SUPPLY and DEMAND

The basic model of market economics

Demand Schedule

Price Quantity

$0.00 12 0.50 10 1.00 8 1.50 6 2.00 4 2.50 2 3.00 0

Demand Curve

$3.002.50

2.001.501.00

0.50

21 3 4 5 6 7 8 9 10

12

11

$/unit

Units/week

单位 / 周0

Price Quantity

$0.00 12 0.50 10 1.00 8 1.50 6 2.00 4 2.50 2 3.00 0

Determinants of Demand Market price

Consumer income

Prices of related goods

Tastes

Expectations

Movements along the demand curve

0

D1

$/unit

units/week

A

C

8

1.00

$2.00

4

Shifts in the demand curve

0

D1

$/unit

units/weekD3

D2

Increase in demand

Decrease in demand

Q2Q1Q3

P

Tilts in the demand curve (change in slope)

0

D1

$/unit

Units /week

D2

Pa

Pb

Qa Qb Qa Qb

The flatter the demand curve, the greater

the change in quantity for a change in price

Supply Schedule

Price Quantity

$0.00 0 0.50 0 1.00 1 1.50 2 2.00 3 2.50 4 3.00 5

Supply Curve

$3.002.502.00

1.501.00

0.50

21 3 4 5 6 7 8 9 10

12

11

$/unit

units/wk

0

Price Quantity

$0.00 0 0.50 0 1.00 1 1.50 2 2.00 3 2.50 4 3.00 5

Determinants of Supply

Market price

Input prices

Technology

Expectations

Number of producers

Movements along the supply curve

1 5

$/unit

(units/wk)0

S

1.00A

C$3.00

Shifts in the Supply Curve

$/unit

units/wk0

SS2

Decrease in Supply

S1

Increase in Supply

Tilts in the Supply Curve

$/unit

units/wk

0

S2

S1

Supply and Demand Together

Price Quantity

$0.00 0 0.50 0 1.00 1 1.50 4 2.00 7 2.50 10 3.00 13

Price Quantity

$0.00 19 0.50 16 1.00 13 1.50 10 2.00 7 2.50 4 3.00 1

Demand Schedule (all buyers)

Supply Schedule (all sellers)

At $2.00, the quantity demanded is equal to the quantity supplied!

Supply

Demand

$/unit

units/wk

Market Equilibrium

21 3 4 5 6 7 8 9 10

12

11

0

$3.002.502.00

1.501.00

0.50

Equilibrium

$/unit

(units/wk)21 3 4 5 6 7 8 9 1

012110

$3.002.50

P*= 2.00

1.501.00

0.50

Supply

Demand

Surplus

Market Not in Equilibrium:P > P* Surplus (Excess Supply)

Equilibrium

Qd Qs

$/unit

(units/wk)21 3 4 5 6 7 8 9 1

012110

$3.002.50

P*= 2.00

1.501.00

0.50

Supply

DemandShortage

Market Not in Equilibrium:P < P* Shortage (Excess Demand)

Equilibrium

QdQs