Week: 2

Consumer Demand and

Supply

A Market
Interaction between

buyers and sellers

Buyers demand goods
Sellers supply goods
Assumptions
Standardized good
Competitive market

Demand
Schedule or curve
Amount consumers

willing and able to

purchase at a given price
Other things equal
Individual demand
Market demand

Law of Demand
Other things equal, as

price falls quantity

demanded rises
Explanations:
Diminishing marginal

utility
Income effect

Individual Demand
Individual
Demand
P Qd
$5 10
4 20
3 35
2 55
1 80

Price (per bushel)

P6
5
4
3
2
1

0
10

D
20

30

40

50

60

70

80 Q

Quantity Demanded (bushels per week)

Determinants of Demand
Factors that shift the

demand curve
Cause more or less to be
bought at any possible price
Increase or decrease in
demand
Tastes
Number of buyers

Determinants of Demand
Income

Normal goods
Inferior goods

Price of related goods

Substitute good
Complementary good
Unrelated goods

Consumer expectations

Demand Can
Increase or Decrease
Individual
Demand
Individual
Demand
P Qd
$5 10
4 20
3 35
2 55
1 80

Price (per bushel)

P6
5

Increase in Demand

4
3
2
1
0

D2

Decrease in Demand
4

10

D1

D3
12

14

16 Q 18

Quantity Demanded (bushels per week)

Demand Can Increase or Decrease

Individual Demand
Individual
Demand
P Qd
$5 10
4 20
3 35
2 55
1 80

Price (per bushel)

P6

Change in
Demand

5
4

Change in
Quantity
Demanded

3
2
1
0

D2

Decrease in Demand
4

10

D1

D3
12

14

16 Q 18

Quantity Demanded (bushels per week)

Supply
Schedule or curve
Amount producers

willing and able to sell at

a given price
Individual supply

Market supply

Law of Supply
Other things equal, as

price rises the quantity

supplied rises
Explanations:
Revenue implications
Marginal cost

Individual Supply
Individual
Supply
P Qs
$5 60
4 50
3 35
2 20
1

Price (per bushel)

P6

S1

5
4
3
2
1
0

10

20

30

40

50

60

Q
70

Quantity Supplied (bushels per week)

Determinants of Supply
Resource prices
Technology
Taxes and subsidies
Prices of Related goods

Substitute in Production
[ if price of energy gel rises, firms switch production from bars to gel. The SS of
energy bars decreases.]
Complements in Production
[ if price of Beef rises, supply of cowhide increases.]

Producer expectations
Number of sellers
The State of Nature

Supply Can
Increase or Decrease
Individual
Supply
P6

P Qs
$5 60
4 50
3 35
2 20
1

Price (per bushel)

Individual
Supply

S3
5

S1
S2

4
3
2
1
0

10

20

30

40

50

60

70Q

Quantity Supplied (bushels per week)

Supply Can
Increase or Decrease
Individual
Supply
P6

P Qs
$5 60
4 50
3 35
2 20
1

Price (per bushel)

Individual
Supply

S3
5

Change in
Quantity Supplied

S1
S2

4
3
2

Change in
Supply

1
0

10

20

30

40

50

60

70 Q

Quantity Supplied (bushels per week)

Exercise 1
The demand schedules of three individuals
(Tom, Dick, and Harry) are shown. If they are
the only three buyers of DVDs, complete the
market demand schedule for DVDs.
Graphically, is the market demand for a
product the horizontal or vertical sum of the
individual demand schedules?
Quantity demanded, DVDs
Price Tom Dick Harry Total
$15.00 1 4 0 _____
13.00 3 5 1 _____
11.00 6 6 5 _____
9.00 10 7 10 _____
7.00 15 8 16 _____

Answer 1
The market demand is the horizontal
sum of the individual schedules.
Quantity demanded, DVDs
Price Tom Dick Harry Total
$15.00 1 4 0 5
13.00 3 5 1 9
11.00 6 6 5 17
9.00 10 7 10 27
7.00 15 8 16 39

Exercise 2

The demand for ice-cream cones

is
P=800-2Qd . Eq. 1
From this Eq. prepare DD
schedule and draw the DD curve
in a graph
The Supply of ice-cream cones is
P=200 + 1Qs . Eq. 2
From this Eq. prepare SS schedule and
draw the SS curve in the same graph

Market Equilibrium
Equilibrium price and quantity
Surplus and shortage
Price as a Regulator
Efficient allocation
Productive efficiency
Allocative efficiency

Productive vs allocative efficiency

Productive efficiency can be defined as

producing goods and services for the lowest

cost. PE is said to occur on the PPF. On the PPF
curve, it is impossible to produce more of one
good without producing less of another.
Point C in graph is productively
inefficient because you can
produce more goods or
services without an
opportunity cost.

Productive vs allocative efficiency

Allocative efficiency is more concerned with the distribution and allocation of resources in society.

For example, there is no point in being productively efficient if all resources are diverted to making guns.
We could be producing on a PPF but, if it is all guns, society may not have enough food and health care.
An anecdote: the Soviet Union under Communist days tells how factories were given targets to produce certain

quantities of goods. They often did this with great vigor and were productively efficient, but, often they were
producing goods which werent needed by society.

AE looks at the marginal benefit (MB) of consumption compared to marginal cost (MC).
AE will occur when MB= MC.

We can assume price = MC. So we also say

AE occurs where price = MC.
Monopolies are often said to be allocatively inefficient because they are able to set the price> MC .

Buyers & 200 Sellers

Market200
Equilibrium
P

Qd

$5 2,000
4 4,000
3 7,000
211,000
116,000

Market
Supply
200 Sellers

Price (per bushel)

Market
Demand
200 Buyers

6,000 Bushel
Surplus

$4 Price Floor

Qs

$5 12,000
4 10,000

3
3

$2 Price Ceiling

7,000 Bushel
Shortage

1
0
2

7,000

4,000

1,000

10 12
14 16 18
78
Bushels of Corn (thousands per week)
4

Market Equilibrium
Change in demand
Shift of the demand curve

Change in supply
Shift of the supply curve

Change in equilibrium price

and quantity

Market Equilibrium

Price Quantity

Supply increase;

Demand decrease
Supply decrease;
Demand increase
Supply increase;
Demand increase
Supply decrease;
Demand decrease

?
?
?
?

Government-Set Prices
Price ceilings on

gasoline
Rationing problem
Black markets

Rent controls
Price floors on wheat
Optimal allocation of

resources

Important Definitions for

Exam
demand
demand schedule
law of demand
diminishing marginal utility
income effect
substitution effect
demand curve
determinants of demand
normal goods
inferior goods
substitute good
complementary good
change in demand
change in quantity

demanded

supply
supply schedule
law of supply
supply curve
determinants of supply
change in supply
change in quantity

supplied
equilibrium price
equilibrium quantity
surplus
shortage
price ceiling
price floor