Lecturer: Dr B. M.

Nowbutsing
Topic Two : Demand, Supply, and the
Market

1.

Demand

A table showing the relationship between price

and quantity of a product demanded is known as
a demand schedule
Price
Quantity
Quantity demanded:
0
200
The quantity of a good
0.10
160
or service that a
0.20
120
consumer is willing to
0.30
80
buy at a given price
0.40
40
0.50

Demand Curve
The Demand curve
shows the relation
between price and
quantity demanded
holding other things
constant (ceteris paribus

Price

2.

D
Quantity

Write the equation!

3.

Market Demand

Market demand shows the demand for a product

by all consumers for a given area/ country
Price

Quantity

Price

Quantity

200

100

0.10

160

0.10

80

0.20

120

0.20

60

0.30

80

0.30

40

0.40

40

0.40

20

0.50

0.50

3.

Market demand

Market demand curve is obtained by horizontal

summation along the demand curve
Price
Quantity
Write the
equation !
0
300
0.10

240

0.20

180

0.30

120

0.40

60

0.50

4.

Law of Demand

Holding everything else constant, when price of a product

falls, the quantity demanded for the product will increase
(vice versa)
This law is the result of the:
substitution effect is the change is quantity demanded that
result from a change in price which make the product more or
less expensive relative to substitute
income effect is the change in quantity demanded of a good
that result from the effect of a change in the price on
purchasing power

5.

Ceteris Paribus

Ceteris Paribus: The requirement that when analysing the

relationship between the two variables such as price and
quantity other variables must be held constant.
If other things held constant, there is a shift in the demand
curve.
Variables that shift the demand curve are also known as
conditions of demand

6.

Shift in the Demand Curve

Price of related goods

substitutes: goods and services that can be used for the same
purpose
complements: goods and services that should be used
together
Income
Normal goods: goods for which demand increases as
income increases
Inferior goods: goods for which demand decreases as
income increases
Tastes
Population and Demographics
Expected Future Price

Shift in the Demand Curve

Price

6.

Quantity

Shift in the Demand Curve

Price

6.

Quantity

7.

P0
P1

Increase in Demand: Two Ways

(1) A movement along
the demand curve from
A to B
represents consumer
reaction to a price
change

A
B

D
Q 0 Q1

Quantity

7.

Increase in Demand: Two Ways

(2) A movement of the
demand curve from D0
to D1

P0

leads to an increase in
demand at each price
e.g. at P0 quantity demanded
increases from Q0 to Q1

A
B

D0
Q 0 Q1

D1

Quantity

8.

Supply

A table showing the relationship between price

and quantity of a product supplied is known as a
supply schedule
Price
Quantity
Quantity Supplied:
0
0
The quantity of a good
0.10
0
or service that a
0.20
40
consumer is willing to
0.30
80
supply at a given price
0.40
120
0.50

160

The Supply Curve

Price

9.

Quantity

The Supply curve shows

the relation between
price and quantity
supplied holding other
things constant
Write the equation!

10. Market Supply

Market supply shows the supply for a product by all
producers for a given area/ country
Price

Quantity

Price

Quantity

0.10

0.10

0.20

40

0.20

20

0.30

80

0.30

40

0.40

120

0.40

60

0.50

160

0.50

80

10. Market Supply

Market supply curve is obtained by horizontal
summation along the supply curve
Price
Quantity
Write the
equation !
0
0
0.10

0.20

60

0.30

120

0.40

180

0.50

240

11. Law of Supply

Holding everything else constant, when price
of a product rises, the quantity supplied for
the product will increase (vice versa)

12. Shift in the Supply Curve

Price of Inputs
Technological Change
A positive or negative change in the ability of a
firm to produce a given level of output with a given
amount of inputs.
Price of substitutes in production
Expected Future Price
Number of Firms in Market

Price

13. Shift in the Supply Curve

Quantity

Price

13. Shift in the Supply Curve

Quantity

14. Movement vs. Shift

Price

S
B

S1
C

Quantity

A/B to C: Shift in
the supply curve
(change in supply)
A to B: Movement
along the demand
curve (change in
quantity supplied)

