Demand and Supply and
Market Equilibrium
Course Teacher:
Md. Shamsuddin Sarker
E-mail:[email protected]
Cell:01763071299
Department of Economics
SEU
DEMAND
Quantity demanded is the amount of a
good that buyers are willing and able to
purchase at a specific price.
Law of Demand
The law of demand states that, other things
equal, the quantity demanded of a good falls
when the price of the good rises.
What Explains the Law of Demand?
Substitution effect The change in the
quantity demanded of a good that results from a
change in price, making the good more or less
expensive relative to other goods that are
substitutes.
Income effect The change in the quantity
demanded of a good that results from the effect
of a change in the good’s price on consumers’
purchasing power.
The Demand Curve: The
Relationship between Price and
Quantity Demanded
Demand Schedule
The demand schedule is a table that shows
the relationship between the price of the
good and the quantity demanded.
Catherine’s Demand
Schedule
The Demand Curve: The
Relationship between Price and
Quantity Demanded
Demand Curve
The demand curve is a graph of the
relationship between the price of a good and
the quantity demanded.
Catherine’s Demand Schedule and Demand Curve
Price of
Ice-Cream Cone
$3.00
2.50
1. A decrease
2.00
in price ...
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 demanded.
Copyright © 2004 South-Western
Market Demand versus Individual
Demand
Market demand refers to the sum of all
individual demands for a particular good or
service.
Graphically, individual demand curves are
summed horizontally to obtain the market
demand curve.
Market Demand Schedule for Compact Discs
Price Fred Mary Total Demanded
$25 1 + 0 = 1
$20 2 1 3
$15 3 3 6
$10 4 5 9
$5 5 7 12
9
P P
Fred’s Demand Curve Mary’s Demand Curve
$20 $20
$15 $15
$10 $10
$5 D1 $5 D2
1 2 3 4 5 6 7 8 9 Q 12
1 2 3 4 5 6 7 8 9 Q 13
P Market Demand Curve
$20
$15
$10 D3
$5
Q
3 4 5 6 710 8 9 10 11 12 14
Variables That Shift Market Demand
Many variables other than price can
influence market demand.
• Income
Normal good A good for which the
demand increases as income rises and
decreases as income falls.
Necessary Good
Luxury Good
Inferior good A good for which the
demand increases as income falls and
decreases as income rises.
Variables That Shift Market Demand
• Price of related goods
Substitutes Goods and services that can
be used for the same purpose.
Complements Goods and services that are
used together.
• Tastes
Consumers can be influenced by an
advertising campaign for a product.
Variables That Shift Market Demand
• Population and demographics
Demographics The characteristics of
a population with respect to age, race,
and gender.
• Expected Future Prices
Consumers choose not only which
products to buy but also when to buy
them.
The Supply Side of the
Market
Quantity supplied is the amount of a good
that sellers/firms are willing and able to sell
at a specific price.
Law of Supply
The law of supply states that, other things
equal, the quantity supplied of a good rises
when the price of the good rises and vice
versa.
The Supply Side of the
Market
Supply Schedules and Supply Curves
Supply schedule A table that shows the
relationship between the price of a product and the
quantity of the product supplied.
Supply curve A curve that shows the relationship
between the price of a product and the quantity of
the product supplied.
The Supply Side of the
Market
Supply Schedules and Supply Curves
The Supply Side of the
Market
Law of supply The rule that, holding
everything else constant, increases in price
cause increases in the quantity supplied, and
decreases in price cause decreases in the
quantity supplied.
The Supply Side of the
Market
Variables That Shift Supply
The following are the most important variables that shift supply:
• Prices of inputs
• Technological change
Technological change A positive or negative
change in the ability of a firm to produce a given
level of output with a given quantity of inputs.
• Prices of substitutes in production
• Number of firms in the market
• Expected future prices
Market Equilibrium: Putting
Demand and Supply Together
FIGURE 3-7
Market Equilibrium
Market Equilibrium: Putting
Demand and Supply Together
Market equilibrium A situation in which
quantity demanded equals quantity supplied.
Market Equilibrium: Putting
Demand and Supply Together
How Markets Eliminate Surpluses and Shortages
Surplus A situation in which the quantity
supplied is greater than the quantity
demanded.
Shortage A situation in which the quantity
demanded is greater than the quantity
supplied.
Market Equilibrium: Putting
Demand and Supply Together
How Markets Eliminate Surpluses and Shortages
FIGURE
The Effect of
Surpluses and
Shortages on the
Market Price
Questions:
Short Questions:
1.Define Demand Curve, Schedule, Demand Law, Demand
Function, Supply Curve, Schedule, Law, Function.
2.What factors can influence market demand?
3.What is Market Equilibrium?
4.Why price and Quantity are inversely related?
5.Math
