ECO 100Y

Introduction to
Economics
Topic 2:
Demand and Supply
Source: LR12, LR 11, LR10 Ch. 3 and
LR12, Ch. 5 to pg 97; LR11 to pg 103; LR10 to pg 105.

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 1

1

Demand and Supply

 Analyze in detail the interactions between buyers and sellers
 Isolate one market in the Circular Flow and focus on it
 We start with one of the Output Markets
 Buyers are the demanders
 We develop the Demand Schedule and Demand Curve
 Sellers are the suppliers
 We develop the Supply Schedule and Supply Curve
 Bring Demand (D) and Supply (S) together
 D = S determines an Equilibrium in a single market

ECO 100 W.G. Wolfson Topic 2: Demand and Supply Slide 2

2
Demand
 Quantity demanded (QDX)
The amount of a commodity (Good X) that a
household (consumer) desires to purchase
 Time is important
Per Day? Per Month? Per Year?
We usually leave this as implicit!
 Note that QDX is “desired”, not actual
Actual amount determined by the equilibrium

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 3

3

Determinants of Demand for

Good X (QDX shown as QX below)
 Price of Good X
∆QX /∆PX < 0 (usually)
 Price of Good Y (a substitute for Good X)
∆QX /∆PY > 0
 Price of Good Z (a complement to Good X)
∆QX /∆PZ < 0
 Tastes / Preferences
Can lead to ∆QX > 0 or ∆QX < 0

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 4

4
Determinants of Demand for
Good X (Cont’d)
 Income
If X is a normal good
 ∆QX /∆I > 0

If X is an inferior good

 ∆QX /∆I < 0

 Other Factors
Price Expectations
Population (when considering total demand)

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 5

5

The Demand Schedule for

Good X
 To derive the Demand Schedule for Good X, we need to
isolate one determinant of quantity demanded
 Own price is the strongest driver (PX)
 When isolating on the Price of X, we are implicitly assuming that
all other determinants of demand are being held constant
(“ceteris paribus”)
 We consider later what happens if one of these “constants”
changes
 The Market Demand Schedule is the sum of the demand
schedules of each individual consumer

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 6

6
Demand Schedule
 The Demand Schedule for a Price of X Q
commodity shows the Demande
different quantities demanded d
when only the price of the
commodity is allowed to $10 8
change $8 10
 To the right are some points $6 12
on a Demand Schedule that
has this linear equation: $4 14
P = 18 - Q
$2 16

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 7

7

The Demand Curve

 A Demand Curve graphs the Price of X Q
relationship between the quantity Demanded
demanded of a commodity and its
own price $10 8
 A Demand Curve shows the $8 10
maximum price that consumers
are willing to pay for the last unit $6 12
bought of the commodity $4 14
 Tradition places Price (P) on the $2 16
Y-axis and Quantity (Q or
sometimes q) on the X-axis
 Draw the D curve from the data
provided

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 8

8
The Demand Curve Will Shift
If There Is ….
1. A change in the price of a substitute
 If the price of a substitute rises, D will increase
2. A change in the price of a complement
 If the price of a complement falls, D will increase
3. A change in income
 If income rises and X is normal, D will increase
4. A change in tastes / preferences
 If tastes shift favourably, D will increase
5. Other changes in a “constant” are possible

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 9

9

Shifts vs. Movements along the

Demand Curve
 If the price of a good changes but
everything else remains the same, P
then the quantity demanded of
that good has changed
 This is a movement along the
Demand Curve
 If the price of the good remains
constant but the quantity D1
demanded changes, then the
Demand for that good has Q
changed
 This is a shift in the entire Demand
Curve
 This occurs when one of the
“constants” changes

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 10

10
Supply
 Quantity supplied (QSX)
The amount of a commodity (Good X) that a firm
is willing to produce and sell
 Time is important
Per Day? Per Month? Per Year?
We usually leave this as implicit!
 Note that QSX is “desired”, not actual
Actual amount determined by the equilibrium

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 11

11

Determinants of Supply for

Good X (QSX shown as QX below)
 Price of Good X
 ∆QX /∆PX > 0 (usually)
 Price of Inputs
 ∆QX /∆Pinput < 0
 State of technology
 A technological improvement leads to ∆QX >0
 Price of other good (Y) which could be produced by the firm
(with the same inputs)
 ∆QX /∆PY < 0
 Other determinants

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 12

12
The Supply Schedule
 To derive the Supply Schedule for Good X, we need to isolate
one determinant of quantity supplied
 Own price is the strongest driver (PX)
 When isolating on the Price of X, we are implicitly assuming that
all other determinants of supply are being held constant (“ceteris
paribus”)
 We consider later what happens if one of these “constants”
changes
 The Market (Industry) Supply Schedule is the sum of the
supply schedules of individual firms

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 13

13

The Supply Schedule

 The Supply Schedule for a Price of X Q Supplied
commodity shows the
different quantities supplied $10 20
when only the price of the $8 16
commodity is allowed to
change $6 12
 To the right are some points $4 8
on a Supply Schedule that has $2 4
this linear equation: P = 0.5Q

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 14

14
The Supply Curve
 The Supply Curve graphs the Price of X Q Supplied
relationship between the quantity
supplied of a commodity and its $10 20
price, holding all other variables $8 16
constant
$6 12
 The Supply Curve of a
commodity shows the minimum $4 8
price that firms are willing to $2 4
accept for the last unit sold of the
commodity
 Draw the S curve from the data
provided

