Lecture 2A - Demand, Supply, Equilibrium Prices

Lecture 2
DEMAND, SUPPLY, AND

EQUILIBRIUM PRICES
Outline
1. Basic Market Mechanism
2. Market Demand
3. Expressing Demand Functions
4. Market Supply
5. Expressing Supply Functions
2
Outline
6. Market Equilibrium
7. Essence of Market Equilibrium
8. Market Disequilibrium vs. Change in
Market Equilibrium
3
Basic Market
Mechanism
What is a market?
1. Physical structure/ geographical location
2. Market is an institution or mechanism
where buyers and sellers interact and
exchange.
Institutions rules of the game
Mechanism process, technique, or
system for achieving results
COPYRIGHT 2010 PEARSON EDUCATION, INC. PUBLISHING

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Basic Market Mechanism
Firms supply
goods and
services and
demand FOP
Households
supply FOP
and demand
goods and
services
6
Why Should Those in Business
Study Supply and Demand?
1. To respond to the actions of their own
competitors and to develop their own
competitive strategies
2. To understand how the structure of the
market that their firm operates in impacts
supply and demand.
3. To understand how public policy will impact
supply and demand.
COPYRIGHT 2010 PEARSON EDUCATION, INC. PUBLISHING 7

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Market Demand
Demand
market expression of the
cumulative willingness and ability of
all households to buy different
amounts of a product at different
prices in a given period of time

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a signal or indicator
Demand an economic
phenomenon
all households to buy different
time-bound
Focus on market demand
relationship between qty. demanded
and price
10
Individual vs. Market Demand
P Market demand is
the horizontal sum
of individual
demand curves.
D1 D2 D1 + D2
Q
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Individual vs. Market demand
PRICE QD OF QD OF MARKET
INDIVIDUAL A INDIVIDUAL B DEMAND
(A + B)
0 9 12 21
1 6 8 14
2 3 4 7
3 0 0 0
12
Demand
Assumption of the basic definition:
Other factors like buyers incomes,
tastes and preferences, and the
prices of goods related in
consumption are held constant.
Ceteris paribus
13
relationship between 2
variables (independent
Demand dependent variables)
The functional relationship

between the price of a good or
service and the quantity demanded
by consumers in a given period of
time, all else held constant.
14
Demand
Factors influencing quantity
demanded:
1. PRICE (of the good itself)
2. NON-PRICE FACTORS (all else
held constant)
15
Functional relationship between
price and quantity demanded
Can be shown in terms of
1. demand schedule
2. graph
3. equation
16
Functional relationship between price of
the good itself and quantity demanded
Demand schedule
table showing the different
amounts of a good or service that
are demanded at different prices
17
Functional relationship between the price
of the good itself and quantity demanded
Demand schedule
PRICE QUANTITY DEMANDED
0 12
1 10
2 8
3 6
4 4
5 2
6 0
18
Functional relationship between price of
the good itself and quantity demanded
7 Demand curve
6
Demand curve
5
-downward sloping or
Price
4
3
negatively sloped
2
1
0
(Note: This graph is not based on
the previous demand schedule.) 0 5 10 15
Quantity

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Demand Curve
Demand curve
downward sloping (negatively sloped), suggesting
an inverse or negative relationship between the
price of the good itself and quantity demanded,
all else equal or constant (ceteris paribus)
graphically shows that when the price of a good

rises (falls), quantity demanded falls (rises), all
else equal or constant (ceteris paribus)
20
Quantity demanded and price
of the good itself
Law of demand:
All else constant (ceteris paribus),
price is inversely or negatively related to
quantity demanded.
21
of the good itself
Normal goods
- adhere to the law of demand
- when the price of the good is high, less will
be bought and vice-versa

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of the good itself
Two possible exceptions: (When the price of

the good is high, more will be bought and
vice-versa.)
1. Giffen good
2. Veblen good

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of the good itself
Giffen goods (Sir Robert Giffen) / Gray
goods (Simon Gray)
Goods that are substitutes for a more
expensive good
Goods that are bought when people cannot
afford a superior good
Examples: (difficult to find in real life)
Bread/noodles (for low-income families)

