Supply and Demand

Supply and Demand
Supply and Demand

Supply and Demand
Demand
DEMAND
I
Relationship between demand and price
the law of demand
the income effect
the substitution effect

I
The demand curve
assumptions
!
other things being equal ceteris paribus!
!
a given time period
the a"es
individual#s and mar$et demand curves

The demand curve%
The demand for potatoes monthly!
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
&rice
(pence per kg)
'(
Mar$et demand
(tonnes 000s)
)(( A
&oint
A
Mar$et demand for potatoes monthly!
Demand
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
&rice
(pence per kg)
'(
*(
Mar$et demand
(tonnes 000s)
)((
+((
A
,
&oint
A
,
Demand
Market deand !or potatoes (ont"#y)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
&rice
(pence per kg)
'(
*(
-(
Mar$et demand
(tonnes 000s)
)((
+((
.+(
A
,
/
&oint
A
,
/
Demand
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
&rice
(pence per kg)
'(
*(
-(
0(
Mar$et demand
(tonnes 000s)
)((
+((
.+(
'((
A
,
/
D
&oint
A
,
/
D
Demand
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
&rice
(pence per kg)
'(
*(
-(
0(
1((
Mar$et demand
(tonnes 000s)
)((
+((
.+(
'((
1((
A
,
/
D
E
&oint
A
,
/
D
E
Demand
DEMAND
I
2ther determinants of demand
tastes
number and price of substitute goods
number and price of complementary

goods
income
distribution of income
e"pectations
DEMAND
I
Movements along and shifts in the
demand curve
change in price
movement along D curve
change in any other determinant of

demand
shift in D curve
$ increase in demand rightward shift
$ decrease in demand leftward shift
D
1
P
r
i
c
e
P
% Q
0
Q
1
Quantity
An increase in demand
D
(
DEMAND
I
Demand functions
simple demand functions

Q
d
= a bP
more comple" demand functions

Q
d
= a bP + cY + dP
s
ePc
estimated demand equations
problems of estimating demand equations
demand functions and the demand curve

0
10
20
30
40
50
0 2 4 6 8 10
D
P
Q (000s)
Demand curve for equation% Q
d
3 1( ((( 4 '((P
0
10
20
30
40
50
0 2 4 6 8 10
P
+
Q
d
(000s)
5
d
3 1( ((( 4 '((P
D
P
Q (000s)
0
10
20
30
40
50
0 2 4 6 8 10
P
5
1(
Q
d
(000s)
&
0
D
P
Q (000s)
d
3 1( ((( 4 '((P
0
10
20
30
40
50
0 2 4 6 8 10
P
5
10
1+
Q
d
(000s)
&
8
)
D
P
Q (000s)
d
3 1( ((( 4 '((P
0
10
20
30
40
50
0 2 4 6 8 10
P
5
10
15
'(
Q
d
(000s)
&
8
7
-
D
P
Q (000s)
d
3 1( ((( 4 '((P
Supply and Demand
Supply
S6&&78
I
Relationship between supply and price
short9run supply
long9run supply
I
The supply curve
assumptions
!
other things remain equal ceteris paribus!
!
a given time period
the a"es
individual#s and mar$et supply curves

The supply curve%
The supply of potatoes monthly!
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
Supply
a
P
'(
Q
1((
a
Mar$et supply of potatoes monthly!
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
Supply
a
b
P
'(
*(
Q
1((
'((
a
b
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
Supply
a
b
c
P
'(
*(
-(
Q
1((
'((
.+(
a
b
c
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
Supply
a
b
c
d
P
'(
*(
-(
0(
Q
1((
'((
.+(
+.(
a
b
c
d
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
Supply
a
b
c
d
e
P
'(
*(
-(
0(
1((
Q
1((
'((
.+(
+.(
)((
a
b
c
d
e
S6&&78
I
Relationship between supply and price
short9run supply
long9run supply
I
The supply curve
assumptions
!
other things remain equal ceteris paribus!
!
a given time period
the a"es
individual#s and mar$et supply curves
why supply curves generally slope up

