1.1.

3 Demand, Supply,
and Market Equilibrium
Ms. Dora Wang
Fall 2023
Demand schedule activity
Quantity 1 2 3 4 5 6 7 8 9
Utility/satisfaction
Price

Quantity 1 2 3 4 5 6 7 8 9
Utility/satisfaction 10 10 8 7 5 3 2 1 0
Price 1 1 0.8 0.7 0.5 0.3 0.2 0.1 0
Demand schedule

– Table of the quantity demanded of a certain good at

different prices

Price 1 1 0.8 0.7 0.5 0.3 0.2 0.1 0

Quantity 1 2 3 4 5 6 7 8 9

The demand schedule of cookies

Demand curve
Price 1 1 0.8 0.7 0.5 0.3 0.2 0.1 0
Quantity 1 2 3 4 5 6 7 8 9

Price
1
0.9
0.8
0.7 Inverse relationship:
0.6
0.5 When price goes up, the quantity
demanded decreases, and vice versa.
0.4
0.3
0.2
0.1
0
1 2 3 4 5 6 7 8 9 Quantity
Demand
(Effective demand) The different quantities of
goods that consumers are willing and able to buy
at different prices.
The law of demand

– other things equal (ceteris paribus) There is an

INVERSE relationship between price and quantity
demanded.
Market Demand VS
Individual Demand
– Market demand （市场需求） refers to the sum of all
individual demands for a particular good or service.
– Graphically, individual demand （个人需求） curves
are summed horizontally to obtain the market demand
curve.
 The Market Demand Curve
When the price is $2.00, When the price is $2.00, The market demand at
Catherine will demand 4 Nicholas will demand 3 $2.00 will be 7 ice-cream
ice-cream cones. ice-cream cones. cones.

Catherine’s Demand + Nicholas’s Demand = Market Demand

Price of Ice- Price of Ice- Price of Ice-
Cream Cone Cream Cone Cream Cone

The market demand curve is the horizontal

2.00
sum of the
2.00
individual demand
2.00
curves!
1.00 1.00 1.00

3 5 7 13
4 8
Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones

When the price is $1.00, When the price is $1.00, The market demand at
Catherine will demand 8 Nicholas will demand 5 $1.00, will be 13 ice-
ice-cream cones. ice-cream cones. cream cones.
Shifters of the demand curve

5 Shifters (Determinants) of Demand: (demonstrated on the whiteboard)

– Advertising
– Tastes and Preferences
– Demographic changes (age, gender, geographical distribution, ethnic
groups)
– Price of Related Goods
– Income
– Future Expectations (optional)
A change in PRICE doesn’t shift the curve. It only causes movement
along the curve.
 Quantity Demanded vs.
Demand
– Change in Quantity Demanded （需求量的变动）
– Movement along the demand curve.
– Caused by a change in the price of the product.

– Change in Demand （需求的变动）

– A shift in the demand curve, either to the left or
right.
– Caused by any non-price change that alters the
quantity demanded at every price.
 Shifts in Demand
– Ceteris paribus-“all other things held constant.”
– When the ceteris paribus assumption is dropped, movement no
longer occurs along the demand curve. Rather, the entire demand
curve shifts.
– A shift means that at the same prices, more people are willing and
able to purchase that good .

This is a change in demand, not a change in

quantity demanded!
PRICE DOESN’T SHIFT THE CURVE
 Shifts in the Demand Curve
Price of
Ice-Cream
Cone

Increase
in demand

Decrease
in demand
Demand
curve, D 2
Demand
curve, D 1
Demand curve, D 3
0 Quantity of
Ice-Cream Cones
Practice Time: Change in Demand
Demand Price of Milk
Schedule $
What if milk
Price
Quantity
5
makes you
Demanded

$5 10
4 smarter?
3
$4 20
$3 30 2

$2 50 1
Demand
$1 80 10 20 30 40 50 60 70 80 Q
Quantity of
Milk
Change in Demand
Demand Price of Milk
Schedule $
What if milk
Price
Quantity
5
makes you
Demanded

