Chapter

2
Demand,
Supply, and
Chapter
Equilibrium
Prices

© 2014 Pearson Education, Inc.

 Demand

The functional relationship

between the price of a good
or service and the quantity
demanded by consumers in
a given time, all else held
constant

2.2
 Non-Price Factors
Influencing Demand

1. Tastes and preferences

Affected by socioeconomic factors
such as age, sex, race, marital
status, and education level
2. Income
The level of income affects
demand for normal goods and
inferior goods
2.3
 Non-Price Factors
Influencing Demand

3. Prices of related goods

Substitute goods – when one good
can be used in the place of
another
Complementary goods – two or more
goods that consumers use together
4. Future expectations
5. Number of consumers

2.4
 Demand Function

QXD = f (PX, T, I, PY, PZ, EXC, NC, … where

QXD = quantity demanded of good X

PX = price of good X

T = variables representing
tastes and preferences
I = income
(continued on next slide) 2.5
 The Demand
Function
QXD = f (PX, T, I, PY, PZ, EXC, NC, … where
PY and PZ = prices of goods Y and Z,
which relate to consumption of good X
EXC = consumer expectations about
future prices
NC = number of consumers
(NOTE: Ellipsis is used to indicate many other
variables that influence demand)
2.6
 Demand
Curves Figure 2.1

The demand curve

shows the
relationship between
price of a good and
P1 A quantity demanded,
all else constant
P2 B

Demand
0 Q1 Q2 Quantity
2.7
 More About
Demand Curves
 Demand shifters: variables held
constant when defining a demand
curve but would shift if their values
changed
 Negative (inverse) relationship: where
an increase in one variable causes a
decrease in another
 Change in quantity demanded: results
when consumers react to change in
price of a good
2.8
 Increase in Demand
Figure 2.2

A change in demand
D2
occurs when one or
more of the factors
D1
are held constant in
defining a given
P1 demand curve change

0
Q1 Q2 Quantity
2.9
 Individual Versus
Market Demand Curve

 Horizontal summation of individual

demand curves: for every price, the
quantity that each person
demands at that price determines
market quantity demanded at that
price
 The market demand curve, DM,
considers quantities demand at
other prices
2.10
Individual Versus Market
Demand Figure 2.3
Curve

P1

DB D M = D A + D B
DA
0 Q1 Q2 Q3 Q4
Quantity 2.11
 Linear Demand
Functions and Curves
 Mathematical relationships with
no exponents that take a value
other than 1
 Simplification of analysis
 Best representation of individuals’
behavior
 Not all demand functions are
linear
2.12
 Demand Function as
an Equation (for
copper)
QD = 10 - 50PC + 0.3I + 1.5TC + 0.5E where

QD = quantity demanded of copper

PC = price of copper

I = consumer income index

TC = index showing uses for
copper
2.13
E = expectations index
 Managerial Rule of Thumb:
Demand Considerations

Managers must
• Understand what influences
demand
• Determine which factors they can
influence
• Determine how to handle factors
they cannot influence

2.14
 Suppl
y

The functional relationship between

the price of a good or service
and
the quantity that producers are
willing to supply in a given time,
all else held constant.
2.15
 Non-Price Factors
Influencing Supply
 State of technology
 Input prices
 Prices of goods related in
production
 Future expectations
 Number of producers
 Changes in trade barriers
2.16
 The Supply
Function
QXS = f (PX, TX, PI, PA, PB, EXP, NP, … where

QXS = quantity supplied of good X

PX = price of good X

TX = state of technology

PI = prices of the inputs of production

(continued on next slide)2.17
 The Supply
Function
QXS = f (PX, TX, PI, PA, PB, EXP, NP, … where

PA, PB = price of goods A and B, related

to good X
EXP = producer
expectations about future
prices
NP = number of producers
(NOTE: Ellipsis is used to indicate
many other 2.18

variables that influence supply)

 Supply
Price Curve for a Figure 2.4
Product
B Supply
P2
Relationship
A between price
P1
of a good and
quantity
supplied
0 Q1 Q2 Quantity
2.19
 Supply
Relationships
 Not all supply curves are linear
 Supply curve does not show actual
price of product but the relationship
of alternative prices and quantities
 A positive relationship is shown as
upward line where increase in one
variable causes increase in another
variable

2.20
 Changes (Increase)
in Figure 2.5
Supply
S1 A change in
supply occurs
when one or more
S2 of the factors held
constant in
P1 defining a given
supply curve
change
0
Q1 Q2 Quantity
2.21
 Change in
Quantity Supplied

A price change causes movement from

one point to another
• An increase in price of a substitute
good causes the supply curve to shift
to the left; a decreases shifts it to the
right
• If the price of a complementary good
increases, the supply increases
• An increase in the number of
producers shifts it to the right
2.22
 Managerial Rule of Thumb:
Supply Considerations

Managers must
• Examine technology and costs of
production
• Find ways to increase productivity
while lowering production costs

2.23
 Demand, Supply,
and Equilibrium
 A price for a good or service is
determined when the market
reaches equilibrium
 The quantity demanded of good X
equals the quantity producers
are willing to supply
 An upset in equilibrium pushes
the price back toward equilibrium
2.24
 Market Equilibrium
Figure 2.6

Supply Market
equilibrium
occurs where
E demand
P equals supply
Demand

0 QE Quantity
QE = equilibrium quantity
PE = equilibrium price 2.25
 Lower-Than-
Equilibrium Prices
 Consumers demand more of a
good than producers are willing to
supply at that price
 Supply and demand become
unstable
 An adjustment process begins
which seeks to again bring
equilibrium
© 2005 Prentice Hall, 2.26
Inc.
 Changes in Equilibrium
Prices and Quantities
 Change in demand
 Change in supply
 Changes on both sides of the
market

© 2005 Prentice Hall, 2.27

Inc.
 Summary of Key Terms

 Demand
 Functional relationship
 Normal and inferior goods
 Substitute and complementary goods
 Individual and market demand
functions
 Demand shifters
 Negative (inverse) and positive (direct)
relationships
2.28
 Summary of Key Terms

 Change in quantity demanded

 Linear demand and supply functions
 Supply
 Input prices and prices related in
production
 Supply shifters
 Equilibrium price
 Lower-than-equilibrium price

2.29
Thank You for
Your Attention