MARKET

PL2105 Pengantar Ekonomika

Demand, Supply, and

Equilibrium
Demand

curve : relationship
between the quantity of a good
that consumers are willing to buy
and the price of the good
Supply curve : relationship
between the quantity of a good
that producers are willing to sell
and the price of the good
Equilibrium price : price that
equates the quantity supplied to

Market Demand
To derive the market demand curve, we
sum the
quantities demanded at every price
px

px

Individual 1s
demand curve

Individual 2s
demand curve

px

Market demand
curve

px*
x1
x1*

x2

x2*

X*

x1* + x2* = X*

Short-Run Market Supply

Curve
To derive the market supply curve, we
sum the
quantities supplied at every price
P

Firm As
supply curve

P
sB
Firm Bs
supply curve

sA

Market supply
curve

P1

q1A

quantity

q1B

quantity

Q1

Quantity

q1A + q1B = Q1

Equilibrium Price
Determination
Price
The interaction between
market demand and market
supply determines the
equilibrium price

P1

D
Q1

Quantity

Factors that shift demand

rightward
1.
2.
3.
4.
5.
6.

A decrease in the price of complements

to the good
An increase in the price of substitutes for
the good
An increase in income (for a normal good)
An increased preference by demanders
for the good
An increase in the population of potential
buyers
An expectation of higher prices in the
future

Factors that shift supply

rightward
1.

2.
3.
4.
5.

A decrease in the cost of materials,

labor, or other inputs used in the
production of the good
An improvement in technology that
reduce the cost of producing the good
An improvement in the weather
(especially for agricultural product)
An increase in the number of supplier
An expectation of lower prices in the
future

Four Simple Rules

An

increase in demand will lead to an

increase in both the equilibrium price
and quantity
A decrease in demand will lead to a
decrease in both the equilibrium price
and quantity
An increase in supply will lead to a
decrease in the equilibrium price and
an increase in the equilibrium quantity
A decrease in supply will lead to an
increase in the equilibrium price and a
decrease in the equilibrium quantity

Shifts in Supply
Small increase in price,
large drop in quantity
Price

Large increase in price,

small drop in quantity
Price

P
P

P
P
D
D
Q

Elastic Demand

Quantity

Q Q

Quantity

Inelastic Demand

Shifts in Demand
Small increase in price,
large rise in quantity

Large increase in price,

small rise in quantity

Price

Price

P
P
P

P
D

D
Q

Elastic Supply

Quantity

Q Q

Quantity

Inelastic Supply

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