$5 10
4 smarter?
3
$4 20
$3 30 2

$2 50 1
Demand
$1 80 10 20 30 40 50 60 70 80 Q
Quantity of
Milk
 Change in Demand
Demand Price of Milk
Schedule $
Quantity 5
Price
Demanded
$5 4

10 30
3

$4 20 40
2
$3 30 50
1
$2 50 70 Demand
10 20 30 40 50 60 70 80 Q
$1 80 100 Quantity of
Milk
 Change in Demand
Demand Price of Milk
Schedule Increase in Demand
$
5 Prices didn’t change but
Quantity people want MORE Milk
Price
Demanded
4
$5
10 30
3

$4 20 40 2
D1
$3 30 50
1
Demand
$2 50 70
10 20 30 40 50 60 70 80 Q
$1 80 100 Quantity of
Copyright
ACDC Leadership 2019 Milk 17
Change in Demand
Demand Price of Milk
Schedule $
What if milk
Price
Quantity
5
causes baldness?
Demanded
4
$5 10
3
$4 20
$3 30 2

$2 50 1 Demand
$1 80 10 20 30 40 50 60 70 80 Q
Quantity of
Milk
Change in Demand
Demand Price of Milk
Schedule $
What if milk
Price
Quantity
5
causes baldness?
Demanded
4
$5 10
3
$4 20
$3 30 2

$2 50 1 Demand
$1 80 10 20 30 40 50 60 70 80 Q
Quantity of
Milk
Change in Demand
Demand Price of Milk
Schedule $
5
Quantity
Price
Demanded
4
$5 10 0
3
$4 20 5
$3 30 20 2

$2 50 30 1 Demand
$1 80 60 10 20 30 40 50 60 70 80 Q
Quantity of
Milk
Change in Demand
Demand Price of Milk
Schedule $
5 Decrease in Demand
Quantity
Price Prices didn’t change but
Demanded
4 people want LESS Milk
$5 10 0
3
$4 20 5
$3 30 20 2

$2 50 30 1 D2 Demand
$1 80 60 10 20 30 40 50 60 70 80 Q
Quantity of
Milk
Change in Qd vs. Change in Demand
There are two ways to increase
Price of Milk quantity from 10 to 20
P 1. A to B is a change
in quantity
demanded (due to
a change in price)
A C
$3 2. A to C is a change
in demand (shift
B in the curve)
$2
D2
D1
10 20 Q
Quantity of
Change in Demand
Demand Price of Milk
Schedule $ What happens to
5
Price
Quantity the demand for milk if
Demanded
4 the price of milk
$5 10
goes up?
3
$4 20
$3 30 2 NOTHING!
The demand
$2 50 1 Demand
stays the same
$1 80 10 20 30 40 50 60 70 80 Q
Quantity of
Milk
Shifters of the demand curve

5 Shifters (Determinants) of Demand: (demonstrated on the whiteboard)

– Advertising
– Tastes and Preferences
– Demographic changes (age, gender, geographical distribution, ethnic
groups)
– Price of Related Goods
– Income
– Future Expectations (optional)
A change in PRICE doesn’t shift the curve. It only causes movement
along the curve.
Prices of Related Goods
The demand curve for one good can be affected by a change in the price of
ANOTHER related good.

1. Substitutes are goods used in place of one another.

– Ex: If price of Pepsi falls, demand for coke will…
– If the price of one increases, the demand for the other will
increase (or vice versa).

