1. ECN 201: Principles of Microeconomics Nusrat Jahan Lecture-2
Basic Concepts of Demand and Supply

2. Market Demand and Supply
Market is a place where buyers and sellers meet for exchanging goods and services
Markets
Buyers
Sellers
Product Market
Household
Firms
Factor Market
Demand and Supply
𝑩𝒖𝒚𝒆𝒓𝒔⇒𝑩𝒖𝒚 𝑺𝒆𝒍𝒍𝒆𝒓𝒔⇒𝑺𝒆𝒍𝒍 Equilibrium

3. Demand Curve Law of Demand
Demand curve shows the change in quantity demanded with the change in price.
 Movement along the demand curve- when price change quantity demanded change.
 Shift in demand curve- when other determinant (except price) of demand change demand changes and the demand curve shifts.
Law of Demand
When P↑ quantity demanded↓ and when P↓ quantity demanded↑
Why?
Substitution effect- When the price of a good rises, other things remaining the same, its relative price—its opportunity cost—rises. As the opportunity cost of a good rises, the incentive to economize on its use and switch to a substitute becomes stronger.
Income effect- When a price rises, other things remaining the same, the price rises relative to income. Faced with a higher price and an unchanged income, people cannot afford to buy all the things they previously bought. They must decrease the quantities demanded of at least some goods and services

4. Shift in Demand Curve Prices of related goods
=> Price of Substitute ↑ Demand ↑
=> Price of Complement ↑ Demand ↓
Average income of consumers
=> Income ↑ Demand ↑
=> Income ↓ Demand ↓
Size of the market
Tastes
Special influences
weather, govt. policy, taxation etc…
Price
Quantity

5. Supply Curve Shift in Supply Curve Cost of production
Supply curve shows the change in quantity supplies with the change in price.
 Movement along the supply curve- when price change quantity supplied change.
 Shift in supply curve- when other determinant (except price) of supply change supply changes and the supply curve shifts.
Shift in Supply Curve
Cost of production
Technological change
Price of related goods
Size of the market
Government policy
Special influences

6. Equilibrium and Market Clearing Price
The price at which quantity demanded equals the quantity supplied is called the equilibrium price or the market clearing price.
Mathematical determination of Equilibrium Price and Quantity
Effect of shift in demand or supply on equilibrium price
Quantity Demanded= QD
Quantity Supplied = QS
Equilibrium Quantity = Q*
Equilibrium Price = P*
Demand Curve: P = a-bQD
Supply Curve : P = c+dQS