PRINCIPLES OF ECONOMICS WITH

AGRARIAN REFORM AND TAXATION

(ECON101)

DEMAND AND
SUPPLY MARKET
Prepared by:
Prof. Ali Fallahchay

MARKET

Interaction between buyers and sellers

Markets may be:
Local
National
International
Price is discovered in the interactions of buyers
and sellers

DEMAND
Is a demand schedule of the different quantities
of a good that the buyers are willing and able to
buy at different prices at a given time.
Two types of Demand
Individual Demand
Market Demand

LAW OF DEMAND
Indicates that as price increases, a smaller
quantity

will

be

bought;

as

price

decreases, a larger quantity will be bought.

Reasons:
Common sense
Law of diminishing marginal utility
Income effect and substitution effects

The
Demand
Curve
THE DEMAND CURVE
P
6

Individual
Demand

4 20
3 35

Price (per bushel)

P Qd
$5 10

5
4
3
2

2 55
1 80

1
0

D
10

20

30

40

50

60

70

80

Quantity Demanded (bushels per week)

LO1

MARKET DEMAND
Market Demand for Corn, Three Buyers
Price
per
bushel

LO1

Quantity Demanded

Total
Qd
per week

Joe

Jen

Jay

$5

10

12

30

20

23

17

60

35

39

26

100

55

60

39

154

80

87

54

221

CHANGES IN DEMAND

Demand Can Increase or Decrease

P6
5

Price (per bushel)

Individual
Demand

Increase in Demand

4
3
2
1

D2
D1

Decrease in Demand
D3

10

12

14

16

Quantity Demanded (bushels per week)

LO1

18

CHANGES IN DEMAND

Demand Can Increase or Decrease

P
6

Price (per bushel)

Individual
Demand

Change in Demand

5
4

Change in Quantity
Demanded

3
2
1
0

D2

Decrease in Demand
2

10

D1

D3
12

14

16

18 Q

Quantity Demanded (bushels per week)

LO1

DETERMINANTS OF DEMAND

LO1

Change in consumer tastes and

preferences
Change in number of buyers
Change in income
Normal goods
Inferior goods
Neutral goods

Question and Answer

Q1: Cite example for Normal goods.

Q2: Cite example for Inferior goods.

DETERMINANTS OF DEMAND

LO1

Change in prices of related goods

Complements
Substitutes

Change in consumers expectations

Future prices
Future income

Question and Answer

Q3: Cite example for Complementary goods

Q4: Cite example for Substitute goods

SUPPLY

Is a schedule of the different quantities of

goods that the sellers are willing and able
to sell at different prices at a given time.

LO2

LAW OF SUPPLY

LO2

Other things equal, as the price rises, the

quantity supplied rises and as the price
falls, the quantity supplied falls.
Reason:
Price acts as an incentive to producers
At some point, costs will rise

THE SUPPLY CURVE

P

Qs
per
Week

$5

60

50

35

20

Price (per bushel)

Price
per
Bushel

Supply of Corn

4
3
2
1
0

10

20

30

40

50

60

70

Quantity supplied (bushels per week)

LO2

CHANGES IN SUPPLY
P
$6

S3

S1

Price (per bushel)

5
4

Decrease
in supply

S2

3
2

Increase
in supply

1
0

10

12

14

Quantity supplied (thousands of bushels per week)

LO2

16

CHANGES IN SUPPLY
P
$6

Change in Quantity
S3
Supplied

S1

Price (per bushel)

S2

4
3
2
1

Change in Supply

10

12

14

Quantity supplied (thousands of bushels per week)

LO2

16

DETERMINANTS OF SUPPLY

LO2

A change in resource prices

A change in technology

A change in the number of sellers

A change in taxes and subsidies

A change in prices of other goods

A change in producer expectations

MARKET EQUILIBRIUM

LO3

Equilibrium occurs where the demand

curve and supply curve intersect.
Surplus and shortage
Rationing function of prices
Efficient allocation
Productive efficiency
Allocative efficiency

MARKET EQUILIBRIUM
200 Buyers & 200 Sellers

Qd

$5

2,000

4,000

7,000

11,000

16,000

Price (per bushel)

6
Market
Demand
200 Buyers 5

6,000 Bushel
Surplus

Market
Supply
200 Sellers

4
33
2

7,000 Bushel
Shortage

1
0

67

10

D
12

14

16

18

Bushels of Corn (thousands per week)

LO3

Qs

$5

12,000

10,000

7,000

4,000

1,000

RATIONING FUNCTIONS OF PRICES

The ability of the competitive forces of

demand and supply to establish a price at
which selling and buying decisions are
consistent.

LO3

EFFICIENT ALLOCATION

Productive efficiency
Producing goods in the least costly way
Using the best technology
Using the right mix of resources

Allocative Efficiency
Producing the right mix of goods
The combination of goods most highly
valued by society
LO3

CHANGES IN DEMAND AND

EQUILIBRIUM
D increase:
P, Q

D decrease:
P, Q

P
S

D2

D3

D1
0

Increase in demand

LO4

D4

Decrease in demand

CHANGES IN SUPPLY AND

EQUILIBRIUM
S increase:
P, Q

S decrease:
P, Q

P
S1

S4

S2

D
0

Increase in supply

LO4

S3

Decrease in supply

COMPLEX CASES
Effects of Changes in Both Supply and Demand

LO4

Change in
Supply
1. Increase

Change in
Demand
Decrease

Effect on
Equilibrium
Price
Decrease

Effect on
Equilibrium
Quantity
Indeterminate

2. Decrease

Increase

Increase

Indeterminate

3. Increase

Increase

Indeterminate

Increase

4. Decrease

Decrease

Indeterminate

Decrease

GOVERNMENT SET PRICES

Price Ceilings
Set below equilibrium price
Rationing problem
Black markets
Example: Rent control

LO5

GOVERNMENT SET PRICES

P

$3.50 P0

ceiling

3.00 PC
D

shortage

Qs

LO5

Q0

Qd

GOVERNMENT SET PRICES

Price Floors
Prices are set above the market
price
Chronic surpluses
Example: Minimum wage laws

LO5

GOVERNMENT SET PRICES

P
S

Surplus

floor
$3.00 Pf

2.00 P0

Q
Qd

LO5

Q0

Qs

LEGAL MARKET OF HUMAN

ORGANS
What if we created a legal market for human
organs?
Positive effects

Increase the incentive to donate

Eliminate the persistent shortage of eyes,
livers, hearts, kidneys, etc.

LEGAL MARKET FOR HUMAN

ORGANS
Negative effects
Increases the cost of medical care
Diminishes the special nature of life by
commercializing it