health


2 The drought causes a diminish in number of salmons


3 Two events happens together



Supply
No Increase (inc) Decrease (dec)
P no P dec P inc
No
Q no Q inc Q dec
P inc
P inc P no
Increase Q (not
Demand Q inc Q inc
determine)
P dec
P dec P (not determine)
Decrease Q (not
Q dec Q dec
determine)

Describe changes in quantity and price in the
equilibrium:
1. The market for paper journal:
1. The salary for journalists increases.
2. When the internet has become popular.
2. The market for Economic Book:
1. When lecturers requires students to finish homework in this book.
2. When the technology improvement reduce the prices of printing a book.
3. The scientists discover that the orange is good for the health, while
there is a new technology that help to improve orange productivity.
Describe what happen to the orange market.

Applications of Demand and Supply
• Dr. Ben-Amots started out in 1989 with a Macintosh SE30 that had
4 megabytes of random access memory (RAM) and an 80-
megabyte hard drive. It cost him about $3,000. Today, he uses a
Macintosh MacBook Pro with 4 gigabytes of memory (a bit in a
computer has a value of 0 or 1, a byte is 8 bits, a megabyte is
slightly more than 1 million bytes, and a gigabyte is slightly more
than 1,000 megabytes), built-in DVD/CD burner, and wireless
Internet connections. His new computer cost about $2,200. Put
another way, his first computer had a cost per megabyte of RAM of
about $750. His present computer costs about $0.75 per megabyte
of RAM and is far more powerful.
• We have all been affected by the sharp swings in the prices of oil
and gasoline in recent years.
– In Vietnam, the price of oil was negative? Why?

ApplicationsofDemandandSupply
Thepersonalcomputermarket
• In the 1960s, to speak of computers was to speak of IBM, the

dominant maker of large mainframe computers used by business and
government agencies.
• hen between 1976, when Apple Computer introduced its first desktop
computer, and 1981, when IBM produced its first personal computers
(PCs), the computer usage expanded dramatically. Only 8.2% of U. S.
households owned a personal computer in 1984. By 2003, 62% did.
• By 2009, more than two-thirds of households had home Internet
access.
How the demand supply work???
• Technological change has been breathtakingly swift in the computer
industry the price of compute decreases over the decades.

The personal computer market
• Figure "The Personal Computer Market" illustrates
changes that have occurred in the computer market.
The horizontal axis shows the quantity of quality-
adjusted personal coputers. Thus, the quantity axis can
be thought of as a unit of computing power. Similarly,
the price axis shows the price per unit of computing
power. The rapid increase in the number of firms,
together with dramatic technological improvements,
led to an increase in supply, shifting the supply curve
in Figure 4.1 "The Personal Computer Market" to the
right from S1 to S2.

The personal computer market
• Demand also shift
• we observe a fall in equilibrium price and
an increase in equilibrium quantity, we
conclude that the rightward shift in supply
has outweighed the rightward shift in
demand.

The market for Crude Oil and Gasoline
• The market for crude oil took a radical turn in 1973. The price per barrel of
crude oil quadrupled between 1973 and 1974. Price remained high until the
early 1980s but fell back drastically and remained low for about two
decades. In 2004, the price of oil began to move upward and by 2008 had
reached $147 per barrel.
• What caused the dramatic increase in gasoline and oil prices in 2008?
– It appeared to be increasing worldwide demand outpacing producers’
ability—or willingness—to increase production much.

The market for Crude Oil and Gasoline
• Higher oil prices also increase the cost of producing virtually every good or
service since the production of most goods requires transportation. These
costs inevitably translate into higher prices for nearly all goods and services.
Supply curves of the goods and services thus affected shift to the left,
putting downward pressure on output and upward pressure on prices.

The stock market
• This section describes how the prices of shares of corporate stock,
shares in the ownership of a corporation, are determined by the
interaction of demand and supply.
• When a corporation needs funds to increase its capital or for other
reasons, one means at its disposal is to issue new stock in the
corporation. (Other means include borrowing funds or using past
profits.) Once the new shares have been sold in what is called an
initial public offering (IPO), the corporation receives no further
funding as shares of its stock are bought and sold on the secondary
market. The secondary market is the market for stocks that have
been issued in the past, and the daily news reports about stock
prices almost always refer to activity in the secondary market.
Generally, the corporations whose shares are traded are not
involved in these transactions.