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of the good itself
Veblen goods (Thorstein Veblen)
The desirability of a product is based on its
price alone.
If the price of the product is low, less will be
bought of it and vice-versa.
Examples:
High status or premium goods
Antiques, exotic goods

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Non-price Factors Influencing
Demand (not qty. demanded)
Tastes and preferences
Income
Prices of goods related in
consumption
Future expectations
Number of potential consumers

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Tastes and Preferences
1. How potential consumers feel about a
good or service and how well a good or
service meets a consumers desire.
2. Involve individual attributes of consumers
3. Business note: Know the different
attributes of different types of consumers

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Income
Income affects demand because
demand incorporates both
willingness and ability to pay for
the good.
Relates to income
Psychological phenomenon
28
Income
Normal good (status good)
If an increase (decrease) in income causes a person
to buy more (less) steak, then for that person, steak
is said to be a normal (status) good.
Inferior good (below status good)
If an increase (decrease) in income causes a person
to buy less (more) hamburger, then for that person,
hamburger is said to be an inferior (below status)
good.

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Income: Business note
Firms selling normal goods, like
jewelry, automobiles and
clothing, experience increase in
sales when the general
economy is booming.

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Income: Business note
Firms selling inferior goods, like
hamburger, used clothing, and
generic bleach, experience
increase in sales when the
general economy is in recession.

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Prices of Related Goods
Prices of related goods also affect the
demand for a good or service.
Two related goods:

Substitute good
Complementary good
32
Substitute goods
Goods that can be used in place of
another.
Complementary goods
Goods or services that consumers use
together.

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Prices of related goods:
Business note
The abundance and relatively low prices
of cell phones, tablets, and laptop
computers resulted in many teens and
young adults no longer purchasing
wristwatches. These all serve as
substitutes for watches.

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Prices of related goods:
Business note
As prices of personal computers have
dropped over time, there has been
increased demand for printers and
printer cartridges. Personal computers
and printers are complementary
products.

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Future expectations of prices
Expectations about future prices of a
product can influence current demand
for that product.
When consumers expect higher future

prices, they will demand more now and
vice-versa.

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Future expectations of income
Expectations about future income play
can influence current demand for a
product.
When consumers expect higher future

income, they will demand more now
and vice-versa.

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Number of Potential
Consumers/ Population
The number of consumers in the
marketplace influences the demand for a
product.
Business note: Know the different types of
consumers in the marketplace. Segment
your market in terms of type of consumer.
Business note: More people, greater
potential demand.

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Distribution of Income
Demand tends to be higher for goods
purchased by groups favored by the
distribution of income.
Common business sense: Sell goods and

services to those with money
39
Distribution of Income:
Business note
The base of the pyramid (BOP) is a huge
market even if the group is not favored by
the distribution of income.
Know the tastes and preferences of the BOP.
Know the willingness and ability to buy of
the BOP.
40
Managerial Rule of Thumb
(Demand)
In developing a competitive strategy, these
demand-related questions are crucial:
Which of the non-price factors of demand can

the firm influence?
How should non-price factors that are beyond
the firms control be handled?

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Shift in the demand curve vs.
movement along the demand curve
CHANGE IN CAUSES LEADS TO
PRICE OF THE MOVEMENT CHANGE IN

GOOD ITSELF ALONG THE QUANTITY
DEMAND CURVE DEMANDED
NON-PRICE SHIFT IN THE CHANGE IN
FACTORS DEMAND CURVE DEMAND
INFLUENCING
DEMAND
42
Shift in the Demand Curve vs.
Movement Along a Demand Curve
Shift in the demand curve Movement along the
P P
demand curve
A to B: change (increase)
in demand A to B: change (increase)
D2
D1 in quantity demanded
D1
P1 A B P1 A
B
P2
Q1 Q2 Q Q1 Q2 Q
C
43
P P
demand curve
When price of the good
is held constant at P1,
D2 When price of the good
more is demanded of the
good. D1 goes down, QD increases
from Q1 to Q2.
D1
P1 A B P1 A
B
P2
Q1 Q2 Q Q1 Q2 Q
44
Shift in the demand curve (due to a
change in a non-price factor): Tabular
exposition
PRICE QD WHEN QD WHEN
INCOME IS INCOME IS
1000 2000 Change in income
0 9 18
Entire
1 6 12 QD
changed
at all
2 3 6 possible
prices
45
Movement along the demand curve (due
to a change in the price of the good itself):
Tabular exposition
PRICE QD when
only the
price of
the good
changes
0 9 Entire QD is unchanged
at all possible prices
1 6
2 3