S6&&78
I
2ther determinants of supply
costs of production
profitability of alternative products

substitutes in supply!
profitability of goods in :oint supply
nature and other random shoc$s
aims of producers
e"pectations of producers
S6&&78
I
Movements along and shifts in the
supply curve
change in price
movement along S curve
change in any other determinant of supply

shift in S curve
$ increase in supply rightward shift
$ decrease in supply leftward shift
S6&&78
I
Supply functions
simple supply functions

Q
s
3 a + bP
more comple" supply functions

Q
s
3 a + bP + cC + dP
s
eP
j
estimated supply equations
problems of estimating supply equations

P
Q %
S
0
Increase
Shifts in the supply curve
S
1
P
Q %
S
2
S
0 S
1
Increase Decrease
'"i!ts in t"e supp#y cur(e
Supply and Demand
&rice and output
determination
&R;/E AND 26T&6T DETERM;NAT;2N
I
Equilibrium price and output
response to shortages and

surpluses
!
shortage D > S!
price rises
!
surplus S > D!
price falls
significance of <equilibrium=
Equilibrium price and output%
The Mar$et Demand and Supply of &otatoes Monthly!
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
The determination of mar$et equilibrium
potatoes% monthly!
)
*
+
,
a
c
d
e
'upp#y
*eand
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
, b
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
)
*
+
,
,
a
b
c
d
e
'upp#y
*eand
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
S>2RTA?E
(300 000)
potatoes% monthly!
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
)
+
-
,
a
.
c
e
'upp#y
*eand
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
D d S6R&76S
(330 000)
potatoes% monthly!
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
* d
Q
e
)
-
,
a
.
e
'upp#y
*eand
P
r
i
c
e

(
p
e
n
c
e

p
e
r

k
g
)
potatoes% monthly!
I
Effects of shifts in the demand curve
movement along the supply curve and the

new demand curve
Effect of a shift in the demand curve
P
Q
%
P
e
1
Q
e
1
S
D
1
g
P
Q
%
P
e
1
Q
e
1
S
D
1
g
P
Q
%
P
e
1
Q
e
1
S
D
1
D
2
g
P
Q
%
P
e
1
Q
e
1
S
g
"
D
1
D
2
P
e
2
Q
e
2
i
I

new demand curve
I
Effects of shifts in the supply curve
movement along demand curve and new

supply curve
Effect of a shift in the supply curve
P
Q
%
P
e
1
Q
e
1
D
S
1
g
P
Q
%
P
e
1
Q
e
1
D
S
1
g
P
Q
%
P
e
1
Q
e
1
D
S
1
S
2
g
P
Q
%
P
e
1
P
e
3
Q
e
3
Q
e
1
D
S
1
S
2
/ g
k
I

new demand curve
I
Effects of shifts in the supply curve
movement along demand curve and new

supply curve
I
;dentifying the position of demand and
supply curves
&roblems in identifying the position and shape of the
demand curve% shift in supply curve
P
% Q
S
1
1000
20p
a
P
% Q
S
1
S
2
800 1000
20p
30p
.
a
Pro.#es in identi!ying t"e position and s"ape o! t"e deand
cur(e: s"i!t in supp#y cur(e
P
% Q
D
S
1
S
2
800 1000
20p
30p
.
a
cur(e: s"i!t in supp#y cur(e
&roblems in identifying the position and shape of the
demand curve% shift in supply and demand curves
P
% Q
S
1
20p
a
1000
P
% Q
S
1
S
2
20p
30p
.
a
800 1000
cur(e: s"i!t in supp#y and deand cur(es
P
% Q
S
1
S
2
800 1000
20p
30p
.
a
D
1
D
2
cur(e: s"i!t in supp#y and deand cur(es
Supply and Demand
Elasticity
E7AST;/;T8
I
Defining elasticity
the responsiveness of demand and supply