The stock market
• What factors, then, cause the demand or supply curves for shares of
stocks to shift? The most important factor is a change in the
expectations of a company’s future profits.
• Suppose Intel announces a new generation of computer chips that
will lead to faster computers with larger memories. Current owners
of Intel stock would adjust upward their estimates of what the value
of a share of Intel stock should be. At the old equilibrium price of
$25 fewer owners of Intel stock would be willing to sell. Since this
would be true at every possible share price, the supply curve for
Intel stock would shift to the left.
• Just as the expectation that a company will be more profitable shifts
the supply curve for its stock to the left, that same change in
expectations will cause more people to want to purchase the stock,
shifting the demand curve to the right.

The stock market
• Other factors may alter the price of an
individual corporation’s share of stock or the
level of stock prices in general. For example,
demographic change and rising incomes have
affected the demand for stocks in recent years.
For example, with a large proportion of the U.S.
population nearing retirement age and
beginning to think about and plan for their lives
during retirement, the demand for stocks has
risen.
The stock market
• Information on the economy as a whole is
also likely to affect stock prices.
– If the economy overall is doing well and people
expect that to continue, they may become
more optimistic about how profitable
companies will be in general, and thus the
prices of stocks will rise.
– Conversely, expectations of a sluggish
economy, as happened in the fall of 2008,
could cause stock prices in general to fall.
Discussion: The Vietnam stock market under impacts
of Covid-19
• Diễn biến thế giới:
– Sự bất ổn của nền kinh tế thế giới khi tình hình dịch
bệnh Covid-19 vẫn phức tạp, ảnh hưởng tới khả năng
mở cửa nhằm phục hồi nền kinh tế.
– Căng thẳng giữa Mỹ và Trung Quốc ở mức cao và
không ai lường trước điều gì sẽ xảy ra, đặc biệt trong
bối cảnh kinh tế đang kém khả quan.
– Lo ngại về sự thua lỗ của các doanh nghiệp trong quý
II
– Giá vàng tăng quá nhanh làm thay đổi định hướng
của nhà đầu tư
Discussion: The Vietnam stock market under impacts
of Covid-19
• Nguyên nhân của sắc xanh trên thị trường chứng
khoán trong tháng quý II, III, 2020?
– 06/04, VN-Index tăng 4,98%, đánh dấu phiên tăng điểm
mạnh nhất từ tháng 8/2001 đến nay.
– 22/6/2020, chỉ số VNIndex đạt 871,28 điểm, tăng 0,79% so
với tháng trước, giảm 9,34% so với cuối năm 2019;
– chỉ số HNX-Index đóng cửa ở mức 114,72 điểm, tăng
4,47% so với tháng trước và tăng 11,91% so với cuối năm
trước.
– Thanh khoản của thị trường cổ phiếu, chứng chỉ quỹ bình
quân trong 6 tháng đầu năm (tính đến 11/6) đạt 5.439 tỷ
đồng/phiên, tăng 6,8% so với bình quân năm 2019.
Discussion: The negative oil prices
• Tại sao người bán lại phải trả tiền cho người
mua?
– Lựa chọn mang lại ít thiệt hại hơn so với việc ngừng sản xuất hay tìm một
nơi để trữ dầu. (Nếu đóng giếng dầu làm cho nó hỏng vĩnh viễn…)
– Thương nhân mua hợp đồng tương lai dầu như một cách đặt cược vào khả
năng giá phục hồi và không hề có ý định mua dầu để tích trữ, sử dụng. Họ
có thể chịu tổn thất nặng nếu dầu vẫn giảm giá mạnh và phải đối mặt với
sự lựa chọn tìm kiếm nơi lưu trữ hoặc chịu bán lỗ. Và tình trạng cung dầu
leo thang đã khiến không gian lưu trữ khan hiếm, và ngày càng đắt đỏ.
– Covid-19 làm giảm nhu cầu về dầu.
– Ả Rập Xê Út và Nga đã thất bại trong việc đàm phán một thỏa thuận mới
về cắt giảm sản lượng dầu, và kết quả là Ả Rập Xê Út đã đẩy mạnh sản xuất,
giải phóng khối lượng dầu thô kỷ lục vào thị trường từ tháng 3 năm nay.

