An Introduction to Demand and

Supply
Market – is a means of interaction between buyers
and sellers for trading or exchange.
Consumer – buys.
Seller – sells.

TYPES OF MARKET
Goods Market – most common type of market.
Wet Market – where people buy pork, chicken, or
fish.
Dry Market – where people buy shoes or clothes.
Labor Market – where workers offer their services
and employers look for workers to hire.
Stock Market – where commodities traded consist of
securities corporations.
Introduction to Demand
• Demand is the desire, willingness, and ability to buy a
good or service.
– Supply can refer to one individual consumer or to the total
demand of all consumers in the market (market demand).
Demand Function shows how the quantity demanded of
a good is dependent on its determinants.
Demand Curve is the graphical presentation of the
demand schedule.
Real Income – refers to the buyers’ purchasing power
obtained from his money income.
Substitution Effect – when the price of a commodity
changes while other prices remain constant, the
consumer would tend to substitute a lower priced
commodity for the more expensive one.
Ceteris Paribus – “all other things are held constant,
or else equal.
Introduction to Demand
A demand schedule is a table that lists the various
quantities of a product or service that someone is
willing to buy over a range of possible prices.

Price per Widget ($) Quantity Demanded of

Widget per day
$5 2
$4 4
$3 6
$2 8
$1 10
Introduction to Demand
A demand schedule can be shown as points on a
graph.

The graph lists prices on the vertical axis and

quantities demanded on the horizontal axis.
Each point on the graph shows how many units of
the product or service an individual will buy at a
particular price.
The demand curve is the line that connects these
points.
Introduction to Demand
The demand curve slopes downward.
This shows that people are normally willing to buy less
of a product at a high price and more at a low price.
According to the law of demand, quantity demanded
and price move in opposite directions.
Changes in Demand
Change in the quantity demanded due to a price change
occurs ALONG the demand curve

•An increase in the Price of

Widgets from $3 to $4 will
lead to a decrease in the
Quantity Demanded of
Widgets from 6 to 4.
 Changes in Demand
• Demand Curves can also shift in response to the following
factors:
– Buyers (# of): changes in the number of consumers
– Income: changes in consumers’ income
– Tastes: changes in preference or popularity of product/
service
– Expectations: changes in what consumers expect to happen in
the future
– Related goods: compliments and substitutes
• BITER: factors that shift the demand curve
 Changes in Demand
• Prices of related goods affect on demand
– Substitute goods a substitute is a product that can be used in
the place of another.
• The price of the substitute good and demand for the other good are
directly related
• For example, Coke Price Pepsi Demand
– Complementary goods a compliment is a good that goes well
with another good.
• When goods are complements, there is an inverse relationship
between the price of one and the demand for the other
• For example, Peanut Butter Jam Demand
Changes in Demand
•Several factors will
change the demand for
the good (shift the entire
demand curve)

•As an example, suppose

consumer income
increases. The demand for
Widgets at all prices will
increase.
Changes in Demand
•Demand will also
decrease due to changes
in factors other than price.

•As an example, suppose

Widgets become less
popular to own.
Changes in Demand
Changes in any of the factors other than price causes
the demand curve to shift either:

Decrease in Demand shifts to the Left (Less demanded

at each price)
OR
Increase in Demand shifts to the Right (More
demanded at each price)
Introduction to Supply
• Supply refers to the various quantities of a good
or service that producers are willing to sell at all
possible market prices.
• Supply can refer to the output of one producer or
to the total output of all producers in the market
(market supply).
• Supply Function shows how the quantity
offered for sale of a good is dependent on its
determinants.
Introduction to Supply
A supply schedule is a table that shows the quantities
producers are willing to supply at various prices

Price per Widget ($) Quantity Supplied of

Widget per day
$5 10
$4 8
$3 6
$2 4
$1 2
Introduction to Supply
A supply schedule can be shown as points on a
graph.

The graph lists prices on the vertical axis and

quantities supplied on the horizontal axis.
Each point on the graph shows how many units of
the product or service a producer (or group of
producers) would willing sell at a particular price.
The supply curve is the line that connects these
points.
Introduction to Supply
• As the price for a good rises, the quantity supplied rises
and the quantity demanded falls. As the price falls, the
quantity supplied falls and the quantity demanded rises.
• The law of supply holds that producers will normally
offer more for sale at higher prices and less at lower
prices.
 Introduction to Supply
The reason the supply curve slopes upward is due to costs
and profit.
Producers purchase resources and use them to produce
output.
Producers will incur costs as they bid resources away from
their alternative uses.
Introduction to Supply
Businesses provide goods and services hoping to
make a profit.
 Profit is the money a business has left over after
it covers its costs.
 Businesses try to sell at prices high enough to
cover their costs with some profit left over.
 The higher the price for a good, the more profit a
business will make after paying the cost for
resources.
Changes in Supply
•Change in the quantity supplied due to a price change
occurs ALONG the supply curve

•If the price of Widgets fell

to $2, then the Quantity
Supplied would fall to 4
Widgets.
Changes in Supply
• Supply Curves can also shift in response to the following
factors:
– Subsidies and taxes: government subsides encourage production,
while taxes discourage production
– Technology: improvements in production increase ability of
firms to supply
– Other goods: businesses consider the price of goods they could
be producing
– Number of sellers: how many firms are in the market
– Expectations: businesses consider future prices and economic
conditions
– Resource costs: cost to purchase factors of production will
influence business decisions
• STONER: factors that shift the supply curve
Changes in Supply
•Several factors will
change the demand for
the good (shift the entire
demand curve)

•As an example, suppose

that there is an
improvement in the
technology used to
produce widgets.
Changes in Supply
•Supply can also decrease
due to factors other than a
change in price.