2. Complements are two goods that are bought and used

together.
– Ex: If price of hot dogs falls, demand for hot dog buns will...
– If the price of one increase, the demand for the other will fall
(or vice versa).
Substitutes or Complements?
Substitutes
Complements
Income
The incomes of consumer change the demand, but how
depends on the type of good.
1. Normal Goods
– Ex: Luxury cars, seafood, jewelry, homes
– As income increases, demand increases
– As income falls, demand falls

2. Inferior Goods
– Ex: Top Ramen, used cars, used clothes
– As income increases, demand falls
– As income falls, demand increases
 Consumer Income Normal
Good
Price of Ice-
Cream Cone
$3.00 An increase
2.50 in income...
Increase
2.00 in demand

1.50

1.00

0.50
D2
D1
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12
Ice-Cream
Cones
Consumer Income Inferior Good
Price of Ice-Cream
Cone
$3.00

2.50 An increase
2.00
in income...
Decrease
1.50 in demand
1.00

0.50

D2 D1
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream
Cones
Supply
the different quantities of a good that sellers are
willing and able to sell (produce) at different
prices.
The law of supply

– There is a DIRECT (or positive) relationship

between price and quantity supplied.
• As price increases, the quantity producers
make increases.
• As price falls, the quantity producers make
falls.
 Example of Supply-Mowing Lawns
You own a lawn mower and you are
willing to mow lawns.
How many lawns will you mow at these prices?

Price per Quantity

lawn mowed
Supply Supplied

Schedule （供给表） $1
The supply schedule is a table $5
that shows the relationship
between the price of the good $20
and the quantity supplied. $50
$100
$1000
Ben’s Supply Schedule and Supply
Curve Price of
Ice-Cream
Cone
$3.00

2.50
1. An
increase
in price ... 2.00

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.
Individual supply
and market supply

– Market supply refers to the

sum of all individual
supplies for all sellers of a
particular good or service.
– Graphically, individual
supply curves are summed
horizontally to obtain the
market supply curve.
Quantity Supplied vs. Supply
– Change in Quantity Supplied
– Movement along the supply curve.

– Change in Supply
– A shift in the supply curve, either to the left or
right.
– Caused by any non-price change that alters the
quantity supplied at every price.
Change in Quantity Supplied
Price of Ice-
Cream S
Cone
C
$3.00
A rise in the price
of ice cream
cones results in a
movement along
A the supply curve.
1.00

Quantity of
Ice-Cream
0 1 5 Cones
 Shifts in the Supply Curve
Price of
Ice-Cream Supply curve, S3
Supply
Cone
curve, S1
Supply
Decrease curve, S2
in supply

Increase
in supply

0 Quantity of
Ice-Cream Cones
Practice Time-Change in Supply
Supply Price of Milk
Schedule $ Supply
5
Quantity
Price
Supplied
4
$5 50 What if there are new
3
$4 40 and more productive
$3 30 milking
2 machines?
$2 20 1

$1 10 10 20 30 40 50 60 70 80 Q
Quantity of
Milk
Change in Supply
Supply Price of Milk Supply
Schedule $
5
Quantity
Price
Supplied
4
$5 50
3
$4 40
$3 30 2

$2 20 1

$1 10 10 20 30 40 50 60 70 80 Q
Quantity of
Milk
Change in Supply
Supply Price of Milk Supply
Schedule $
5
Quantity
Price
Supplied
4
$5 50
3
$4 40
$3 30 2

$2 20 1

$1 10 10 20 30 40 50 60 70 80 Q
Quantity of
Milk
Change in Supply
Supply Price of Milk Supply
Schedule $
5
Quantity
Price
Supplied
4
$5 50 70
3
$4 40 60
$3 30 50 2

$2 20 40 1

$1 10 30 10 20 30 40 50 60 70 80 Q
Quantity of
Milk
Change in Supply
Supply Price of Milk Supply
Schedule $ S2
5
Quantity
Price
Supplied
4
$5 50 70
3
$4 40 60
Increase in Supply
$3 30 50 2
Prices didn’t change but
there is MORE milk
$2 20 40 1 produced
$1 10 30 10 20 30 40 50 60 70 80 Q
Quantity of
Milk
 Change in Supply
Supply Price of Milk
Schedule $ Supply
5
Quantity
Price
Supplied

