MICROECONOMICS

Topic 2
Demand & Supply

Demand & Supply

Demand
Supply
Market Equilibrium
Key Terms

Demand

Introduction
The Law of Demand
Demand Schedule/Demand Curve
A Change in Demand
A Change in Quantity Demanded vs A Change in
Demand

Demand - Introduction
If you demand something, then you:
Want it
Can afford it
Plan to buy it
Quantity Demanded:
Is the amount of goods and services that
consumers plan to buy during a given time period
at a particular price.
It is measured as an amount per unit of time.
Example: 1 cup per day at RM1.50, 1 kg per week
at RM3.00

Demand - Introduction
Demand:
Refers to the entire relationship between the price of
the good and the quantity demanded of the good.

Demand The Law of Demand

The law of demand states:
Other things remaining the same, the higher the price
of goods, the smaller the quantity demanded; and the
lower the price of a good, the greater is the quantity
demanded.

Demand - Schedule
Demand schedule:
Lists the quantities demanded at each price when all
the other influences on consumers planned
purchases remain the same.
Example:
Price = RM 2.00
Quantity Demanded = 3 units per week

Demand Schedule
Price
(RM per disc)

Quantity Demanded
(millions of discs per
week)

0.50

1.00

1.50

2.00

2.50

Demand - Curve
Demand curve:
Shows the relationship between the quantity demand
of a good and its price when all other influences on
consumers planned purchases remain the same.

Demand - Curve
Price
(RM per disc)
Demand Curve
2.50

1.50

0.50
0

Demand for disc

2 4

9
Quantity ( millions of discs per week)

Demand A Change in Quantity Demanded

vs A Change in Demand
Movement along the demand curve
If the price of a goods changes but everything else
remain the same.
A shift of the demand curve
If the price of a good remains constant but some
other influences on buyers plans changes.
When demand increases, the demand curve shifts
rightward.
When demand decreases, the demand curve shifts
leftward.

Demand A Change in Demand

6 factors bring changes in demand:
The prices of related goods (substitute goods;
complement goods)
Expected future prices
Income ( normal goods; inferior goods)
Expected future income
Population
Preferences

Demand A Change in Quantity Demanded

vs A Change in Demand
Price
Decrease in
quantity
demanded

Decrease
in demand

Increase
in demand

D1

D0

D2
0

Increase in
quantity
demanded

Quantity

Supply

Introduction
The Law of Supply
Supply Schedule/Supply Curve
A Change in Supply
A Change in Quantity Supplied VS A Change in Supply

Supply - Introduction
If a firm supplies a good or service, the firm:
Has the resources and technology to produce it,
Can profit from producing it,
Plans to produce it and sell it.
Quantity supplied:
The amount that producers plan to sell during a given
time period at a particular price.

Supply - Introduction
Supply:
Refers to the entire relationship between the quantity
supplied and the price of a good.

Supply The Law of Supply

The law of supply states:
Other things remaining the same, the higher the price
of a good, the greater is the quantity supplied; and
the lower the price of a good, the smaller is the
quantity supplied.

Supply - Schedule
Supply schedule
Lists the quantities supplied at each price when all
the other influences on producers planned sale
remain the same.
Example:
Price = RM 1.00
Quantity supplied = 3 millions CDs a week

Supply - Schedule
Price
(RM per disc)

Quantity supplied
(millions of discs per
week)

0.50

1.00

1.50

2.00

2.50

Supply - Curve
Price
(RM per disc)
Supply of disc

2.50

Supply curve

1.50
0.50
0

6
Quantity (millions of discs per week)

Supply A Change in Supply

When any factor that influences selling plans other than
the price of the good changes, there is a change in
supply.
When supply decreases, the supply curve shift leftward.
When supply increases, the supply curve shift rightward.

Supply A Change in Quantity

Supplied vs A Change in Supply
Price
S2
Increase in
quantity
supplied

S0

S1

Decrease
in supply

Decrease in
quantity
supplied

Increase
in supply

Quantity

Supply A Change in Supply

5 main factors bring changes in supply:
The prices of resources used to produce the good
(car price of steel increase)
The prices of related goods produced (substitute gds
& complement gds)
Expected future prices (sugar price is expected to
rise next month)
The number of suppliers
Technology

Market Equilibrium
A market is said to be in equilibrium if the price in the
market is such that the quantity supplied (QS) in the
market and the quantity demanded (QD) in the
market are equal.

Market Equilibrium
Equilibrium price:
The price at which the quantity demanded
equals the quantity supplied
Equilibrium quantity:
The quantity bought and sold at the
equilibrium price

Market Equilibrium
Price
(RM per disc)

Quantity
Demanded
(millions of discs
per week)

Quantity
supplied
(millions of discs
per week)

Surplus /
Shortage (of
Supply)

0.50

(9 0) =-9

1.00

(6 3) =-3

1.50

(4 4) =0

2.00

(3 5) =+2

2.50

(2 6) = +4

Market Equilibrium - Graph

Price
(RM per disc)

Demand
of disc

Supply
of disc

1.50

equilibrium

A market is in
equilibrium when
the price is
such that excess
supply equals
excess demand
equals zero.

1.00
0.50
0
3

Quantity (millions of discs per week

Market Equilibrium
Only in equilibrium
is quantity supplied
equal to quantity
demanded.
At any price level
other than P0, the
wishes of buyers
and sellers do not
coincide.

Surplus and Shortage

Surplus
At a given price, the excess of the quantity supplied
over the quantity demand is called the excess supply.

Surplus

QS > QD

Market Disequilibria
Excess supply, or
surplus, is the condition
that exists when quantity
supplied exceeds quantity
demanded at the current
price.
When quantity supplied
exceeds quantity
demanded, price tends to
fall until equilibrium is
restored.

Surplus and Shortage

At a given price, the excess of the quantity demanded
over the quantity supplied is called the excess demand.

Shortage

QS < QD

Market Disequilibria
Excess demand, or
shortage, is the condition
that exists when quantity
demanded exceeds
quantity supplied at the
current price.
When quantity demanded
exceeds quantity
supplied, price tends to
rise until equilibrium is
restored.

Increases in Demand and Supply

Higher demand leads to higher Higher supply leads to lower

equilibrium price and higher
equilibrium price and higher
equilibrium quantity.
equilibrium quantity.

Decreases in Demand and Supply

Lower demand leads to

lower price and lower
quantity exchanged.

Lower supply leads to

higher price and lower
quantity exchanged.

Algebraic analysis of supply and demand

To find an equilibrium in a market:
1.

Set supply equal to demand

and solve for P.

2.

Substitute P in the supply and

demand equations
to get the quantities.

Example Demand Equation

QD = 20 - 2P

Example Supply Equation

QS = -4 + 2P

Example Calculation
Set supply equal to demand and solve the equation
for P.

QD = 20 - 2P = -4 + 2P = QS
20 - 2P = -4 + 2P
20 + 4 = 2P + 2P
24 = 4P
24 = 4P
4
4

6 =P

Example Calculation
QD = 20 - 2P
= 20 2(6)
= 8 unit

QS = - 4 + 2P
= - 4 + 2(6)
= - 4 + 12
= 8 unit

The End
Next Topic:
Elasticity