• Tại sao người bán lại phải trả tiền cho
người mua?
– một trong những lý do kéo giảm giá dầu là hợp đồng tương lai tháng
5 hết hạn vào hôm nay 21/4. Trên thị trường có 1 nhóm không nhỏ
những nhà giao dịch đầu cơ chỉ buôn bán các hợp đồng chứ không
thực sự mua bán những thùng dầu. Thời điểm này, họ cần bán ra
hết hợp đồng tháng 5 để chuyển sang mua hợp đồng tháng 6 hoặc
các hợp đồng kỳ hạn xa hơn.
– Nhiều chuyên gia dự báo, trong nửa cuối năm, khó khăn về lưu trữ sẽ
nhanh chóng được giải quyết vì nhu cầu dầu tăng mạnh nên hàng tồn
kho sẽ giảm theo. Đây cũng là lý do tại sao giá dầu thô Brent giao
năm 2021 đang giữ giá rất tốt. Do vậy, tháng 4 là thời điểm nền kinh
tế và nhu cầu dầu đang rơi vào vùng lõm của đường cong, và giá
cũng thế.


• Thực chất giá (-) 37,63 USD/thùng là mức giá được
giao dịch giữa các trader trên sàn giao dịch chứ
không phải là giá giao dịch giữa nhà sản xuất dầu
thô và người sử dụng cuối cùng (nhà máy lọc dầu).
Hơn nữa, số lượng dầu giao dịch ở mức (-) 37,63
USD/thùng này chỉ vào khoảng 600 ngàn thùng,
không đáng kể trong tổng số giao dịch dầu mỏ của
thế giới trung bình là khoảng 100 triệu thùng/ngày.
Nghĩa là, giá âm không phản ánh giá mua-bán thời
điểm thực tại của thị trường dầu mỏ thế giới…



• Nếu thỏa thuận mới nhất của OPEC+ đạt
được, xu thế giá dầu sẽ diễn ra ra sao?

Apply the Demand and Supply to explain some events in Vietnam
• Why the price of pork was too high in the

last months?
• What happened for the price oil during the
pandemic time?
• Why the price of mask was too high during
the pandemic time?

4
POLICIES
Government’s Policies
Tax and
Price Controls
Subsidy
Ceiling Price Floor Price

Tax
Tax on Sellers

Tax
Tax on Buyers

Tax

Assignment
S.
a. If the government imposes 5$/product, what happen to the
supply curve?
b. If the government subsidies 5$/product, what happen to the
supply curve?

Elasticity and Tax Incidence
CASE 1: Supply is more elastic than demand
P It’s easier for

sellers than
Buyers’ share PB S buyers to leave
of tax burden the market.
Tax So buyers bear
Price if no tax
most of the
Sellers’ share PS burden of the
of tax burden tax.
D
Q

88
Elasticity and Tax Incidence
CASE 2: Demand is more elastic than supply
• It’s easier for

P
S buyers than
sellers to leave
Buyers’ share the market.
of tax burden PB
• Sellers bear most
Price if no tax of the burden of
Tax
the tax.
Sellers’ share
of tax burden PS
D

89
• Concept price celling and price floor?
• What are main purposes of these policies
• How to make these policies effective?
• Consequences?

Ceiling Price
A legal maximum on the

price at which a good can be
sold.

Ceiling Price
Only feasible if it
is lower than the
equilibrium price.

Ceiling Price
Only feasible if it
is lower than the
equilibrium price.

Ceiling Price
Control on Rent

Ceiling Price

Shortages and Rationing
• Because of shortage
– Sellers must ration the goods among buyers
• Some rationing mechanisms:
• Long lines
• Discrimination according to sellers’ biases
– Are often unfair and inefficient
• The goods do not necessarily go to the buyers who
value them most highly
Chapter
© 2018 Learning®. May not be scanned, copied or duplicated, or posted toSlide
2: Demand-Supply
Cengage a 96 96
Floor Price
A legal minimum on the

price at which a good can be
sold.

Floor Price
Only feasible
when it is higher
than the
equilibrium price.