$5 What if the price for

50
4

$4 dairy cows increases

40 3

$3 30
drastically?
2

$2 20 1

$1 10 10 20 30 40 50 60 70 80 Q
Quantity of
Copyright
ACDC Leadership 2019 Milk 45
Change in Supply
Supply Price of Milk Supply
Schedule $
5
Quantity
Price
Supplied
4
$5 50
3
$4 40
$3 30 2

$2 20 1

$1 10 10 20 30 40 50 60 70 80 Q
Quantity of
Milk
Change in Supply
Supply Price of Milk Supply
Schedule $
5
Quantity
Price
Supplied
4
$5 50
3
$4 40
$3 30 2

$2 20 1

$1 10 10 20 30 40 50 60 70 80 Q
Quantity of
Milk
Change in Supply
Supply Price of Milk Supply
Schedule $
5
Quantity
Price
Supplied
4
$5 50 30
3
$4 40 20
$3 30 10 2

$2 20 1 1

$1 10 0 10 20 30 40 50 60 70 80 Q
Quantity of
Milk
Change in Supply
Supply Price of Milk Supply
Schedule $ S2
5
Quantity
Price
Supplied
4
$5 50 30
3
$4 40 20 Decrease in Supply
Prices didn’t change but
$3 30 10 2 there is LESS milk
produced
$2 20 1 1

$1 10 0 10 20 30 40 50 60 70 80 Q
Quantity of
Milk
Non-price determinants of
supply
– Changes in costs of factors of production
(FOPs)
– Prices of related goods (in the cases of
joint and competitive supply) (optional)
– Indirect taxes and subsidies
– Future price expectations (optional)
– Changes in technology
– Natural disasters
– Number of firms
Taxes and Subsidies
Indirect taxes
Taxes imposed on spending, also
called VAT (value-added tax).
Examples include: cigarettes,
alcohol…
Subsidies
Money given to firms or
organizations from the
government, usually to
encourage the production of
goods. Examples include:
education, medical care, electric
cars…
 Supply Practice
Identify the determinant (shifter) then decide if
supply will increase or decrease
Increase or
Shifter Left or Right
Decrease
1
2
3
4
5
6
 Supply Practice
1. Which determinant (SHIFTER)?
2. Increase or decrease?
3. Which direction will curve shift?

Analyze Hamburgers
1. Strange virus kills 20% of cows
2. Price of hamburgers increase 30%
3. Government taxes burger producers
4. New bun baking technology cuts production
time in half
5. The government subsidizes beef producers
6. Minimum wage increases to $20
 Supply Practice
Identify the determinant (shifter) then decide if
supply will increase or decrease
Increase or
Shifter Left or Right
Decrease
1 Input Availability Decrease Left
2 NO SHIFT Increase QD Right along curve

3 Taxes Decrease Left

4 Technology Increase Right
5 Subsidies Increase Right
6 Cost of Input Decrease Left
Competitive market
equilibrium
Market
equilibrium
– a situation in which
the price has reached
the level where
quantity supplied
equals quantity
demanded.
 SUPPLY AND DEMAND TOGETHER

–Equilibrium Price （均衡价格）

– The price that balances quantity supplied and
quantity demanded.

–Equilibrium Quantity （均衡产量）

– The quantity supplied and the quantity
demanded at the equilibrium price.
SUPPLY AND DEMAND TOGETHER

Demand Schedule Supply Schedule

At $2.00, the quantity demanded

is equal to the quantity supplied!
The Equilibrium of Supply and Demand
Price of
Ice-Cream
Cone Supply

Equilibrium price Equilibrium point

$2.00

Equilibrium Demand
quantity

0 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of Ice-Cream Cones
Markets Not in Equilibrium
(a) Excess Supply
Price of
Ice-Cream Supply
Cone Surplus
$2.50

2.00

Demand

0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
demanded supplied Cones
 Equilibrium

