This document discusses demand, supply, and market equilibrium. It begins by defining demand as the quantity of a product consumers are willing and able to purchase at various prices. The law of demand states that, all else equal, quantity demanded increases as price decreases. Supply is defined as the quantity producers are willing to provide at various prices. The law of supply indicates that, all else equal, quantity supplied increases as price increases. Equilibrium occurs where supply and demand are equal, at the price where quantity supplied equals quantity demanded. The document outlines factors that shift supply and demand curves, such as income, prices of related goods, and technology. It also discusses how markets can experience surpluses or shortages and how prices act to ration

1. Demand, Supply,
and Market
Equilibrium
NTU Sajjad Ahmad Baig

2. McConnell, Brue,
Economics, Nineteenth
Edition/Eighteen
NTU Sajjad Ahmad Baig

3. Demand, Supply,
and Market
Equilibrium
NTU Sajjad Ahmad Baig

4. Objectives
• Demand and its determinants
• Supply and its determinants
• Supply, demand, & market
equilibrium
• Changes in supply and demand
3-4

5. A Market
• Interaction between buyers and
sellers
• Buyers demand goods
• Sellers supply goods
•In a market economy, the price of a
good is determined by the interaction
of demand and supplyMarkets may be
• Local
• National
• International
3-5

6. People commonly think of
consumer demands as fixed
amounts

7. Demand
• Demand is 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 during a specified period.
• Demand is simply a statement of a
buyer’s plans, or intentions, with respect
to the purchase of a product.
• Demand shows the quantities of a
product that will be purchased at various
possible prices, other things equal .
3-7

8. Demand schedule

9. Demand curve

10. Law of Demand
• Other things equal, as price
falls quantity demanded rises
• An inverse relationship exists
between the price of a good
and the quantity demanded in a
given time period,
• Explanations:
• Common sense
• Law of diminishing marginal utility
• Income effect and substitution
effects 3-10

11. 6
5
4
3
2
1
0 10 20 30 40 50 60 70 80
Quantity Demanded (bushels per week)
Price(perbushel)
P Qd
$5
4
3
2
1
10
20
35
55
80
P
Q
D
The Demand Curve
LO1
The Demand Curve
3-11

12. Determinants of Demand
• Price is the most important
influence on the amount of any
product purchased. But
Economists know that other factors
can and do affect purchases. These
factors, called determinants of
demand , are assumed to be
constant when a demand curve is
Drawn
3-12

13. Determinants of Demand
• Factors that shift the demand
curve
• Tastes
• Number of buyers
3-13

14. Determinants of Demand
• Income
–Normal goods
–Inferior goods
• Price of related goods
–Substitute good
–Complementary good
–Unrelated goods
• Consumer expectations
3-14

15. Demand
6
5
4
3
2
1
0
Quantity Demanded (bushels per week)
Price(perbushel)
P Qd
$5
4
3
2
1
10
20
35
55
80
P
Q
D1
2 4 6 8 10 12 14 16 18
D2
D3
Change in Demand
Change in Quantity
Demanded
3-15

16. Change in quantity demanded vs.
change in demand
Change in quantity demanded Change in demand

17. Change in demand
• Income is sometimes called “demand
shifters”
• Be sure to understand difference between
a “change in demand” and a “change in
quantity demanded”
– change in demand --- shift of the function
– change in quantity demanded --- move on the function
– M
Principles of Microeconomics
slid
e
17

18. Market Demand
Principles of Microeconomics
slid
e
18

19. Supply
• Schedule or curve
• Amount producers willing
and able to sell at a given
price in a specific period.
3-19

20. Supply
• Schedule or curve
• Amount producers are willing and
able to sell at a given price
• Individual supply
• Market supply
LO2 3-20

21. Supply Schedule
• A supply schedule is a table
showing how the quantity supplied
of some product changes as the
price of that product changes during
a specified period of time, holding all
other determinants of quantity
supplied constant.
3-21

22. Supply Curve
• A supply curve is a graphical
representation of a supply schedule. It
shows how the quantity supplied of a
product will change as the price of that
product changes during a specified
period of time, holding all other
determinants of quantity supplied
constant
3-22

23. Law of Supply
• Other things equal, as price
rises the quantity supplied
rises
• Explanations:
–Revenue implications
–Marginal cost
3-23

24. The Supply Curve
LO2
5
4
3
2
1
0
Price(perbushel)
Quantity supplied (bushels per week)
S
10 20 30 40 50 60 70
Supply of Corn
Price
per
Bushel
Qs
per
Week
$5 60
4 50
3 35
2 20
1 5
P
Q
3-24

25. Determinants of Supply
• Resource prices
• Technology
• Taxes and subsidies
• Prices of other goods
• Producer expectations
• Number of sellers
3-25

26. Price of resources
• As the price of a resource rises, profitability
declines, leading to a reduction in the quantity
supplied at any price.

