1. Supply and Demand
Overheads

2. Equilibrium Equilibrium is defined a state of rest;
a situation that, one achieved, will not change,
unless some external factor,
previously held constant, changes.

3. 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.

4. Supply = Demand D0 Demand and Supply of Hamburger Patties S0 Price
3.5
Price 3 S0
2.5 D0 2
1.5 1
0.5
2000
4000
6000
8000
10000
12000
Quantity

5. Quantity Quantity
Price (per lb) supplied demanded

6. Excess supply and excess demand
At a given price, the excess of the
quantity supplied over the quantity demand
is called the excess supply.
Excess supply = QS (P) - QD (P)

7. Quantity Quantity
Price (per lb) supplied demanded
At a price of $2.10, excess supply (QS (P) - QD (P) ) is given by
7, ,600 = 4,400

8. Quantity Quantity
Price (per lb) supplied demanded
At a price of $1.20, excess supply (QS (P) - QD (P) ) is given by
4, ,200 = -2,200

9. Excess demand Excess Demand = QD (P) - QS (P)
At a given price, the excess of the
quantity demanded over the quantity supplied
is called the excess demand.
Excess Demand = QD (P) - QS (P)

10. Quantity Quantity
Price (per lb) supplied demanded
At a price of $0.90, excess demand (QD (P) - QS (P) ) is given by
7, ,000 = 4,400

11. Quantity Quantity
Price (per lb) supplied demanded
At a price of $2.10, excess demand (QD (P) - QS (P) ) is given by
2, ,000 = -4,400

12. Market Equilibrium A market is in equilibrium when the price is
such that the quantity supplied
is equal to quantity demanded.
A market is in equilibrium when the price is
such that excess supply equals
excess demand equals zero.

13. QD (P) > QS (P) there is excess demand,
Excess supply and excess demand and price pressure
When the quantity demanded in the market
exceeds the quantity supplied at a given price,
QD (P) > QS (P)
there is excess demand,
and the price will tend to rise.

14. Excess demand and excess supply and price pressure
When the price in the market rises,
quantity demanded falls
& quantity supplied rises
until an equilibrium is reached at which
quantity demanded equals quantity supplied.

15. The process of price rising so that
excess demand falls to zero is called
price rationing

16. Graphical analysis of excess supply
QS (P) > QD (P)
Supply = Demand
3.5
Price 3 S0
Price Falls
2.5 D0 2
1.5 1
0.5
2000
4000
6000
8000
10000
12000
Quantity

17. Graphical analysis of excess demand
Supply = Demand
3.5
Price
Price Rises 3 S0
2.5 D0 2
1.5 1
QD (P) > QS (P)
0.5
2000
4000
6000
8000
10000
12000
Quantity

18. Algebraic analysis of supply and demand
Equilibrium  Supply = 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.

19. Example Demand Equation
QD = P

20. Demand QD = 20 - 2P D0 Price Quantity 14 12 10 8 6 4 2 2 4 6 8 10 122 4 6 8 10 12 14 16 18 20 22 24
Quantity

21. Example Supply Equation
QS = P

22. Supply S0 QS -4 + 2P Price Quantity 14 12 10 8 6 4 2 2 4 6 8 10 12 142 4 6 8 10 12 14 16 18 20 22 24
Quantity

23. Demand and Supply QD = 20 - 2P QS = -4 + 2P D0 S0 Price Quantity 14 1210 D0 8 6 4 2 2 4 6 8 10 12 14 16 18 20 22 24
Quantity

24. Example Calculation 6 = P
Set supply equal to demand and solve the equation for P.
QD = P = P = QS
20 - 2P = P
24 - 2P = 2P
+2P +2P
QD = P
= 20 – 2(6)
= 8
24 = 4P
24 = 4P
4 4
6 = P

25. Some notes on solving equations
We get equivalent equations if on both sides
of the equality sign we do the following:
a. add the same number
b. subtract the same number
c. multiply by the same number  0
d. divide by the same number  0.

26. Comparative Statics or
What happens when things change
Demand Shifts
Increases in demand (shifts to the right)
will increase the equilibrium price and quantity.
Decreases in demand (shifts to the left)
will decrease the equilibrium price and quantity.

27. Changes in Demand S0 D0 D1 D2 Price Quantity 16 14 12 10 8 6 4 2 5 105 10 15 20 25
Quantity

28. Supply Shifts Increases in supply (shifts to the right)
will decrease the equilibrium price
and increase the equilibrium quantity.
Decreases in supply (shifts to the left)
will increase the equilibrium price
and decrease the equilibrium quantity.

29. Changes in Supply D0 S0 S2 S1 Quantity Price 14 12 10 8 6 4 2 5 10 155 10 15 20
Quantity

30. Price Ceilings A price ceiling occurs when some outside force
sets a price for the market
that is below the equilibrium price.
When quantity supplied & quantity demanded differ,
the short side of the market —
whichever of the two quantities is less —
will prevail.

31. Price Ceiling D0 Supply  Demand Queuing S0 Price Quantity
3.5
Price
Queuing 3 S0
2.5 D0 2
1.5 1
QD (P) > QS (P)
0.5
2000
4000
6000
8000
10000
12000
Quantity

32. The results:
Queuing Shortages
A black market

33. Price Floors A price floor occurs when some outside force
sets a price for the market
that is above the equilibrium price.
When quantity supplied & quantity demanded differ,
the short side of the market —
whichever of the two quantities is less —
will prevail.

34. Price Floor D0  Demand Supply Excess Supply S0 QS (P) > QD (P)
3.5
Price
Excess Supply 3 S0
2.5 D0 2
1.5 1
0.5
2000
4000
6000
8000
10000
12000
Quantity

35. The results:
Excess supply
Unemployment