1. Prepared by Anton Ljutic
Lecture notes
Prepared by Anton Ljutic

2. Demand and Supply: An Introduction
CHAPTER TWO
Demand and Supply:
An Introduction

3. This Chapter Will Enable You to Understand and Explain:
the concept of demand
the concept of supply
the term “market”
the concept of “equilibrium” price and quantity
the causes and effects of a change in demand or a change in supply
why demand and supply determine price, not the reverse

4. Demand Refers to both the desire and the ability to purchase something
Is the relationship between price and quantities demanded, “other things remaining the same”
Refers to a range of prices
Measures quantities over time

5. Other things remaining the same:
Demand
Other things remaining the same:
The higher the price, the lower the quantity demanded
The lower the price, the higher the quantity demanded

6. Demand Curve And Demand Schedule
A table showing the various quantities demanded per period of time at different prices
It is assumed that all other factors that might influence demand do not change
Demand Curve
A graphic representation of a demand schedule

7. Individual Demand Schedule: Number of Cases Per Week
Price Per Case
(In Dollars)
Quantity Demanded 12 6 13 5 14 4 15 3 16 2 17 1 18

8. An increase in quantity
Demand Curve
$/case
An increase in quantity
demanded 15 12 D 3 6
Q (cases/week)

9. Demand Curve $/case 15 A decrease in quantity demanded 12 D 3 6
Q (cases/week)

10. Why The Demand Curve Slopes Downward?
Income effect
The effect that a price change has on real income, and therefore on the quantity demanded of a product
Substitution effect
The substitution of one product for another as a result of a change in their relative prices
Real income, measured in terms of the amount of goods and services that it will buy, will increase if prices fall

11. Market Demand Curve Total consumer demand for a product
The horizontal summation of the individual demand curves
Consumers do not set prices; they react to different prices by altering their quantity demanded.
Market: A mechanism that allows buyers and sellers to negotiate the exchange of products

12. Market Demand Schedule: Number of Cases per Week
Quantity demanded (cases/week)
$/case
Tomiko
Jan
Market demand
$12 6 9 13
$14 4 10
$16 2 1 3
$18

13. Market Demand Curve: Number of Cases per Week
Tomiko P
Jan
Market D Q

14. Individual Supply Schedule: Number of Cases per Week
Price Per Case
(In Dollars)
Quantity Supplied 12 2 13 3 14 4 15 5 16 6 17 7 18 8

15. Supply Supply Supply Schedule Supply Curve
The quantities that producers are willing and able to sell per period of time at different prices
Supply Schedule
A table showing the various quantities supplied per period of time at different prices
Supply Curve
A graphic representation of the supply schedule

16. Supply Curve $/case S 16 Increase in quantity supplied 12 3 6
Q (cases/week)

17. Supply Curve $/case S 16 Decrease in quantity supplied 12 3 6
Q (cases/week)

18. Market Supply Curve Total producer supply of a product
The horizontal summation of each individual producer’s supply curve
Assumptions:
producers are all making a similar product
consumers have no preference as to which supplier or product they use

19. Market Supply Schedule: Number of Cases per Week
Quantity supplied (cases/week)
$/case
Bobbie
Other
brewers
Market supply
$12 2 6 8
$14 3 9 12
$16 4 16
$18 5 15 20

20. Market Equilibrium Equilibrium Price Equilibrium Quantity Surplus
The price at which quantity demanded equals quantity supplied, and there is neither a shortage nor a surplus
Equilibrium Quantity
Quantity that corresponds to the equilibrium price
Surplus
The amount by which quantity supplied is greater than quantity demanded; occurs at prices above equilibrium
Shortage
The amount by which quantity supplied is less than quantity demanded; occurs at prices below equilibrium

21. Market Demand and Supply
Price per Case
Market Demand
Market Supply
Surplus +
Shortage -
$12 22 8
-14 13 18 12 -6 14 16 15 9 20
+11 6 24
+18 17 3 28
+25 2 32
+30
Table 2.5

22. Market Equilibrium P S 14 D 16 Q

23. Market Shortage D S P1 P2
Shortage Qs Q1 Qd

24. Market Surplus S D
Surplus P2 P1 Qd Q Qs

25. Change In Demand
A change in quantity demanded at every price, caused by a change in the determinants of demand P
Increase in demand
Decrease in demand D2 D D1 Q

26. Determinants of a Change in Demand (I)
Consumer preferences
If tastes change, demand changes
Expectations of future prices, income, availability
If prices expected to rise, consumers buy more
If income expected to rise, consumers buy more
If goods expected to be scarcer, buy more now
Population size, income, and age distribution
An increase in population will cause an increase in demand

27. Determinants (II): Income
A change in income will have a different effect on the demand for normal vs. inferior products
Normal Products
You buy more of it when your income increases and less when your income decreases
Inferior Products
You buy more when your income falls and less when your income rises

28. Determinants (III): Related Prices
Product prices are related if a change in the price of one product causes a change in the demand for the other product
Substitute Products
A product whose demand varies directly with a change in the price of a similar product
Complementary Products
Products that tend to be purchased jointly, and whose demands are directly related

29. Effects of an Increase in DemandP2 P1 D2 D1 Q1 Q2

30. Effects of a Decrease in DemandP1 P2 D2 D1 Q2 Q1

31. Change in Supply S2 P S
A change in the quantity supplied at every price, caused by a change in the determinants of supply
Decrease in S S1
Increase in S Q

32. Determinants of a Change in Supply (I)
Prices of Productive Resources
If the price of a productive resource increases, firms will supply less
Business Taxes
If business taxes rise, firms will supply less
Technology
An improvement in technology leads to a fall in the cost of production and an increase in supply

33. Determinants of Supply (II)
Prices of Substitutes in Production
An increase in the price of one product will cause a drop in the supply of products that are substitutes in production
Future Expectation of Suppliers
Lower expected future prices will lead to an increase in supply
Number of Suppliers
A decrease in the number of suppliers will reduce market supply

34. Effects of an Increase in SupplyD S1 S2 P1 P2 Q1 Q2

35. Effects of a Decrease In SupplyQ2 Q1

36. Chapter Summary: What to Study and Remember
the concept of demand vs. Qd
the concept of supply vs. Qs
the term “market”
the concept of “equilibrium” price and quantity
the determinants and effects of a change in demand or a change in supply
why demand and supply determine price, not the reverse