Section 2

SUPPLY AND DEMAND

Demand
Supply
Equilibrium
Changes in equilibrium
Efficiency of markets

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DEMAND

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 Demand
 Market: A group of buyers and sellers for a
particular good or service
 Demand: the amount of a good that buyers are
willing and able to purchase across a range of
prices, ceteris paribus
 Quantity demanded: the amount of a good that
buyers are willing and able to purchase at a
specific price
 Notation:
Demand D Price P

Quantity demanded QD
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 Representing demand
Demand
Demand curve Demand function
schedule
A linear demand
Price Quantity function:
(dollars (bottles
per bottle) per day)

A 2.00 0
B 1.50 1
C 1.00 2
D 0.50 3

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 Law of demand
Law of demand

A change in price
causes a movement
along demand curve

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 Market demand
Price (dollars per Price (dollars per Price (dollars per
bottle) bottle) bottle)

Quantity Quantity Quantity

(bottles per day) (bottles per day) (bottles per day) 6
 Factors impacting on demand
Movement
along the Price (P)
demand curve

Income (I)

Shifts the Price of related goods (

demand Number of buyers ()
curve
Tastes (T)
Expectations (E)

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 Income (I)
Normal goods Normal good

shift to the right) P

An increase
shift to the left) in income
causes an
increase in
Inferior goods demand
A decrease
in income
shift to the right) causes a
decrease in D3 D1 D2
demand
Q

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 Price of related goods

Substitutes Compliments

an increase in the price an increase in the price

of one goods leads to of one goods leads to a
an increase in the decrease in the
demand for the other demand for the other

𝑷 𝑿 ↑→ 𝑫𝒀 ↑ 𝑷 𝑿 ↑→ 𝑫𝒀 ↓

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Factors impacting on demand
Market size Number of buyers

Tastes Preferences

ie. Expectation of income,

Expectations
price

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QuickQuiz

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SUPPLY

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 Supply

Supply the amount of a good that sellers are

willing and able to sell across a range of prices,
ceteris paribus

Quantity supplied the amount of a good that

sellers are willing and able to sell at a specified
price

Notations: Supply S Price P

Quantity supplied QS
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 Representing supply
Supply schedule Supply curve Supply function
Price (dollars per bottle) Supply function:
Price Quantity
(dollars per supplied 2.05
bottle) (thousands
of bottles 2.00 A linear supply
per day) A
function:
A 2.00 3 1.50 Supply
B
B 1.50 2 Curve
C 1.00 1 1.00
C
D 0.50 0
0.50 D

0 1 2 3 4
Quantity
(thousands of bottles per day) 14
 Law of supply
P
Law of supply S
E

D
Changes in price
C
cause movement
along supply curve B

Q
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 Market supply
Price Nam’s QS Ha’s QS Market QS

Market supply is the horizontal summing of

individual supply 16
 Determinants of supply
P

A shift in supply A movement

along

Technology
Input prices
Tax and subsidy
A shift
Number of sellers
Expectations
Q

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 Determinants of supply
Technology An improvement in technology causes
an increase in supply

An increase in input prices results in a

Input prices
decrease in supply

Number of The higher the number of sellers is,

sellers the larger the supply is

Tax and Taxes/ subsidy cause decrease/

subsidy increase in supply

Expectations
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 Number of sellers (Ns)
𝑆 3
Price
𝑆1
𝑆2

Decrease in
Increase in

Quantity
supplied
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Quickquiz

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EQUILIBIRIUM

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 Equilibrium
Price

Surplus

$15.00
C F

$10.00 E

A B
$5.00
Shortage D

250 500 700 Quantity

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 Example
• P = -2Qd + 100
• P = 60 + 2Qs
Qe, Pe?
-2Qd +100 = 60 + 2Qs
Qe = 10
Pe = 80

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 Equilibrium
Equilibrium is the situation in which both buyers
and sellers have no motivation to change their
behaviors
• PE : Price at equilibrium
• QE : Quantity at equilibrium

Two ways identifying the equilibrium

• QS(P) = QD(P)
• The intersection point between supply and
demand curves
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 Self-adjustment mechanism
Surplus Shortage

• P1 > PE -> QS1 > QD1 • P2 < PE -> QS2 < QD2
called a surplus called a shortage
• The surplus causes a • The shortage causes a
pressure for price to pressure for price to
decrease. increase.
• Price decrease until no • Price increase until no
surplus exists -> go shortage exists -> go
back to equilibrium back to equilibrium
point. point.
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CHANGES EQUILIBIRIUM

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 Changes in equilibrium
Figure 1 Figure 2
D increases, S unchanged S increases, D unchanged

S
S1
E2
E1 E1 S2
P1 P1
E2
P2

D
D2 D1

Q1 Q2

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 Changes in equilibrium
Both supply and demand increase
QE increase – Price unknown

