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Demand, Supply and Price (Part 1) Demand, Supply and Price (Part 1)

Quantity

Price

0

Market

D S

P*

Q*I. Demand CurveII. Supply CurveIII. Equilibrium Price & Quantity

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I. Demand

Q

P

0

D6

5

4

3

3 4 5 6

Demand curve shows the quantities demanded at all prices.

P ($) Qty demanded

6 3

5 4

4 5

3 6DemandDemand

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The Law of Demand states that when the price of a good increases, the quantity demanded for the good will decrease, vice versa and ceteris paribus.

P Qd

P Qd

Q

P

0

D

Demand curve will be downward sloping.

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It is wrong to say that:

P D or P D

It should be:

P Qd or P Qd

D D

Movement along the same demand curve.

D represents the entire demand curve. Its shifts are not caused by any change in the price of the good.

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Demand Quantity demanded

The entire plan of purchase: quantities demanded at all prices.

It is represented by the entire demand curve.

The quantity planned to buy at a particular price.

It is represented by a point on the X-axis.

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Quantity Demanded Quantity purchased

The quantity planned to buy.

The quantity has been bought actually.

Quantity boughtQuantity transacted

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IV. Market demand

Q

P

0

D

Da Db Dc

6 8 10 24

Market demand curve is the horizontal horizontal summationsummation of all individual demand curves.

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II. Supply

Q

P

0

6

5

4

3

2 3 4 5

Supply curve shows the quantities supplied at all prices.

P ($) Qty supplied

6 5

5 4

4 3

3 2SupplySupply

S

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The Law of Supply states that when the price of a good increases, the quantity supplied of the good will increase, vice versa and ceteris paribus.

P Qs

P Qs

Supply curve will be upward sloping.

Q

P

0

S

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It is wrong to say that:

P S or P S

It should be:

P Qs or P Qs

S S

Supply Quantity supplied

Quantity supplied Quantity soldQuantity transacted

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IV. Market supply

Sf Sg Sh

5 9 13 27

Q

P

0

S

Market supply curve is the horizontal horizontal summationsummation of all individual supply curves.

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III. Equilibrium price and quantity

Qty suppliedP ($) Qty demanded

6 3 55 4 44 5 33 6 2

6

5

4

3

3 4 5 6 Q

P

0 2

D S

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6

5

4

3

3 4 5 6 Q

P

0 2

D S

When P = $6,

Qd = 3 units and Qs = 5 units.

There will be an excess supplyexcess supply of 2 units (= 5 - 3).

The price will decrease until no excess supply at all.

P=

QsQd

Excess supplyExcess supply

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6

5

4

3

3 4 5 6 Q

P

0 2

D S

When P = $3,

Qd = 6 units and Qs = 2 units.

There will be an excess demandexcess demand of 4 units (= 6 - 2).

The price will increase until no excess demand at all.

P=

Qs Qd

Excess demandExcess demand

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6

5

4

3

3 4 5 6 Q

P

0 2

D S

When P = $5,

Qd = 4 units and Qs = 4 units.

EquilibriumEquilibrium will appear, where $5 and 4 units are equilibrium price and quantity respectively.

P=

Qs Qd

EquilibriumEquilibrium

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Definitions:

Excess supplyExcess supply or surplus means that the quantity supplied is greater than the quantity demanded at a price which is above the equilibrium price.

not S > D

the condition

Excess demandExcess demand or shortage means that the quantity demanded is greater than the quantity supplied at a price which is below the equilibrium price.

not D > S

the condition

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Definitions:

Equilibrium Equilibrium appears when the quantity demanded is equal to the quantity supplied; there will be no tendency for the price to change.

not D = S

no internal force to change the price

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Demand, Supply and Price Demand, Supply and Price

(Part 1) (Part 1)

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