–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.
Markets Not in Equilibrium
(b) Excess Demand
Price of
Ice-Cream Supply
Cone

$2.00

1.50
Shortage

Demand

0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
supplied demanded Cones
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.
Equilibrium
–Law of supply and demand
– The claim that the price of any good adjusts
to bring the quantity supplied and the
quantity demanded for that good into
balance.
 Supply and Demand Analysis
Easy as 1, 2, 3 steps for analyzing changes in Equilibrium
1. Before the change:
• Draw supply and demand.
• Label original equilibrium price and quantity.
2. The change:
• Did it affect supply or demand first?
• Which determinant caused the shift?
• Draw increase or decrease.
3. After change:
• Label new equilibrium?
• What happens to Price? (increase or decrease)
• What happens to Quantity? (increase or decrease)

Let’s Practice!
How an Increase in Demand Affects the Equilibrium
Price of
Ice-Cream 1. Hot weather increases
Cone the demand for ice cream . . .

Supply

$2.50 New equilibrium

2.00
2. . . . resulting Initial
in a higher
equilibrium
price . . .
D

0 7 10 Quantity of
3. . . . and a higher Ice-Cream Cones
quantity sold.
How a Decrease in Supply Affects the Equilibrium
Price of
Ice-Cream 1. An increase in the
Cone price of sugar reduces
the supply of ice cream. . .
S2
S1

New
$2.50 equilibrium

2.00 Initial equilibrium

2. . . . resulting
in a higher
price of ice
cream . . . Demand

0 4 7 Quantity of
3. . . . and a lower Ice-Cream Cones
quantity sold.
 Table 2: Laurel
Table 1: Cathy
William Eason Jeffrey Tim
Antonio Phoebe Charlotte Jaehwan

Table 4:
Sophie Shirley
Table 3: Vincent
Esther Rachel Angel
Grace Sabrina
Talia Alvin
 The diagram on the left shows
Price the demand curve for a
brand of coffee.
£3.0 a. What is the quantity
0
£2.5 demanded at a price of
0 £3.00?
£2.0
0 b. How much does the quantity
£1.5
0 demanded change if the
price falls to £2.00?
Demand

500 750 1000 1250 Quantity

 The diagram on the left shows the demand
Price
curve for a brand of coffee.
a. What is the quantity demanded at a
£3.0 price of £3.00?
0
500 units

£2.0
0 b. How much does the quantity
demanded change if the price falls to
£2.00
Increases by 500 units
Demand

500 1000 Quantity

 The diagram on the left
PRIC
shows the demand and
E S supply of DVD players.
What would happen to the
demand curve if average
income in the economy
increases?

QUANTI
TY
 The demand curve shifts to the
PRIC right because people now have
E S more money and can therefore
afford to buy more DVD players.

What happens to the

equilibrium price and
D2
quantity?

QUANTI
TY
PRIC
The equilibrium price
E S increases because firms
can charge more due to the
increased demand.
P2

P The equilibrium quantity

D2 also increases because
more DVDs are now
bought and sold.
D

Q Q
2 QUANTI
TY
 The diagram on the left shows
PRIC the demand and supply of Coca
E S Cola.
What would happen to the
price and quantity if Pepsi
launched a successful
advertising campaign?

QUANTI
TY
 The demand curve shifts to the
left because people may start
buying Pepsi instead of Coke.
PRIC
E S

The equilibrium price decreases

because firms cannot charge as
much due to the decreased
demand.
P

P2
The equilibrium quantity also
decreases because less cans
of Coke are now bought and
D sold.
D2

Q Q
2 QUANTI
TY
 Demand and supply analysis can
be applied to many different
markets e.g the labour market.
WAG
ES S The demand and supply diagram
on the left shows the market for
builders.

What would happen to the

W
equilibrium wage and employment
if the demand for new houses
increased?
Tip: Think about what would happen
D to the demand for builders.

Q
EMPLOYM
ENT
 The equilibrium wage
Wag increases because firms
es S will now have to pay
more to attract extra
workers.
W2

W The employment level in

D2
the industry will also
increase because more
builders are now needed
D

Q Q
2 Employm
ent
 The diagram on the left shows
Price the market clearing price for a
S
product.
What would happen if the price
of that product was set at a level
below the market clearing price?
P

Q
Quantity
Price S

Setting the price below the

market clearing price will cause
a shortage of products in the
P market because consumers
want to buy more than firms
P1 want to supply i.e. demand is
greater than supply
Shortage
D

15 000 20000 25 000 Quantity

Price
S
The diagram on the left shows
the market clearing price for a
product. What would happen if
the price of that product was
£3.6
0 set at a level above the market
clearing price?

20
Quantity
000
Price S
Setting the price above the market
Surplus clearing price will cause a surplus of
£4.20
products in the market because there
firms want to sell more of the product than
customers want to buy.
£3.6
0 In the case on the diagram,
The amount of surplus will be:
25 000 – 15 000 = 10 000.

D Q. What would happen to

the price in this situation?
15 000 20000 25 000 Quantity
Price S

Surplus
The price will decrease
back towards the market
£4.20
clearing price to remove the
surplus.
£3.6
0

15 000 20000 25 000 Quantity

 The diagram on the left
PRIC shows the demand and
E S
supply of houses in
Mumbai.
What would happen
to the price and
quantity if people felt
that crime was
getting high in New
D Delhi?

QUANTI
TY
 More people will want to live in
Mumbai instead of New Delhi,
this will lead to an increase in
PRIC demand for houses in Mumbai.
E S

This increases the price of

P2
houses (P-P2)
P
D2 The equilibrium quantity also
increases because more
houses are now bought and
sold.
D

Q Q
2 QUANTI
TY
 A recent report has published research which found
that sunscreens did not prevent skin cancer.
Scientists from a medical research charity, the
PRICE
S Restoration of Appearance and Function Trust (Raft),
warned that using a sunscreen could increase the
risk of developing malignant melanoma - the most
aggressive form of skin cancer.
The team, based at Mount Vernon hospital in north
London, said British consumers were staying out
longer in the sun while using high factor sun creams
that protected against UVB rays and prevented
burning. But the same creams offered almost no
protection against the invisible damage caused by
harmful UVA rays, despite assurances on the bottle.
Article from Guardian 30/09/03
D
What effect might this have
on the market for sun
QUANTI creams?
TY
PRIC If people take the research
E S seriously then they might stay in
the sun less and use less sun
cream. The demand would
decrease (D-D2).

The equilibrium price

P decreases because firms
cannot charge as much due to
the decreased demand.
P2
The equilibrium quantity also
decreases because less
bottles of sunscream are now
D
D2 bought and sold.

Q Q
2 QUANTI
TY
*Double Shifts
• Suppose the demand for milk increased at
the same time as production technology
improved.
• Use S&D Analysis to show what will
happen to PRICE and QUANTITY.
Double Shift Rule:
If TWO curves shift at the same
time, EITHER price or quantity
will be indeterminate (ambiguous).
Demand increases AND supply increases
Price
S
S1

P1 Pe

D1
D
P indeterminate Qe Q1 Quantity
Q increase
 Trick: Draw it out
separately and
combine the results

P indeterminate
Q increase
 What if supply
increases and
demand falls?

P decrease
Q indeterminate
 What if supply
decreases and
demand falls?

P indeterminate
Q decrease
 92

Group Discussion: Turkey

Economics
Before reading After reading
– What do you think happens to the – What really happens to
demand for turkey around Thanksgiving?
demand? Why?
– What do you think happens to the supply
of turkeys around Thanksgiving? – What really happens to supply?
– Based on your answers, what do you think Why?
will happen to the price of turkey at
Thanksgiving?
– What is the real intention of the
– Show the above info in diagrams
stores? Show it in diagrams