Supply and Demand

Rini Novrianti Sutardjo Tui

Supply Demand Analysis

Supply Demand Analysis

Understanding and predicting how changing world economic conditions affect market price and production
Evaluating the impact of government price controls, minimum wages, price supports, and production incentives

Determining how taxes, subsidies, tariffs, and import quotas affect consumers and producers

Income and Wealth

Difference
of income and wealth

Income is the sum

of all households wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. It is a flow measure.

Wealth or net
worth, is the total value of what a household owns minus what it owes. It is a stock measure.

The Demand Curve

Demand Curve
Relationship between the quantity of a good that consumers are willing to buy and the price of the good. The demand curve is downward sloping; holding other things equal, consumers will want to purchase more of a good as its price goes down.

QD QD (P)

A higher income level shifts the demand curve to the right (from D to D).

Determinants of Demand
The price of the product Income available

Expectations of future income, wealth, and price

Demand

Amounts of accumulated wealth

Tastes and preferences

Price of related product

Shift of Demand and Movement along Demand Curve

Change in price of a good or service leads to change in quantity demanded. Change in income, preferences, or prices of other goods or services leads to change in demand.

Future Demand
consumption

Reduce

or hold consumptio n steady

Demand
Apply new technology : in finding and extracting resources

The Supply Curve

Supply Curve
Relationship between the quantity of a good that producers are willing to sell and the price of the good. The supply curve is upward sloping: The higher the price, the more firms are able and willing to produce and sell. If production costs fall, the supply curve then shifts to the right (from S to S).

QS QS (P)

Determinants of Supply
The cost of producing: The price of required inputs and the technologies
The price of the good or service The price of related products

Supply

A Change in Supply and A Change in Quantity Supplied

Change in price of a
good or service leads to change in quantity supplied.

Change in costs, input prices, technology, or prices of related goods

and services leads to change in supply.

Future Supply
Physical availability of mineral resources in the nature

Short Term

Long Term

Production capacity

Processing capacity

Successful exploration

Technology development

The Market Mechanism

When the demand curve shifts to the right, the market clears at a higher price P3 and a larger quantity Q3. When the supply curve shifts to the right, the market clears at a lower price P3 and a larger quantity Q3.

Market Equilibrium
An equilibrium is the condition that exists when quantity supplied and quantity demanded are equal. At any price level other than P0, the wishes of buyers and sellers do not coincide. At equilibrium, there is no tendency for the market price to change.

Market Disequilibria
Excess demand, or shortage, is the condition that exists when quantity demanded exceeds quantity supplied at the current price. Therefore, price tends to rise. Excess supply, or surplus, is the condition that exists when quantity supplied exceeds quantity demanded at the current price. Therefore, price tends to fall.