SSS1
SS1 SSS
1 1 S2
E2 S12 E1
E1 SS12 P2 E1 P2 E2
E2 P1 P1

D2 D1 D2 D
D D2
D11 D
D1 DD1

Q2 Q1 Q1 Q2 Q1 Q2

Figure 3.1 Figure 3.2 Figure 3.3

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 Three Steps for Analyzing Changes
in Equilibrium
1. Decide whether the event shifts the
supply or demand curve (or perhaps
both).
2. Decide in which direction the curve shifts.
3. Use the supply-and-demand diagram to
see how the shift changes the equilibrium
price and quantity

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 What Happens to Price and Quantity When Supply
or Demand Shifts?
Pe Qe
D increase; S unchanged Increase Increase
D decrease; S unchanged decrease decrease
S increase; D unchanged
S decrease; D unchanged
D increase; S decrease
S increase; D decrease
D increase; S increase
S decrease; D decrease

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 SUMMARY
DEMAND SUPPLY
• The demand curve shows how the quantity of a good • The supply curve shows how the
demanded depends on the price. According to the law of quantity of a good supplied
depends on the price. According
demand, as the price of a good falls, the quantity demanded
to the law of supply, as the price
rises. Therefore, the demand curve slopes downward. of a good rises, the quantity
• Other determinants of how much consumers want to buy supplied rises. Therefore, the
include income, the prices of substitutes and complements, supply curve slopes upward.
tastes, expectations, and the number of buyers. When one • Other determinants of how
of these factors changes, the quantity demanded at each price much producers want to sell
include input prices,
changes, and the demand curve shifts. technology…

MARKET SITUATION
- At the Pe, the quantity demanded equals the quantity supplied.
- When the market price is above Pe, there is a surplus of the good, which causes the
market price to fall.
- When the market price is below Pe, there is a shortage, which causes the market price to
rise.

CHANGES IN MARKET EQUILIBIRIUM

To analyze how any event influences the equilibrium price and quantity in a market, we use
the supply and-demand diagram and follow three steps.
- First, we decide whether the event shifts the supply curve or the demand curve (or both)
- Second, we decide in which direction the curve shifts.
- Third, we compare the new equilibrium with the initial equilibrium. 31
EFFICIENCY OF MARKET

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 Efficiency of market
 Markets allocate scarce resources to
alternative uses.
 Efficiency is the property of a resource
allocation that maximizes the total surplus
received by all members of society.

Max NSB = CS + PS

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 Consumer surplus (CS)

CS1 = 11-6 = 5
CS2 = 10-6 = 4
CS3 = 9-6 = 3
CS4 = 8-6 = 2
CS5 = 7-6 = 1
CS = 5 + 4 + 3 + 2 + 1 = 15

Cầu

𝐶𝑆=∑ (𝑀𝑈 𝑖−𝑃 𝑖)

P
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 Consumer surplus (CS)
CS: Amount a
P
buyer is willing to
pay minus the
amount the buyer
actually pays
CS

PE

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 Consumer surplus (CS)
Mai buys an iPhone for $240 and gets
consumer surplus of $160.
a. What is her willingness to pay?
b. If she had bought the iPhone on sale for $180,
what would her consumer surplus have been?
c. If the price of an iPhone were $500, what would
her consumer surplus have been?

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 Consumer surplus (CS)
It is a hot day, and Minh is thirsty. Here is the value he
places on each bottle of water: Value of first bottle $7;
Value of second bottle $5; Value of third bottle $3; Value
of fourth bottle $1.
a. From this information, derive Minh’s demand schedule. Graph his
demand curve for bottled water.
b. If the price of a bottle of water is $4, how many bottles does Minh
buy? How much consumer surplus does Minh get from his
purchases? Show Minh’s consumer surplus in your graph.
c. If the price falls to $2, how does quantity demanded change?
How does Minh’s consumer surplus change? Show these changes
in your graph.

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 Producer surplus (PS)
PS: P
- Amount a seller is
paid for a good
minus the seller’s PE
cost of providing it
PS
- Price received minus
willingness to sell

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 Producer surplus (PS)
Minh owns a water pump. Because pumping large amounts of
water is harder than pumping small amounts, the cost of
producing a bottle of water rises as he pumps more.
Here is the cost he incurs to produce each bottle of water: Cost of
first bottle $1; Cost of second bottle $3; Cost of third bottle $5;
Cost of fourth bottle $7
a. From this information, derive Minh’s supply schedule. Graph his
supply curve for bottled water.
b. If the price of a bottle of water is $4, how many bottles does Minh
produce and sell? How much producer surplus does Minh get
from these sales? Show Minh’s producer surplus in your graph.
c. If the price rises to $6, how does quantity supplied change? How
does Minh’s producer surplus?

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 Market efficiency
Free markets produce P

the quantity of goods

that maximizes the
sum of consumer and
producer surplus CS

NSB = CS + PS PE
PS

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