I
&rice elasticity of demand
the responsiveness of demand to a change

in price
Quantity
P
r
i
c
e
%
Q
1
P
1
a
S
1
D
Mar$et supply and demand
Quantity
P
r
i
c
e
%
Q
2
Q
1
P
1
P
2
.
S
2
S
1
D
a
Quantity
P
r
i
c
e
%
Q
2
Q
1
P
1
P
2
S
2
S
1
D
D'
a
.
Quantity
P
r
i
c
e
%
Q
3
Q
2
Q
1
P
1
P
2
P
3
c
S
2
S
1
D
D'
a
.
E7AST;/;T8
I
&rice elasticity of demand
measurement
proportionate or @! Q
d
/ proportionate or @! P
use of proportionate or percentage

changes
the sign positive or negative!
the value greater or less than one!

E7AST;/;T8
I
Determinants of price elasticity of
demand
number and closeness of substitute goods
the proportion of income spent on the

good
time
I
&rice elasticity of demand and
consumer e"penditure & " A!
+onsuers0 tota# e1penditure
2
!irs0 tota# re(enue
2
32 1 3 2 36
P(3)
Q (i##ions o! units per period o! tie)
D
Total e"penditure
0
1
2
3
4
0 1 2 3 4 5
E7AST;/;T8
I
effects of a price change on e"penditure%

elastic demand
P(3)
0
a
D
Elastic demand between two points
Expenditure falls
as price rises
4
20
5
10
.
E7AST;/;T8
I

elastic demand

inelastic demand
a
4
20
P(3)
0
D
Expenditure rises
as price rises
;nelastic demand between two points
8
15
c
E7AST;/;T8
I

elastic demand

inelastic demand
special cases
P
2
P
Q
% Q
1
P
1
D
.
a
Totally inelastic demand P
D

3 (!
Q
2
P
Q
% Q
1
P
1
D
a .
;nfinitely elastic demand P
D

3 !
P
Q
% 40
20
D
100
8
a
6nit elastic demand P
D
3 41!
.
E7AST;/;T8
I

elastic demand

inelastic demand
special cases
applications to price decisions

P(3)
0
.
a
D
5
4
10
20
)1penditure !a##s
as price rises
Elastic demand between two points
P(3)
0
c
a
D
8
4
15 20
)1penditure rises
as price rises
;nelastic demand between two points
E7AST;/;T8
I

elastic demand

inelastic demand
special cases
applications to price decisions
different elasticities along a demand curve

Different elasticities along different portions of a demand curve
P
Q
%
P
1
Q
1
a
D
P
Q
%
P
1
P
2
Q
1
Q
2
a
.
D
Elastic
demand
P
Q
%
P
1
P
2
P
3
Q
1
Q
2
Q
3
a
.
c
D
Inelastic
demand
E7AST;/;T8
I
Measurement of elasticity% arc elasticity
the formula for price elasticity of demand

Q/Q P/P
using the average or #mid9point# method

0
2
4
6
8
10
0 10 20 30 40 50
P (3)
Q (000s)
*eand
Measuring elasticity using the arc method
n
0
2
4
6
8
10
0 10 20 30 40 50
P (3)
Q (000s)
Q P
id Q id P
P
d
2
*eand
n
Q = 10
P = 2
Mid P
7
Mid Q
15
0
2
4
6
8
10
0 10 20 30 40 50
P (3)
Q (000s)
Q P
id Q id P
P
d
2
10 2
15 7
2
*eand
n
Q = 10
P = 2
Mid P
7
Mid Q
15
0
2
4
6
8
10
0 10 20 30 40 50
P (3)
Q (000s)
Q P
id Q id P
P
d
2
10 2
15 7
2
2 10415 1 742
*eand
n
Q = 10
P = 2
Mid P
7
Mid Q
15
0
2
4
6
8
10
0 10 20 30 40 50
P (3)
Q (000s)
Q P
id Q id P
P
d
2
10 2
15 7
2
2 10415 1 742
2 70430
*eand
n
Q = 10
P = 2
Mid P
7
Mid Q
15
0
2
4
6
8
10
0 10 20 30 40 50
P (3)
Q (000s)
Q P
id Q id P
P
d
2
10 2
15 7
2
2 10415 1 742
2 70430
2 743 2 2533
*eand
n
Q = 10
P = 2
Mid P
7
Mid Q
15
E7AST;/;T8
I
Measurement of elasticity% point
elasticity

