CHAPTER #3
DEMAND, SUPPLY, AND
MARKET EQULIBRIUM
MARKETS
Market bring together buyer (“demanders”) and
sellers (“suppliers”) and they exist in many
forms.
Market is a place where goods and services are
exchanged.
Market consist of buyer and seller with facilities
to communicate each other for transaction of
goods and services.
Some markets are local; others are national or
international. Some are highly personal, involving
face-to-face contact between demander and
supplier; others are faceless, with buyer and
seller never seeing or knowing each other.
INPUT AND OUTPUT MARKET
There are two types of
market :
input and output market
Output markets are the
markets in which goods
and services are
exchanged.
Input markets are the
markets in which
resources: land, labor and
capital used to produce
products are exchanged.
DEMAND
Demand is a schedule or a curve that shows the various
amounts of a product that consumers are willing and able
to purchase at each of a series of possible prices during a
specified period of time.
Demand shows the quantities of a product that will be
purchased at various possible prices, other things equal.
EXAMPLE:
An individual buyer’s demand for corn. Because price and
quantity demanded are inversely related, an individual’s
demand schedule graphs as a down sloping curve such as
D. Other things equal, consumers will buy more of a
product as its price declines and less of the product as its
price rises. (Here and in later figures, P stands for price
and Q stands for quantity demanded or supplied.)
DEMAND SCHDULE AND CURVE
EXPLINATION OF DEMAND
CURVE
The table reveals the relationship between the
various prices of corn and the quantity of corn a
particular consumer would be willing and able to
purchase at each of these prices. We say “willing
and able” because willingness alone is not
effective in the market. You may be willing to buy
a plasma television set, but if that willingness is
not backed by the necessary dollars, it will not be
effective and, therefore, will not be reflected in
the market.
LAW OF DEMAND
The law of demand states that, there is a negative
or inverse relationship between price and the
quantity of a good demanded and its price.
DEMAND CURVE
• A graph that shows the relationship
between the price of a good or
service and the quantity demanded
within a specified time frame.
MARKET DEMAND
Market demand refers to the total quantity of a
product or service that consumers are willing and
able to purchase at a given price within a specific
market.
EXAMPLE:
Market demand for corn, three buyers. The market
demand curve D is the horizontal summation of
the individual demand curves (D1, D2, and D3) of
all the consumers in the market. At the price of
$3, for example, the three individual curves yield
a total quantity demanded of 100 bushels.
EXAMPLE,OF THREE
INDIVIDUAL CURVES
CHANGES IN DEMAND
A change in demand describes a shift in consumer desire to
purchase a particular good or service, irrespective of a variation
in its price.
A change in the demand schedule or, graphically, a shift in the
demand curve is called a change in demand.
EXAMPLE:
Changes in the demand for corn. A change in one or more of the
determinants of demand causes a change in demand. An
increase in demand is shown as a shift of the demand curve to
the right, as from D1 to D2. A decrease in demand is shown as a
shift of the demand curve to the left, as from D1 to D3. These
changes in demand are to be distinguished from a change in
quantity demanded, which is caused by a change in the price of
the product, as shown by a movement from, say, point a to
point b on fixed demand curve D1.
EXAMPLE
PRICE OF RELATED GOODS
A change in the price of a related good may either
increase or decrease the demand for a product,
depending on whether the related good is a substitute
or a complement:
A substitute good is one that can be used in place of
another good.
A complementary good is one that is used together
with another good.
A complementary goods (or, simply, complements) are
used together, they are typically demanded jointly.
The vast majority of goods are not related to one
another and are called independent goods.
CHANGES IN QUANTITY
DEMANDED
A change in demand must not be confused with a change
in quantity demanded. A change in demand is a shift of
the demand curve to the right (an increase in demand) or
to the left (a decrease in demand).
It occurs because the consumer’s state of mind about
purchasing the product has been altered in response to a
change in one or more of the determinants of demand.
Recall that “demand” is a schedule or a curve; therefore, a
“change in demand” means a change in the schedule and
a shift of the curve.
A change in quantity demanded is a movement from one
point to another point from one price-quantity
combination to another on a fixed demand schedule or
demand curve
SUPPLY AND LAW OF SUPPLY
Supply is a schedule or curve showing the various
amounts of a product that producers are willing
and able to make available for sale at each of a
series of possible prices during a specific period.
As price rises, the quantity supplied rises; as
price falls, the quantity supplied falls. This
relationship is called the law of supply. A supply
schedule tells us that, other things equal, firms
will produce and offer for sale more of their
product at a high price than at a low price.
EXAMPLE
An individual producer’s supply of corn. Because
price and quantity supplied are directly related,
the supply curve for an individual producer graphs
as an up sloping curve. Other things equal,
producers will offer more of a product for sale as
its price rises and less of the product for sale as
its price falls.
MARKET SUPPLY
Market supply is derived from individual supply in
exactly the same way that market demand is
derived from individual demand. We sum the
quantities supplied by each producer at each
price. That is, we obtain the market supply curve
by “horizontally adding” the supply curves of the
individual producers.
DETERMINANTS OF SUPPLY
The basic determinants of
supply are:
resource prices,
technology,
taxes and subsidies,
prices of other goods,
producer expectations, and
the number of sellers in the
market.
CHANGES IN SUPPLY
Let’s consider how changes in each of the
determinants affect supply.
Resource Prices
Technology
Taxes and Subsidies
Producer Expectations
Number of Sellers
EXAMPLE
Changes in the supply of corn. A change in one or
more of the determinants of supply causes a
change in supply. An increase in supply is shown
as a rightward shift of the supply curve, as from
S1 to S2. A decrease in supply is depicted as a
leftward shift of the curve, as from S1 to S3. In
contrast, a change in the quantity supplied is
caused by a change in the product’s price and is
shown by a movement from one point to another,
as from b to a on fixed supply curve S1.
GRAPH
CHANGES IN QUANTITY
SUPPLIED
The distinction between a change in supply and a
change in quantity supplied parallels the
distinction between a change in demand and a
change in quantity demanded.
Because supply is a schedule or curve, a change
in supply means a change in the schedule and a
shift of the curve.
An increase in supply shifts the curve to the right;
a decrease in supply shifts it to the left.
The cause of a change in supply is a change in
one or more of the determinants of supply
MARKET EQUILIBRIUM
Market equilibrium is defined as the price and
quantity point at which market supply and market
demand for an item are equal.
EQUILIBRIUM PRICE AND QUANTITY
The equilibrium price (or market clearing price) is
the price where the intentions of buyers and
sellers match. It is the price where quantity
demanded equals quantity supplied.