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46
Shift in the demand curve and
movement along the demand curve
CHANGES IN PRICE AND
QUANTITY DEMANDED
MOVEMENT ALONG THE CHANGE IN PRICE AND

DEMAND CURVE CHANGE IN QUANTITY
DEMANDED
SHIFT IN THE DEMAND CHANGE IN QUANTITY
CURVE DEMANDED AT ALL POSSIBLE
PRICES (CHANGE IN
DEMAND)
47
P P demand curve
Change in QD at all
possible prices Change in price and
D2
D1 change in QD
D1
P1 A B P1 A
B
P2
Q1 Q2 Q Q1 Q2 Q
C
48
Shifts in the demand curve
KIND OF SHIFT CHANGES
SHIFT TO THE RIGHT INCREASE IN QUANTITY

DEMANDED AT ALL POSSIBLE
PRICES (INCREASE IN DEMAND)
SHIFT TO THE LEFT DECREASE IN QUANTITY

DEMANDED AT ALL POSSIBLE
PRICES (DECREASE IN
DEMAND)
49
Shift to the right Shift to the left
Increase in demand Decrease in demand

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50
How will the demand curve for a product shift in these cases?
FACTOR INCREASE/IMPROVE DECREASE/DETERIORATE
Tastes and Shift to the RIGHT Shift to the LEFT

preferences
Income Shift to the RIGHT Shift to the LEFT
Price of substitute Shift to the RIGHT Shift to the LEFT
goods
Price of Shift to the LEFT Shift to the RIGHT
complementary
goods
51
How will the demand curve for a product shift in these cases?
Future Shift to the RIGHT Shift to the LEFT

expectations of
price
expectations of
income
Population Shift to the RIGHT Shift to the LEFT
52
Movements along the demand
curve
KIND OF MOVEMENT CHANGES
MOVEMENT UPWARD DECREASE IN QUANTITY

DEMANDED AS PRICE
INCREASES (DECREASE IN QD)
MOVEMENT DOWNWARD INCREASE IN QUANTITY

DEMANDED AS PRICE
DECREASES (INCREASE IN QD)
53
Movements along the demand
curve
upward
downward

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54
Expressing
Demand
Functions
1. demand schedule
2. graph
3. equation DEMAND FUNCTION
56
1. demand schedule
2. graph
3. equation DEMAND FUNCTION
57
Expressing Demand Functions
Qxd = f(Px,T,I,Py,Pz,EXP,N)
7 where
6 Qxd = quantity of good x demanded
5 Px = price of good x
Price
4 T = variables representing tastes and

3 preferences
2 I = income
1 Py = price of related good y
0 Pz = price of related good z
0 5 10 15 EXP = expected future prices
Quantity N = number of consumers

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Linear Demand Functions
Qxd = f(Px,T,I,Py,Pz,EXP,N)
econometric modelling
QD = 10 - 50Pc + 0.31I +1.5TC + 0.5E

(linear demand function)

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59
Interpreting and Using Linear
Demand Functions
QD = 10 - 50Pc + 0.31I +1.5TC + 0.5E
Where QD = quantity demanded of copper

Pc = price of copper
I = consumer income index
TC = telecom index
E = expectations index representing
purchasers expectations of a lower
price over the next 6 months

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Interpreting and Using Linear
Demand Functions
QD = 10 - 50Pc + 0.31I +1.5TC + 0.5E
1. What are the different parts of the demand function?

2. What do the signs before the variables show?
3. What do the numbers stand for?
4. How do we use a linear demand function?
5. How do we define a specific demand curve from a
demand equation/function?
.
61
Estimating the demand curve when
data are limited or incomplete
Available data
PRICE QUANTITY DEMANDED
(Y-VARIABLE) (X-VARIABLE)
50 40
40 60
62
Use the 2- point form formula of the straight line
y2 - y1
y y1 = ----------- ( x x1 )
x2 x1
where y is price, x is quantity demanded, subscript

1 is observation 1, subscript 2 is observation 2.
63
Available data
OBSERVATION PRICE QUANTITY
NUMBER (Y-VARIABLE) DEMANDED
(X-VARIABLE)
1 50 40
2 40 60
64
40 - 50
y 50 = ----------- ( x 40)
60 40
(Please see the whiteboard for the continuation of

the solution.)
65
Market Supply
66
Supply
cumulative willingness and
ability of all firms to supply
different amounts of a product
at different prices in a given
period of time
67
a signal or indicator
Supply
an economic
market expression of the phenomenon
all firms to supply different
time-bound
Focus on market supply
relationship between qty. supplied
and price
68
Individual vs. Market Supply
69
Individual vs. Market supply
PRICE QS OF FIRM A QS OF FIRM B MARKET
SUPPLY
(A + B)
0 0 0 0
1 6 10 16
2 12 20 32
3 18 30 48
70
Supply
Assumption of the basic definition:
Other factors like resource prices,
production technology and prices of
goods related in production are held
constant.
Ceteris paribus

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relationship between 2
variables (independent
Supply dependent variables)
The functional relationship

between the price of a good or
service and the quantity supplied by
producers in a given period of time,
all else held constant (ceteris
paribus).
72
Supply
Factors influencing quantity
supplied:
1. PRICE (of the good itself)
2. NON-PRICE FACTORS (all else
held constant)
73
price and quantity supplied
1. supply schedule
2. graph
3. equation
74
Functional relationship between price
of the good itself and quantity supplied
Supply schedule
table showing the different
amounts of a good or service that
are supplied at different prices
75
price and quantity supplied
Supply schedule
PRICE QUANTITY SUPPLIED
0 0
1 2
2 4
3 6
4 8
5 10
6 12
76
Functional relationship between price and
of the good itself and quantity supplied
Supply curve Supply curve
-upward sloping (positively
sloped)
- shows the positive or direct
relationship between
quantity supplied and price
- when the price of a good
rises, the quantity supplied
increases
C
77
Quantity supplied and price of
the good itself
Law of supply:
All else constant (ceteris paribus),
price is positively or directly related
to quantity supplied.

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the good itself
Possible exceptions to the law of
supply:
1. expectations of a fall in future
prices
2. cash-strapped sellers or
producers

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the good itself
Possible exceptions to the law of
supply:
3. firm leaving an industry
4. agricultural output
5. Backward-bending supply curve
of labor

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Backward-bending supply
curve of labor
If wages rise
beyond W2, an
individual can
choose to have less
hours for work
(from H2 to H3)
and have more
hours for leisure.
81
Non-price Factors Influencing
Supply (not quantity supplied)
Technology
Input prices
Prices of goods related in prodn
Future expectations
Number of producers

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Technology
Body of knowledge about how to combine inputs
of production
Technology how the good is produced
supply of the good and costs of production
83
Technology
Business note:
New technology can increase supply of goods and
services.
84
Input Prices
Refer to the prices of all the inputs or
factors of productionlabor, capital, land,
and raw materialsused to produce the
given product
Affect costs of production and, therefore,
the prices at which producers are willing to
supply different amounts of output.

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Input Prices
Business note: Prices of production inputs

influence prices of outputs and consequently
revenues and profitability.
Know the top industry sources of your inputs and

monitor their status, performance, and prospects.
86
The prices of other goods related in production
can also affect the supply of a particular good.
Two related goods:

1. Substitutes in production
2. Complementary in production

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Prices of Production-Related
Goods
Two goods are substitutes in production if the
same inputs can be used to produce either of the
goods, such as land for different agricultural
crops.
If the price of the substitute good increases, the

supply of this good will increase while the supply
of the other good will decrease.

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Prices of Production-Related
Goods
Two goods are complementary in production if
the production of one is a by-product of the
production of the other.
If the price of the complementary good increases

(decreases), the supply of the other good
increases (decreases).

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Future Expectations of Prices
If producers expect prices to
increase (decrease) in the future,
they may supply less (more) output
now than without those
expectations.

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Number of Producers
Influences the total supply of a product at
any given price
The number of producers may increase

because of perceived profitability in a given
industry or because of changes in laws or
regulations such as removal of trade
barriers.

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Shift in the supply curve vs.
movement along the supply curve
CHANGE IN CAUSES LEADS TO
PRICE OF THE MOVEMENT CHANGE IN

GOOD ITSELF ALONG THE QUANTITY
SUPPLY CURVE SUPPLIED
NONPRICE SHIFT IN THE CHANGE IN
FACTORS SUPPLY CURVE SUPPLY
INFLUENCING
SUPPLY

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Shift in the Supply Curve vs.
Movement Along a Supply Curve
A to B: change (increase) A to B: change (increase)
in supply in quantity supplied
P P
S1 S2 S1
B
P2
A B
P1 Movement
A
P1 along a supply
Supply curve
curve
shift
Q1 Q2 Q Q1 Q2 Q
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Supply Curve Shift vs. Movement
Along a Supply Curve
When price is held When price of the good
constant at P1, more is goes up from P1 to P2, QS
supplied of the good. increases from Q1 to Q2.
P P
S1 S2 S1
B
P2
A B
P1 Movement
A
P1 along a supply
Supply curve
curve
shift
Q1 Q2 Q Q1 Q2 Q
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Shift in the supply curve:
Tabular exposition
PRICE QS WHEN QS WHEN Input price
INPUT PRICE INPUT PRICE
IS 100 IS 50
decreases from
100 to 50
0 100 200
Entire QS
1 150 300 changed at all
possible prices
2 200 400
95
Movement along the supply
curve: Tabular exposition
PRICE QS WHEN Input price does not change
INPUT PRICE
IS 100
but price of the product
changes
0 100
Entire QS is
1 150 unchanged at all
possible prices
2 200
96
Shift in the supply curve and
movement along the supply curve
CHANGES
MOVEMENT ALONG THE CHANGE IN PRICE AND

SUPPLY CURVE CHANGE IN QUANTITY
SUPPLIED
SHIFT IN THE SUPPLY CURVE CHANGE IN QUANTITY
SUPPLIED AT ALL POSSIBLE
PRICES (CHANGE IN SUPPLY)
97
Shifts in the supply curve
CHANGES
SHIFT TO THE RIGHT INCREASE IN QUANTITY

PRICES (INCREASE IN
SUPPLY)
SHIFT TO THE LEFT DECREASE IN QUANTITY
PRICES (DECREASE IN
SUPPLY)
98
99
Technology Shift to the RIGHT Shift to the LEFT
Input Prices Shift to the LEFT Shift to the RIGHT
Prices of Shift to the RIGHT (for Shift to the LEFT (for the
Substitute Good the substitute good) substitute good)
Price of Shift to the RIGHT Shift to the LEFT

Complementary
Good
100

Expectations
of Price
Number of Shift to the RIGHT Shift to the LEFT
Producers
101
Expressing Supply
Functions
102
Expressing Supply Curves
Qxs=f(Px,TX,Pi,Pa,Pb,EXP,N)
where
Qxs = quantity of good x supplied
Px = price of good x
Price
T = variables representing tastes and

preferences
I = income
Py = price of related good y
Pz = price of related good z
EXP = expected future prices
Quantity N = number of consumers

AS PRENTICE HALL
Linear Supply Functions
Qxs=f(Px,TX,Pi,Pa,Pb,EXP,N)
econometric modelling
QS= -86 + 90Pc 1.5W +0.5T + 0.4N

(linear supply function)

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104
Interpreting and Using Linear Supply
Functions
QS = -86 + 90Pc 1.5W +0.5T + 0.4N
Where QS = quantity supplied of copper

Pc = price of copper
W = index of wage rates in the copper industry
T = technology index
N = number of active mines in the copper industry

AS PRENTICE HALL 105
Interpreting and Using Linear Supply
Functions
QS = -86 + 90Pc 1.5W +0.5T + 0.4N
1. What are the different parts of the supply function?
2. What do the signs before the variables show?
3. What do the numbers stand for?
4. How do we use a linear supply function?
5. How do we define a specific supply curve from a
supply equation/function?
.
106
Estimating the supply curve when
Available data
PRICE QUANTITY SUPPLIED
(Y-VARIABLE) (X-VARIABLE)
20 40
40 80
107
y2 - y1
y y1 = ----------- ( x x1 )
x2 x1
where y is price, x is quantity supplied, subscript 1

is observation 1, subscript 2 is observation 2.
108
Available data
OBSERVATION PRICE QUANTITY
NUMBER (Y-VARIABLE) DEMANDED
(X-VARIABLE)
1 20 40
2 40 80
109
40 - 20
y 20 = ----------- ( x 40)
80 40
(Please see the whiteboard for the continuation of

the solution.)
110
Market
Equilibrium
What is market equilibrium?
A state where the quantity that sellers
are willing and able to sell and the
quantity that buyers are willing and
able to buy are equal at the same and
one and only price.
112
What is market equilibrium?
Implications of the definition:
1. Market equilibrium is a state. It can change from
time to time.
2. Condition for market equilibrium:
a) Supply = Demand (WRONG!)
b) QS = QD ( incomplete)
C) QS = QD at the same and one and only price
(PERFECT!)
113
Market Equilibrium
Mechanism behind market equilibrium:
Assumption: Efficient market with flexible prices
(perfect competition)
Mechanism:
Market price fluctuates to eliminate shortages (an
excess of quantity demanded over quantity
supplied) and surpluses (an excess of quantity
supplied over quantity demanded).
114
Determination of Market
Equilibrium
Market equilibrium can be determined as
follows:
1. using demand and supply schedules
2. using graphs
3. using equations
115
Determination of Market Equilibrium:
Demand and Supply Schedules
PRICE QUANTITY QUANTITY
SUPPLIED DEMANDED
0 0 20
2 5 15
4 10 10
6 15 5
Market equilibrium price = 4

Market equilibrium quantity = 10
116
Determination of Market
Equilibrium: Graphical Approach
The market equilibrium
Price
price (PE) and quantity
(QE) is that price for which
the quantity supplied is
equal to the quantity PE
demanded.
QE Quantity
COPYRIGHT 2010 PEARSON EDUCATION, 117

INC. PUBLISHING AS PRENTICE HALL
Quantitative determination of
market equilibrium
Assume that you have calculated the following equations of the
demand and supply curves:
QD = 60- 50PC
QS = -66 + 90Pc
Equate the two equations and solve for PC algebraically.
Equilibrium condition: QS = QD
-66 + 90Pc = 60- 50PC
40PC = 126
PC = 0.90 (equilibrium/market price
118
Quantitative determination of
market equilibrium
To solve for the equilibrium/ market quantity, substitute the
equilibrium or market price (PC) to either the QD or QS
equation. Substituting the equilibrium or market price to
either the QD or QS equation is supposed to give the same
result.
QD = 60- 50 (0.90) QS = -66 + 90 (0.90)

QD = 60 45 QS = -66 + 81
QD = 15 QS = 15
119
Essence of Market
Equilibrium
120
Essence of Market Equilibrium
To understand the essence of market
equilibrium, we need to understand
market disequilibrium.
Two market disequilibria conditions:

Surplus or glut
Shortage
121
Market Disequilibrium: Surplus
At prices where the quantity
supplied exceeds the P S
quantity demanded there surplus
P1
exists a surplus at those
prices.
Buyers and sellers are
dissatisfied. Why?
Dissatisfaction prompts a
market reaction.
D
Q
122
Market Disequilibrium: Shortage
At prices where the
P
quantity demanded S
exceeds the quantity
supplied there exists a
shortage at those prices.
Buyers and sellers are
dissatisfied. Why?
P2
shortage
Dissatisfaction prompts a
market reaction. D
Q
123
Essence of market equilibrium
How is market equilibrium reached from a
point of disequilibrium?
Dissatisfaction
Market reaction
Price changes (rationing function of price
in a market systemdirect goods to those
who value the product most)
Market equilibrium is reached.
124
Essence of market equilibrium
1. Market equilibrium is a state that results in mutually
satisfying and beneficial conditions.
2. Market equilibrium is a state of efficiency since it
results in mutually satisfying and beneficial conditions.
3. Market equilibrium is a state of maximum utility,
welfare, or satisfaction for the consumer, producer,
and community as a whole.
125
Consumer and Producer
Surplus
126
Market Disequilibrium
vs. Change in Market
Equilibrium
127
Market disequilibrium vs
change in market equilibrium
MARKET CHANGE IN MARKET
DISEQUILIBRIUM EQUILIBRIUM
(surplus or shortage)
Due to a change in Due to a change in

the price of the good non-price factors
itself
128
Change in market equilibrium
Three ways in which equilibrium can change:
1. When demand changes (assuming constant
supply) / demand-induced change in equilibrium
2. When supply changes (assuming constant
demand) / supply-induced change in equilibrium
3. When both supply and demand change /
demand- and supply-induced change in equilibrium

AS PRENTICE HALL 129
Changes in Market Equilibrium
Demand Induced
When non-price demand
P
factors change, the
demand curve shifts and
produces a change in the S
equilibrium price and P3
quantity. P2
How do equilibrium price P1
and quantity change? D1 D2 D3
Q1 Q2 Q3 Q
AS PRENTICE HALL
Supply Induced
When non-price factors
change, the supply curve P S1
shifts and produces a S2
change in the S3
equilibrium price and P1
quantity. P2
How do equilibrium P3
price and quantity

change?
D1
Q1 Q2 Q3 Q
AS PRENTICE HALL
Changes in Demand and Supply
When non-price factors
change, the supply and P S1
demand curves may

both shift and produce a S2
change in the
P1
equilibrium price and
P2
quantity.
How do equilibrium D2
price and quantity D1
change? Q1 Q2 Q
AS PRENTICE HALL
Mathematical Example of an
Equilibrium Change
OLD DEMAND AND SUPPLY NEW DEMAND AND SUPPLY
EQUATIONS EQUATIONS
QD1 = 60 50PC QD2 = 80 50PC
QS1 = -66 + 90PC QS2 = -18 + 90PC

AS PRENTICE HALL
133
Mathematical Example of an
Equilibrium Change
Equate the new QD and QS equations and solve for
the equilibrium price and quantity algebraically.
More important questions:
1. What type of change in demand and supply do
the new equations for demand and supply
indicate?
2. Do they indicate an increase/decrease in
demand or an increase/ decrease in supply?

AS PRENTICE HALL
134

Lecture 2A - Demand, Supply, Equilibrium Prices

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Lecture 2A - Demand, Supply, Equilibrium Prices

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Lecture 2

DEMAND, SUPPLY, AND

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The functional relationship

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graphically shows that when the price of a good

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Two possible exceptions: (When the price of

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Two related goods:

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When consumers expect higher future

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When consumers expect higher future

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Common business sense: Sell goods and

Which of the non-price factors of demand can

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PRICE OF THE MOVEMENT CHANGE IN

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MOVEMENT ALONG THE CHANGE IN PRICE AND

SHIFT TO THE RIGHT INCREASE IN QUANTITY

SHIFT TO THE LEFT DECREASE IN QUANTITY

Increase in demand Decrease in demand

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Tastes and Shift to the RIGHT Shift to the LEFT

Future Shift to the RIGHT Shift to the LEFT

MOVEMENT UPWARD DECREASE IN QUANTITY

MOVEMENT DOWNWARD INCREASE IN QUANTITY

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4 T = variables representing tastes and

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QD = 10 - 50Pc + 0.31I +1.5TC + 0.5E

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Where QD = quantity demanded of copper

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1. What are the different parts of the demand function?

where y is price, x is quantity demanded, subscript

(Please see the whiteboard for the continuation of

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The functional relationship

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Technology how the good is produced

supply of the good and costs of production

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Business note: Prices of production inputs

Know the top industry sources of your inputs and

Two related goods:

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