dQ/dP x P/Q
the elasticity of a straight9line demand

<curve= constant dABd&!
the elasticity of a curved demand curve

dQ/dP is the tangent to the curve
Measuring elasticity at a point
P
Q
0
D
r
P
d
2 (1 4 s#ope) 1 P/Q
P
Q
30
0 40
D
r
50
100
P
d
2 (1 4 s#ope) 1 P/Q
P
Q
50
30
0 40 100
D
r
P
d
2 (1 4 s#ope) 1 P/Q
= 100450 1 30440
P
Q
50
30
0 40 100
D
r
P
d
2 (1 4 s#ope) 1 P/Q
= 100450 1 30440
2 60440
P
Q
50
30
0 40 100
D
r
P
d
2 (1 4 s#ope) 1 P/Q
= 100450 1 30440
2 60440
2 1C+
E7AST;/;T8
I
Measurement of elasticity% point
elasticity

dQ/dP x P/Q
the elasticity of a straight9line demand

<curve= constant dABd&!
the elasticity of a curved demand curve

dQ/dP is the tangent to the curve
different elasticities along a straight9line

demand curve
0
2
4
6
8
10
0 10 20 30 40 50
Different elasticities along a straight9line demand curve
P
Q
*eand
n
#
k
P
d
2 (1 4 s#ope) 1 P/Q
0
2
4
6
8
10
0 10 20 30 40 50
P
Q
*eand
n
#
k
P
d
2 (1 4 s#ope) 1 P/Q
(1 4 s#ope) is constant
2 50410 2 5
0
2
4
6
8
10
0 10 20 30 40 50
P
Q
*eand
n
#
k
P
d
2 (1 4 s#ope) 1 P/Q
2 50410 2 5
-ut P/Q (aries:
at n6 P/Q 2 8410
0
2
4
6
8
10
0 10 20 30 40 50
P
Q
*eand
n
#
k
P
d
2 (1 4 s#ope) 1 P/Q
2 50410 2 5
-ut P/Q (aries:
at n6 P/Q 2 8410
at 6 P/Q 2 6420
at #6 P/Q 2 4430
#
E7AST;/;T8
I
&rice elasticity of supply
measurement
determinants
applications
Supply in different time periods
D
1
P
1
Q
1
P
Q
%
a
D
1
D
2
P
1
Q
1
P
Q
%
a
D
1
D
2
S
i
P
1
P
2
Q
1
P
Q
%
a
.
D
1
D
2
S
i
S
'
P
1
P
3
P
2
Q
1
Q
3
P
Q
%
a
.
c
D
1
D
2
S
i
S
'
S
7
P
1
P
3
P
2
Q
1
Q
3
P
Q
%
a
.
c
P
4
Q
4
d
E7AST;/;T8
I
;ncome elasticity of demand
measurement
determinants
applications
I
/ross9price elasticity of demand
measurement
determinants
applications
Supply and Demand
The Time
Dimension
T>E T;ME D;MENS;2N
I
Short9run and long9run price
ad:ustment
short9 and long9run demand and supply

curves
short9 and long9run ad:ustment to a

change in demand or supply
D
1
P
1
Q
1
P
Q
%
Response of supply to an increase in demand
a
D
1
D
2
P
1
Q
1
P
Q
%
a
D
1
D
2
S
s"ort8run
P
1
P
2
Q
1
Q
2
P
Q
%
a
.
D
1
D
2
S
#ong8run
P
1
P
3
P
2
Q
1
Q
2
Q
3
P
Q
%
.
c
S
s"ort8run
a
Response of demand to an increase in supply
S
1
P
1
Q
1
P
Q
%
a
S
1
P
1
Q
1
P
Q
%
a
S
2
S
1
S
2
D
s"ort8run
P
1
P
2
Q
1
Q
2
P
Q
%
a
.
S
1
S
2
D
s"ort8run
D
#ong8run
P
1
P
3
P
2
Q
1
Q
2
Q
3
P
Q
%
a
.
c
T>E T;ME D;MENS;2N
I
Short9run and long9run price ad:ustment
short9 and long9run demand and supply curves
short9 and long9run ad:ustment to a change in

demand or supply
I
Speculation
T>E T;ME D;MENS;2N
I

demand or supply
I
Speculation
stabilising speculation
Stabilising speculation% initial price fall
P
1
P
Q
%
S
1
D
1
a
P
1
P
2
P
Q
%
D
2
a
.
S
1
D
1
S
2
D
3
P
1
P
2
P
Q
%
P
3
D
2
a
.
c
S
1
D
1
Stabilising speculation% initial price rise
P
1
P
Q
%
S
1
D
1
a
P
1
P
2
P
Q
%
S
1
D
1
D
2
a
.
P
1
P
2
P
Q
%
P
3
S
1
S
2
D
1
D
2
a
.
D
3
c
T>E T;ME D;MENS;2N
I

demand or supply
I
Speculation
destabilising speculation
Destabilising speculation% initial price fall
P
1
P
Q
%
S
1
D
1
a
P
1
P
2
P
Q
%
S
1
D
1
D
2
a
.
P
1
P
2
P
Q
%
P
3
S
1
S
2
D
1
D
2
a
.
D
3
c
Destabilising speculation% initial price rise
P
1
P
Q
%
S
1
D
1
a
P
1
P
2
P
Q
%
S
1
D
1
D
2
a
.
P
1
P
2
P
Q
%
P
3
S
1
S
2
D
1
D
2
a
.
D
3
c
T>E T;ME D;MENS;2N
I

demand or supply
I
Speculation
I
6ncertainty and ris$
T>E T;ME D;MENS;2N
I

demand or supply
I
Speculation
I
defining ris$ and uncertainty

T>E T;ME D;MENS;2N
I

demand or supply
I
Speculation
I
reducing ris$s by holding stoc$s

T>E T;ME D;MENS;2N
I

demand or supply
I
Speculation
I
reducing ris$s by holding stoc$s
futures mar$ets

Supply and Demand

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Supply and Demand

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Supply and Demand

Supply and Demand

the law of demand

the income effect

the substitution effect

individual#s and mar$et demand curves

number and price of substitute goods

number and price of complementary

change in any other determinant of

simple demand functions

more comple" demand functions

estimated demand equations

problems of estimating demand equations

demand functions and the demand curve

individual#s and mar$et supply curves

individual#s and mar$et supply curves

why supply curves generally slope up

profitability of alternative products

profitability of goods in :oint supply

nature and other random shoc$s

change in any other determinant of supply

simple supply functions

more comple" supply functions

estimated supply equations

problems of estimating supply equations

response to shortages and

movement along the supply curve and the

movement along the supply curve and the

movement along demand curve and new

movement along the supply curve and the

movement along demand curve and new

the responsiveness of demand and supply

the responsiveness of demand to a change

use of proportionate or percentage

the sign positive or negative!

the value greater or less than one!

number and closeness of substitute goods

the proportion of income spent on the

effects of a price change on e"penditure%

effects of a price change on e"penditure%

effects of a price change on e"penditure%

effects of a price change on e"penditure%

effects of a price change on e"penditure%

effects of a price change on e"penditure%

effects of a price change on e"penditure%

applications to price decisions

effects of a price change on e"penditure%

effects of a price change on e"penditure%

applications to price decisions

different elasticities along a demand curve

the formula for price elasticity of demand

using the average or #mid9point# method

the formula for price elasticity of demand

the elasticity of a straight9line demand

the elasticity of a curved demand curve

the formula for price elasticity of demand

the elasticity of a straight9line demand

the elasticity of a curved demand curve

different elasticities along a straight9line

short9 and long9run demand and supply

short9 and long9run ad:ustment to a

short9 and long9run demand and supply curves