•As an example, suppose

that a large number of
Widget producers go out
of business, decreasing
the number of suppliers.
Changes in Supply
Changes in any of the factors other than price causes
the supply curve to shift either:

Decrease in Supply shifts to the Left (Less supplied at

each price)
OR
Increase in Supply shifts to the Right (More supplied
at each price)
Elasticity of Demand and Supply
Elasticity
 Elasticity: the responsiveness of quantity to a change in another
variable

 Price Elasticity of Demand: the responsiveness of quantity

demanded to a change in price

 Price Elasticity of Supply: the responsiveness of quantity supplied to

a change in price

 Income Elasticity of Demand: the responsiveness of quantity

demanded to a change in income

 Cross Price Elasticity of Demand: the responsiveness of quantity

demanded of one good to a change in the price of another good
 The Mathematical Representation of
Elasticity

ΔQ
%ΔQ Q
Elasticity = =
%ΔP ΔP
P

Because the demand curve is downward sloping and the supply

curve is upward sloping the elasticity of demand is negative and
the elasticity of supply is positive. Often these signs are implicit
and ignored.
Elasticity Labels
Elastic : the condition of demand when the
percentage change in quantity is larger than
the percentage change in price
Inelastic: the condition of demand when the
percentage change in quantity is smaller than
the percentage change in price
Unitary Elastic: the condition of demand when
the percentage change in quantity is equal to
the percentage change in price
The Relationship Between Slope and
Elasticity
Elasticity and the slope of the demand curve
are not the same but they are related.
At a given price level, elasticity is greater with
a flatter demand curve.
With a linear demand curve (meaning a
demand curve that has a single value for the
slope) elasticity is greater at higher prices
Figure 1 Flatter Demand Means Greater
Elasticity
P
P2
D2

P1

P*

D1

Q1=Q2 Q* Q/t
Figure 2 Higher Prices Means Greater
Elasticity
P

P4 4
3
P3

P2
2
P1
1

Q 4 Q3 Q 2 Q1 Q/t
Elasticity
 A good for which there are no good substitutes is
likely to be one for which you must pay whatever price
is charged. It is also likely to be one for which a lower
price will not induce substantially greater
consumption. Thus, as price changes there is very
little change in consumption, i.e. demand is inelastic
and the demand curve is steep.
 Inexpensive goods that take up little of your income
can change in price and your consumption will not
change dramatically. Thus, at low prices, demand is
inelastic.
Seeing Elasticity Through Total
Expenditures
Total Expenditure Rule: if the price and the
amount you spend both go in the same direction
then demand is inelastic while if they go in
opposite directions demand is elastic.
Determinants of Elasticity
Number of and Closeness of Substitutes
The more alternatives you have the less likely you are to
pay high prices for a good and the more likely you are to
settle for something that will do.
Time
The longer you have to come up with alternatives to
paying high prices the more likely it is you will shift to
those alternatives.
Extremes of Elasticity
Perfectly Inelastic: the condition of demand when
price changes have no effect on quantity
Perfectly Elastic: the condition of demand when
price cannot change
Elasticity and the Demand Curve

How the Elasticity of Demand Affects

Reactions to Price Changes
P Perfectly Inelastic Demand
S2

P2
S1

P1

D
Q1=Q2
Q/t
 Perfectly Elastic Demand
P

S2

S1

P1=P2

Q2 Q1
Q/t
 Inelastic Demand
P (at moderate prices)

S2

S1
P2

P1

Q2 Q 1
Q/t
 Elastic Demand
P (at moderate prices)

S2

S1
P2

P1
D

Q2 Q1
Q/t
Consumer and Producer Surplus
Consumer Surplus: the value you get that is
in excess of what you pay to get it
On a graph, consumer surplus is the area below the
demand curve and above the price line.
Producer Surplus: the money the firm gets
that is in excess of its marginal costs
On a graph, producer surplus is the area below the
price line and above the supply curve.
 Consumer and Producer Surplus on a
Graph
P • Value to the Consumer:
A
Supply • 0ACQ*
• Consumers Pay Producers:
• OP*CQ*
P* C
• The Variable Cost to Producers:
• OBCQ*
B • Consumer Surplus:
Demand • P*AC
0 Q* Q/t • Producer Surplus:
• BP*C