Demand and Supply Analysis
Demand and Supply Analysis
SUPPLY
ANALYSIS
1
CIRCULAR FLOW OF ECONOMIC ACTIVITY
2
DEMAND
3
LAW OF DEMAND
4
EXPLANATIONS FOR LAW
OF DEMAND
Degree of scarcity of one good relative to
another helps determine each good’s
relative price
Definition of demand includes the “other
things constant” assumption
Among the “other things” are the prices of other goods
5
SUBSTITUTION EFFECT
7
EXHIBIT 1: DEMAND SCHEDULE
& DEMAND CURVE FOR PIZZA
(a) Demand Schedule
(b) Demand Curve
Price per Quantity Demanded
Pizza per Week (millions)
P18
a) P15 8
a
b) 12 14 P15
c) 9 20
d) 6 26
P9 c
The demand schedule lists possible
prices, along with quantity
demanded at each price. The P6 d
demand curve at the right shows
each price / quantity combination P3 e
listed in the demand schedule as a
point on the demand curve. P0
8 14 20 26 32
Millions of Pizzas per week 8
DEMAND AND QUANTITY
DEMANDED
P15.00 a
Demand for pizza is not a
10
SHIFTS OF THE DEMAND CURVE
11
EXHIBIT 2: INCREASE IN THE
MARKET DEMAND
Suppose income
P15
increases: some
consumers will now b f
be able to buy more Price 12
pizza at each price
market demand 9
increases demand
shifts to the right
6
from D to D'
A decrease in D'
demand will mean 3
demand shifts to the D
left from D' to D. 0
8 14 20 26 32
Millions of pizzas per week
12
CHANGES IN CONSUMER INCOME
15
SUPPLY
16
LAW OF SUPPLY
17
EXHIBIT 3: SUPPLY SCHEDULE AND CURVE
FOR PIZZAS
Supply Schedule
19
INDIVIDUAL SUPPLY AND MARKET
SUPPLY
20
SHIFTS OF THE SUPPLY CURVE
21
EXHIBIT 4:CHANGE IN TECHNOLOGY CAN MEAN AN
INCREASE IN SUPPLY
S
S'
A more efficient P15.00
technology, a high-
g
tech oven, is invented 12.00 h
22
CHANGES IN THE PRICES OF RELEVANT
RESOURCES
23
PRICES OF ALTERNATIVE GOODS
Alternative goods are those that use some of the
same resources employed to produce the good
under consideration
24
CHANGES IN PRODUCER EXPECTATIONS
25
NUMBER OF PRODUCERS
26
DEMAND AND SUPPLY CREATE A MARKET
29
EXHIBIT 5: THE MARKET FOR PIZZAS
S
At initial price P12, Price
producers supply 24 P15.00
million pizzas per week Surplus
(supply curve) while 12.00
consumers demand only
14 million: excess 9.00 c
quantity supplied (or
surplus) of 10 million 6.00
pizzas per week
To eliminate this 3.00
surplus, suppliers put D
downward pressure on 0
prices 14 20 24
As prices fall, quantity Millions of pizzas per week
supplied declines and
quantity demanded
increases: market moves
towards equilibrium at
30
point c
EXHIBIT 5: THE MARKET FOR PIZZAS
S
Initial price is P6
P15.00
per pizza, 26 million
are demanded, but
12.00
producers supply Price
only 16 million: an c
excess quantity 9.00
demanded (or
shortage) of 10 6.00
Shortage
million pizzas per
3.00
week
As prices increase, D
0
producers increase 16 20 26
quantity supplied and Millions of pizzas per week
consumers reduce
their quantity
demanded, moving
towards equilibrium
at point c 31
EQUILIBRIUM
When the quantity consumers are willing and able to pay equals the quantity
producers are willing and able to sell, the market reaches equilibrium
Independent plans of both buyers and sellers exactly match
Market forces exert no pressure to change price or quantity
32
EQUILIBRIUM
33
CHANGES IN EQUILIBRIUM
34
Exhibit 6: Effects of an Increase in Demand
Assume one of the
Price
S
determinants of demand
changes so that demand
increases from D to D'
After the increase, the g
amount demanded at P9 is P12
30 million – which exceeds c
the amount supplied of 20 9
million pizzas: shortage
and upward pressure on
price D'
As price increases,
D
quantity demanded 0
decreases along the new 20 24 30 Millions of pizzas per week
demand curve, D'. The
quantity supplied
increases along the
existing supply curve, S,
until the two quantities 35
are in equilibrium.
SHIFTS OF THE DEMAND CURVE
36
Exhibit 7: Effects of an Increase in Supply
S
Suppose supply shifts from
S to S' increases S'
After supply increases, the
amount supplied at the
initial price of P9 increases
Price
c
from 20 to 30 million pizzas
P9
per week a surplus exists
Surplus puts downward 6
d
pressure on price
quantity demanded
increases along the existing
demand curve until a new
equilibrium is reached.
D
20 26 30
Millions of Pizzas per Week 37
SHIFTS OF THE SUPPLY
CURVE
An increase in supply: a rightward shift of the
supply curve reduces equilibrium price but
increases equilibrium quantity
A decrease in supply: a leftward shift of the
supply curve increases equilibrium price but
decreases equilibrium quantity
Given a downward-sloping demand curve, a
rightward shift of the supply curve decreases
price, but increases quantity
A leftward shift increases price, but decreases quantity
38
SIMULTANEOUS SHIFTS IN DEMAND AND
SUPPLY
39
Exhibit 8: Indeterminate Effect of an
Increase in Both Supply and Demand
a) Shift in demand dominates
Price
shifts by more than
demand: price
decreases from p to p''
p
and quantity increases
p"
Conversely, if both
supply and demand
decrease with the shift
in supply dominating, D"
price will increase and D
quantity will decrease. 0
Q Q" Units per period
41
Exhibit 9: Effects of Changes in Both
Supply and Demand
Change in Demand
Demand increases Demand decreases
43
Exhibit 11a: Effects of a Price Floor
Monthly rent
Suppose the market-clearing
rent is P1,000 per month with
50,000 apartments being rented
Now suppose the government P600
decides to set a maximum rent
Shortage
of P600
At this ceiling price, 60,000
rental units are demanded
However, only 40,000 are
supplied, a shortage
D
0
40 50 60
Thousands of rental units per month
45
The algebraic approach to equilibrium.
To solve simultaneously, one first rewrites either the demand or the supply
equation as a function of price. In the example above, the supply curve may be
rewritten as follows:
Substituting this expression into the demand equation, one can solve for the
equilibrium price: