The document discusses demand, supply, and market equilibrium. It defines demand as the quantity of a good consumers are willing and able to purchase at different prices. The law of demand states that quantity demanded increases when price decreases and decreases when price increases. Supply is defined as the quantity of a good producers are willing to provide at different prices, with the law of supply stating that quantity supplied increases with price. Market equilibrium occurs when quantity demanded equals quantity supplied at the market clearing price. The document uses graphs to illustrate the interaction of demand and supply and how equilibrium is impacted by shifts in demand or supply.

1. Demand &
Supply

2. MARKETS DEFINED
MARKETS
POTENTIAL
SELLERS
POTENTIAL
BUYERS

3. $5
4
3
2
1
DEMAND DEFINED
P QD
10
20
35
55
80
A schedule or a curve that
shows the various amounts of
a product that consumers are
willing and able to purchase at
each of a series of possible
prices.

4. LAW OF DEMAND
• As Price Falls…
…Quantity Demanded Rises
• As Price Rises…
…Quantity Demanded Falls
An inverse relationship exists between
price and quantity demanded

5. LAW OF DEMAND
• Diminishing Marginal
Utility

6. LAW OF DEMAND
• Diminishing Marginal
Utility
• Income Effect

7. LAW OF DEMAND
• Diminishing Marginal
Utility
• Income Effect
• Substitution Effect

8. GRAPHING DEMAND
P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1
10
20
35
55
80
Price of Corn
Quantity of Corn
CORN
Plot the Points
10 20 30 40 50 60 70 80

9. 55
P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1
10
20
35
55
80
Price of Corn
Quantity of Corn
CORN
Plot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND

10. 35
P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1
10
20
35
55
80
Price of Corn
Quantity of Corn
CORN
Plot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND

11. P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1
10
20
35
55
80
Price of Corn
Quantity of Corn
CORN
Plot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND

12. P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1
10
20
35
55
80
Price of Corn
Quantity of Corn
CORN
Plot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND

13. P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1
10
20
35
55
80
D
Price of Corn
Quantity of Corn
CORN
Connect the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND

14. P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1
10
20
35
55
80
D
Price of Corn
Quantity of Corn
CORN
10 20 30 40 50 60 70 80
What if
Demand
Increases?
GRAPHING DEMAND

15. P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1
D
Price of Corn
Quantity of Corn
CORN
10 20 30 40 50 60 70 80
D’
Increase
in
Demand
Increase
in Quantity
Demanded10
20
35
55
80
30
40
60
80
+
GRAPHING DEMAND

16. P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1
10
20
35
55
80
D
Price of Corn
Quantity of Corn
CORN
10 20 30 40 50 60 70 80
What if
Demand
Decreases?
GRAPHING DEMAND

17. P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1
10
20
35
55
80
D
Price of Corn
Quantity of Corn
CORN
10 20 30 40 50 60 70 80
--
10
20
40
60
D’
Decrease
in
Demand
Decrease
in Quantity
Demanded
GRAPHING DEMAND

18. DETERMINANTS OF
DEMAND
• Tastes
• Number of Buyers
• Income
– Normal (Superior) & Inferior Goods
• Prices of Related Goods
– Substitutes & Complements
– Unrelated Goods
• Expectations

19. SUPPLY DEFINED
$1
2
3
4
5
P QS
CORN
Supply is a schedule or a curve
showing the amounts of
a product that producers are
willing and able to make
available for sale at each of a
series of possible prices.
5
20
35
50
60

20. LAW OF SUPPLY
• As Price Rises…
…Quantity Supplied Rises
• As Price Falls…
…Quantity Supplied Falls
A direct relationship exists between
price and quantity supplied

21. 5
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$5
4
3
2
1
60
50
35
20
5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the Points
GRAPHING SUPPLY

22. P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$5
4
3
2
1
60
50
35
20
5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the Points
GRAPHING SUPPLY

23. 35
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$5
4
3
2
1
60
50
35
20
5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the Points
GRAPHING SUPPLY

24. P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$5
4
3
2
1
60
50
35
20
5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the Points
GRAPHING SUPPLY

25. P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$5
4
3
2
1
60
50
35
20
5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the Points
GRAPHING SUPPLY

26. S
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$5
4
3
2
1
60
50
35
20
5
P QS
Price of Corn
Quantity of Corn
CORN
Connect the Points
GRAPHING SUPPLY

27. S
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$5
4
3
2
1
60
50
35
20
5
P QS
Price of Corn
Quantity of Corn
CORN
What if
Supply
Increases?
GRAPHING SUPPLY

28. S
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
Price of Corn
Quantity of Corn
$5
4
3
2
1
60
50
35
20
5
P QS
CORN
80
70
60
45
30
S’Increase
in
Supply
Increase
in Quantity
Supplied
GRAPHING SUPPLY

29. S
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$5
4
3
2
1
60
50
35
20
5
P QS
Price of Corn
Quantity of Corn
CORN
What if
Supply
Decreases?
GRAPHING SUPPLY

30. S
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$5
4
3
2
1
60
50
35
20
5
P QS
Price of Corn
Quantity of Corn
CORN
S’
45
30
20
0
--
Decrease
in
Supply
Decrease
in Quantity
Supplied
GRAPHING SUPPLY

31. DETERMINANTS OF
SUPPLY
• Resource Prices
• Technology
• Taxes & Subsidies
• Prices of Other Goods
• Price Expectations
• Number of Sellers

32. DETERMINANTS OF
SUPPLY
• Resource Prices
• Technology
• Taxes & Subsidies
• Prices of Other Goods
• Price Expectations
• Number of Sellers
Combining
with
Demand

33. MARKET DEMAND &
SUPPLY
$5
4
3
2
1
10
20
35
55
80
$5
4
3
2
1
60
50
35
20
5
200
B
U
Y
E
R
S
P QD
BUSHELS
OF CORN
MARKET
DEMAND
2,000
4,000
7,000
11,000
16,000
200
S
E
L
L
E
R
S
12,000
10,000
7,000
4,000
1,000
P QS
BUSHELS
OF CORN
MARKET
SUPPLY
EQUILIBRIUM
x x

34. 7
S
P
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD
$5
4
3
2
1
2,000
4,000
7,000
11,000
16,000
$5
4
3
2
1
12,000
10,000
7,000
4,000
1,000
D
P Q
S
Price of Corn
Quantity of Corn
CORN
MARKET
CORN
MARKET
Market
Clearing
Equilibrium
MARKET DEMAND &
SUPPLY

35. 7
S
P
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD
$5
4
3
2
1
2,000
4,000
7,000
11,000
16,000
$5
4
3
2
1
12,000
10,000
7,000
4,000
1,000
D
P Q
S
Price of Corn
Quantity of Corn
CORN
MARKET
CORN
MARKETSurplus
At a $4 price
more is being
supplied than
demanded
MARKET DEMAND &
SUPPLY

36. 117
S
P
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD
$5
4
3
2
1
2,000
4,000
7,000
11,000
16,000
$5
4
3
2
1
12,000
10,000
7,000
4,000
1,000
D
P Q
S
Price of Corn
Quantity of Corn
CORN
MARKET
CORN
MARKET
At a $2 price
more is being
demanded than
supplied
Shortage
MARKET DEMAND &
SUPPLY

37. 117
S
P
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD
$5
4
3
2
1
2,000
4,000
7,000
11,000
16,000
$5
4
3
2
1
12,000
10,000
7,000
4,000
1,000
D
P Q
S
Price of Corn
Quantity of Corn
CORN
MARKET
CORN
MARKET
Shortage
MARKET DEMAND &
SUPPLY
Surplus

38. Equilibrium
• Equilibrium price – the price toward
which the invisible hand drives the
market.
• Equilibrium quantity – the amount bought
and sold at the equilibrium price.

39. What Equilibrium Isn’t
• Equilibrium isn’t a state of the world, it is
a characteristic of a model.
• Equilibrium isn’t inherently good or bad, it
is simply a state in which dynamic
pressures offset each other.
• When the market is not in equilibrium,
you get either excess supply or excess
demand, and a tendency for price to
change.

40. Excess Supply
• Excess supply – a surplus, the quantity
supplied is greater than quantity
demanded
• Prices tend to fall.

41. Excess Demand
• Excess demand – a shortage, the
quantity demanded is greater than
quantity supplied
• Prices tend to rise.

42. Price Adjusts
• The greater the difference between
quantity supplied and quantity
demanded, the more pressure there is for
prices to rise or fall.
• When quantity demanded equals quantity
supplied, prices have no tendency to
change

43. The Graphical Interaction of Supply and
Demand
Price (per
DVD)
Quantity
Supplied
Quantity
Demanded
Surplus (+)
Shortage (-)
$3.50 7 3 +4
$2.50 5 5 0
$1.50 3 7 -4

44. A
The Graphical Interaction of Supply and
Demand
PriceperDVD
$5.00
4.00
3.50
3.00
2.50
2.00
1.50
1.00
S
D
Quantity of DVDs supplied and
demanded
C
Excess demand
1 2 3 4 5 6 7 8 9 10 11 12
Excess supply
E

45. The Graphical Interaction of Supply and
Demand
• When price is $3.50 each, quantity supplied
equals 7 and quantity demanded equals 3.
• The excess supply of 4 pushes price down.

46. The Graphical Interaction of Supply and
Demand
• When price is $1.50 each, quantity supplied
equals 3 and quantity demanded equals 7.
• The excess demand of 4 pushes price up.

47. The Graphical Interaction of Supply and
Demand
• When price is $2.50 each, quantity supplied
equals 5 and quantity demanded equals 5.
• There is no excess supply or excess demand,
so price will not rise or fall.

48. The Graphical Interaction of Supply and
Demand
• When price is $2.50 each, quantity supplied
equals 5 and quantity demanded equals 5.
• There is no excess supply or excess demand,
so price will not rise or fall.

49. Shifts in Supply and Demand
• Shifts in either supply or demand change
equilibrium price and quantity.

50. Increase in Demand
• An increase in demand creates excess
demand at the original equilibrium price.
• The excess demand pushes price
upward until a new higher price and
quantity are reached.

51. A
S0
Quantity of DVDs (per week)
$2.50
2.25
0 98 10
Excess demand
D1
Increase in Demand
D0
B

52. The Effects of a Shift
of the Demand Curve

53. Decrease in Supply
• A decrease in supply creates excess
demand at the original equilibrium price.
• The excess demand pushes price
upward until a new higher price and
lower quantity are reached.

54. A
Decrease in Supply
Quantity of DVDs (per week)
$2.50
2.25
0 98 10
D0
S1
S0
C
B Excess demand

55. Government Set Prices
• Price Ceilings
–Shortages
–Rationing Problem
–Black Markets
–Rent Controls
• Price Floors
–Surpluses

56. Price Ceiling
•A maximum price that sellers may charge for a good,
usually set by government.
• Excess Demand
(Shortage)
Created by a
Price Ceiling

57. Price ceiling
• Price Rationing :The process by which the
market system allocates goods and services to
consumers when quantity demanded exceeds
quantity supplied.
• Ration coupons Tickets or coupons that entitle
individuals to purchase a certain amount of a
given product per month.
• Black market A market in which illegal trading
takes place at market-determined prices.

58. •PRICE FLOORS
•Price floor A minimum price
below which exchange is not
permitted.
•Minimum wage A price floor
set under the price of labor.
•Agricultural Products