27. Technological improvements
• Technological improvements (and any changes that raise
the productivity of labor) lower production costs and
increase profitability.

28. Taxes & Subsidies
• Businesses treat most taxes as costs
• Subsidies are “taxes in reverse.

29. Prices of other goods
• Firms produce and sell more than one
commodity.
• Firms respond to the relative profitability of the
different items that they sell.
• The supply decision for a particular good is
affected not only by the good’s own price but
also by the prices of other goods and services
the firm may produce.

30. Producer Expectations and supply
• An increase in the expected future price
of a good or service results in a reduction
in current supply.
• Wheat

31. Increase in # of sellers

32. Individual Supply
6
5
4
3
2
1
0
Quantity Supplied (bushels per week)
Price(perbushel)
P Qs
$5
4
3
2
1
60
50
35
20
5
P
Q
S1
S2
S3
10 20 30 40 50 60 70
Change in Quantity
Supplied
Change in Supply
3-32

33. Change in supply vs. change in
quantity supplied
Change in supply Change in quantity supplied

34. Market Equilibrium
• Equilibrium price and quantity
• Surplus and shortage
• Rationing function of price
3-34

35. Equilibrium
1. a state of rest or balance due to the equal action of
opposing forces. 2. equal balance between any powers,
influences, [Webster’s Encyclopedic Unabridged Dictionary of the English
Language]
•In a market an Equilibrium is said to exist when the
forces of supply [sellers] and demand [buyers] are in balance:
the actions of sellers and buyers are coordinated. The
quantity supplied equals the quantity demanded!
slide
35

36. Market Equilibrium
• Equilibrium occurs where the demand
curve and supply curve intersect
• Surplus and shortage
• Rationing functions of prices
• The ability of the competitive forces of
demand and supply to establish a price
at which selling and buying decisions
are consistent
LO3 3-36

37. Market Equilibrium
LO3
6
5
4
3
2
1
0 2 4 6 8 10 12 14 16 18
Bushels of Corn (thousands per week)
Price(perbushel)
P Qd
$5
4
3
2
1
2,000
4,000
7,000
11,000
16,000
P Qs
$5
4
3
2
1
12,000
10,000
7,000
4,000
1,000
7
3
D
S6,000 Bushel
Surplus
7,000 Bushel
Shortage
3-37

38. `Changes in Demand and Equilibrium
LO4
0
P
D4
D3
`Changes in Demand and Equilibrium
LO4
0
P
D1
D2
S
Increase in demand
D increase:
P↑, Q↑
D decrease:
P↓, Q↓
Decrease in demand
S
3-38

39. `Changes in Demand and Equilibrium
LO4
0
P
D
S4
`Changes in Supply and Equilibrium
LO4
S3
0
P
D
S2
S1
Increase in supply
S increase:
P↓, Q↑
S decrease:
P↑, Q↓
Decrease in supply
3-39

40. Government-Set Prices
• Price Ceilings
•Set below equilibrium price
•Rationing problem
•Black markets
• Example: Rent control
LO5 3-40

41. Government-Set Prices
LO5
S
P
Q
D
P0
PC
Q0
Shortage
QdQs
Ceiling$3.50
3.00
3-41

42. Government-Set Prices
LO5
S
P
Q
D
P0
Pf
Q0
Surplus
QsQd
Floor
2.00
$3.00
3-42

43. Market Equilibrium
• Supply increase;
Demand decrease
• Supply decrease;
Demand increase
• Supply increase;
Demand increase
• Supply decrease;
Demand decrease
Price Quantity
?
?
?
?
3-43

44. Government-Set Prices
• Price ceilings
• Maximum Legal Price
• gasoline
• Rent controls
• Price floors on wheat
• Minimum Price Fixed By
Govt
3-44