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