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 15

15

The Supply Curve Will Shift If

There Is ….
1. A change in an input price
 If the wage rate for Labour increases, S will decrease

2. A change in technology
 If technology improves, S will increase

3. Other changes in a “constant” are possible

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 16

16
Shifts vs. Movements along the
Supply Curve
 If the price of a good changes but
everything else remains the same, P
the quantity supplied of that S1
good has changed
 This is a movement along the Supply
Curve
 If at every price level the quantity
supplied changes, the Supply for
that good has changed Q
 This is a shift in the Supply Curve
 This occurs when one of the
“constants” changes

17
ECO 100 W.G. Wolfson Topic 2: Demand and Supply
17

The Market Equilibrium

 The price of a good regulates the quantity demanded and the
quantity supplied of that good
 There is only one price at which the quantity demanded and the
quantity supplied are equal: the equilibrium price
 At any price below the equilibrium price the quantity demanded
exceeds the quantity supplied − this is called a situation of
excess demand, which pushes the price up
 At any price above the equilibrium price the quantity supplied
exceeds the quantity demanded − this is called a situation of
excess supply, which drives the price down

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 18

18
Equilibrium, Excess Demand (ED)
and Excess Supply (ES)
Price Q Demanded Q Supplied ED or ES
$10 8 20 ES = 12
$8 10 16 ES = 6
$6 12 12 ES=ED=0
$4 14 8 ED = 6
$2 16 4 ED = 12

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 19

19

Seen on a Bumper Sticker

“Talk is cheap because Supply exceeds Demand!”

ECO 100 W.G. Wolfson Topic 2: Demand and Supply Slide 20

20
Solving For The Equilibrium
 Demand:
 P = 18 – Q
 Supply:
 P = 0.5Q
 D = S determines the equilibrium
 Solve for P* = $6 and Q* = 12

ECO 100 W.G. Wolfson Topic 2: Demand and Supply Slide 21

21

The “Laws” of Demand and

Supply (- sloped D and +sloped S)
1. An increase in demand causes an increase in both the
equilibrium price and the equilibrium quantity
2. A decrease in demand causes a decrease in both the
equilibrium price and the equilibrium quantity
3. An increase in supply causes a decrease in the equilibrium
price and an increase in the equilibrium quantity
4. A decrease in supply causes an increase in the equilibrium
price and a decrease in the equilibrium quantity
 Note: The Algebra of Market Equilibrium (LR12, pages 64-65 and LR11, page 68) is
interesting and helpful, but you do not need to memorize the formulae!

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 22

22
The Functioning of the
Market - Examples
1. Good X: Conventional Television Sets
 As Canadians become wealthier, they switch to plasma TVs
2. Good X: Cement
 There is a rise in the price of sand, an essential ingredient in cement
3. Good X: Computers
 The price of computer memory chips falls
4. Good X: Bubblegum baseball cards of the 1950 season,
produced in 1950 (No counterfeits allowed!!)
 The first World Convention of Baseball Buffs creates new interest in
collecting cards.

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 23

23

The Functioning of the

Market (Cont’d)
5.  Good X: Hockey Skates
 Canadians get even more hooked on playing hockey. Simultaneously,
there is a revolutionary change in skate construction, lowering unit costs
of production.

6. Good X: Software engineers

 An increase in the demand for software products
 price = wage rate

7. Good X in an “open economy”: Soybeans (imported at a fixed

“world price”)
 An increase in domestic demand for soybeans

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 24

24
Two Puzzles About D & S
Demand
Puzzle Supply Puzzle
 Are these two statements  Are these two statements
contradictory? contradictory?
 “The quantity demanded varies  “The quantity supplied varies
inversely with the price” directly with the price”
 “A rise in demand causes a rise in  “A rise in supply causes price to
price” fall”

ECO 100 W.G. Wolfson Topic 2: Demand and Supply Slide 25

25

Interrelationships Between
Markets
Source: LR 12, Chapter 5 to page 97; LR11, Chapter 5, to page 103; LR10, Chapter 5, to page 105.
 So far, we have analyzed one market in isolation (“partial
equilibrium” analysis)
 But markets are inter-related, and in theory we should try to
figure out the impact of an event on all markets (“general
equilibrium” analysis)
 The best we can do in ECO100 is to analyze 2 markets, in a
sequential manner:
 Consider the impact of a change in market one on market one and
then “the second order” impact on market two
 We stop before considering the impact of the change in market
two back on market one!

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 26

26
Interrelationships: Example 1
 Widgets are sold in both the South and the North, and are easily transported
between the two (by producers only!)
 There is an increase in demand for widgets in the North (the shock in Market
One).
 Suppliers of widgets in the South see an opportunity to sell more widgets in
the North by redirecting to the North some widgets originally destined for the
South (the “second order” impact in Market Two).

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 27

27

Interrelationships:Example 2
 Tea and coffee are substitutes.
 A poor coffee crop is the shock in the coffee market (Market
One).
 There is also an impact on the tea market (the “second order”
impact on Market Two).

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 28

28
Interrelationships:Example 3
 There has been a technological improvement in the production of computer
chips (Market One).
 Computer chips are used as an input for both gadgets (Market Two) and
gizmoes (Market Three). [This example pushes the analysis to three markets, to
illustrate the pervasive “second order” impacts of shocks across the economy.]
Note: In most cases in ECO 100, we will use partial equilibrium analysis (i.e., the impact in
“Market One” only). But watch carefully for questions that are explicitly asking for the impacts
beyond the original market.

ECO 100 W.G. Wolfson Topic 2: Demand and Supply 29

29