15. Market Equilibrium

D0

P0

E0

D0
Q0

Quantity

Market equilibrium is at
E0 where quantity
demanded equals quantity
supplied
with price P0 and
quantity Q0

15. Market equilibrium

D0

P0

If price were above P0

there would be excess
supply
producers wish to
supply more than
consumers wish to
demand

E0

D0
Q0

Quantity

If price were below P0

there would be excess
demand
consumers wish to
demand more than
producers wish to
supply

16. A shift in demand

D0

D1

If the price of a substitute

good increases ...

P1

more will be demanded at

each price

E1

P0

E0

The demand curve shifts

from D0D0 to D1D1.

D0

D1

Q0 Q1 Quantity

The market moves to a

new equilibrium at E1.

17. A shift in supply

S1
S0

D
E2

P1
P0

Suppose safety
regulations are tightened,
increasing producers costs
The supply curve
shifts to S1S1

E0

If price stayed at P0 there

would be excess demand

S1

S0

D
Q1 Q 0

So the market moves to a

Quantity new equilibrium at E2.

18. What, How and For Whom

The market:
decides how much of a good should be produced
by finding the price at which the quantity demanded equals the
quantity supplied

tells us for whom the goods are produced

those consumers willing to pay the equilibrium price

determines what goods are being produced

there may be goods for which no consumer is prepared to pay a
price at which firms would be willing to supply

19. Price Controls

Price controls are government rules of laws that
forbid the adjustment of prices to clear
Price controls may be floor prices (minimum prices)
or ceiling prices (maximum prices)

20. Price Ceiling

Price ceiling is the
maximum price at which
a commodity can be sold

D
PM
P0

The immediate effect is

to create a shortage
(quantity demanded >
quantity supplied)

Pc
D

S
Qs

Qd

20. Price Ceiling

Possible consequences of imposing a maximum price:

- goods will be supplied on a first come and first

serve basis
- base on sellers preference

- emergence of black market while consumers are

willing to pay more than the regulated price in order
to obtain the commodity

21. Price Floor

Price ceiling is the
minimum price at which
a commodity can be sold

D
PF

The immediate effect is

to create a surplus
(quantity supplied >
quantity demand)

P0

S
Qd

Qs

22. Effect of a Per Unit Tax

S1

The effect of the tax is to

shift the supply curve
S
parallel upwards
The perpendicular
distance between the two
supply is the amount of
the tax

P1
P0

S1

D
S
Q1 Q0

23. Who pays a commodity tax?

P1
P0
S'

C
B

D
Q1Q0

S'

Area A is borne
by consumers

Area B is borne
by producers

Area C is a
welfare loss.
The incidence of the
tax depends upon the
elasticities of demand
and supply.

24. Effect of a Per Unit Tax

By how much price will increase will depend on the
slope of the demand curve
Steeper demand curve: higher price increase burden
more on the consumer

Flatter demand curve: lesser price increase burden

more on the supplier

25. Questions
D = 50 0.5 P and S = 20 + 0.25 P
D: Demand; S: Supply and P: Price
a)

Calculate quantity demanded when price is Rs 10

b)

Calculate quantity demanded when price is Rs 20

c)

Calculate equilibrium price and quantity

d)

Calculate the shortage/surplus if government imposes a regulatory

price of Rs 60. Is this a floor or ceiling?

e)

If demand shift to 100 0.25 P, calculate new equilibrium price

and quantity.

f)

Sketch both new and old demand and supply curve, illustrating the
equilibrium conditions

25. Questions
D = 100 0.25 P and S = 40 + 0.75 P
a)

Calculate equilibrium price and quantity

b)

If a maximum price of Rs 48 was imposed, what is the resulting

shortage?

c)

Calculate the amount that the government will receive when

imposing such a price?

d)

Estimate the extra revenue that can be generated from black

market.

e)

Calculate the new equilibrium if supply changes to s = 60 + 0.25

P

f)

Interpret what has happened to the original supply curve.