Floor Price
A minimum wage

EXAMPLE 2: The Market for Unskiled Labor
Wage W S
paid to
unskilled • Equilibrium
workers without price
$6.00
controls
D
L
500
Quantity of
unskilled workers

10
How Price Floors Affect Market Outcomes
W S
• A price floor
below the
equilibrium
$6.00
price is not
binding – has $5.00
Price
no effect on floor
the market
D
outcome. L
500

10
How Price Floors Affect Market Outcomes
labor
W surplus S
• The equilibrium wage ($6) is Price
below the floor and $7.25
floor
therefore illegal.
• The price floor is binding,
causes a surplus (i.e.,
$6.00
unemployment).
• Minimum wage laws do not

affect highly skilled workers.
They do affect teen workers. D
A 10% increase in the
L
400 550
minimum wage raises teen
unemployment by 1–3%.

10
Active Learning 1 Price controls
The market for hotel The market for
P
140 hotel rooms
rooms is in S
equilibrium as in the 130
graph. 120
110
• Determine the
100
effects of:
90
A. $90 price ceiling 80 D
B. $90 price floor 70
C. $120 price floor 60
50
40
0 Q
50 60 70 80 90 100 110 120 130
10
Active Learning 1 A. $90 price ceiling
The market for
P
140 hotel rooms
S
130
The price falls to 120
$90. (binding price
110
ceiling below the
100
equilibrium) Price ceiling
90
Buyers demand 80 D
120 rooms, sellers shortage = 30
70
supply 90, leaving a
60
shortage.
50
40
0 Q
50 60 70 80 90 100 110 120 130
10
Active Learning 1 B. $90 price floor
The market for
P
140 hotel rooms
S
• Equilibrium price 130
is above the $90 120
price floor, so the 110
price floor is not 100
binding. Price floor
90
• P = $100, 80 D
Q = 100 rooms. 70
60
50
40
0 Q
50 60 70 80 90 100 110 120 130
10
Active Learning 1 C. $120 price floor
The market for
P
140 hotel rooms
S
• The price rises to 130 surplus = 60
$120. (binding 120
price floor above Price floor
110
the equilibrium) 100
• Buyers demand 90
60 rooms, sellers 80 D
supply 120, 70
causing a surplus. 60
50
40
0 Q
50 60 70 80 90 100 110 120 130
10
Evaluating Price Controls
• Markets are usually a good way to

organize economic activity
– Economists usually oppose price ceilings and
price floors
– Prices are not the outcome of some
haphazard process
– Prices have the crucial job of balancing supply
and demand
• Coordinating economic activity
Chapter
© 2018 Cengage 2: Demand-Supply
Learning®. Slidefor107
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107
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
Evaluating Price Controls
• Governments can sometimes improve

market outcomes
– Want to use price controls
• Because of unfair market outcome
• Aimed at helping the poor
– Often hurt those they are trying to help
– Other ways of helping those in need
• Rent subsidies
• Wage subsidies (earned income tax credit)
Chapter
© 2018 Cengage 2: Demand-Supply
Learning®. Slidefor108
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except use
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Theory of Demand and Supply: Dr. Lê Thanh Hà

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Theory of Demand and Supply: Dr. Lê Thanh Hà

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Chapter 2: Demand-Supply Slide 4

Chapter 2: Demand-Supply Slide 6

Chapter 2: Demand-Supply Slide 7

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The amount of good that buyers are willing and

Chapter 2: Demand-Supply Slide 10

Changes in prices causes a

Chapter 2: Demand-Supply Slide 11

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They satisfy similar desires

Shift to the right

They are used together

Shift to the left

Chapter 2: Demand-Supply Slide 20

Tshifts to the right

Chapter 2: Demand-Supply Slide 21

Tastes cause demand to

Chapter 2: Demand-Supply Slide 22

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Chapter 2: Demand-Supply Slide 24

1. In rainy days, customers are willing to pay more to buy umbrella.

Chapter 2: Demand-Supply Slide 25

Supply is the amount of good that seller are willing

Chapter 2: Demand-Supply Slide 27

Supply is the amount of good that seller are willing

Demand depicts the relationship between price

Chapter 2: Demand-Supply Slide 28

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Chapter 2: Demand-Supply Slide 32

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Changes in prices cause a

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Tax burden on consumers/producer

Chapter 2: Demand-Supply Slide 40

Expectation about demand.

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Equilibrium price is the price that balances

Equilibrium quantity is the quantity supplied and

Chapter 2: Demand-Supply Slide 47

A pressure causes price to

Chapter 2: Demand-Supply Slide 48

A pressure causes price to

Chapter 2: Demand-Supply Slide 49

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