given by my eco teacher that can help us a lot !!!! thank you shaju sir

1. LECTURE 3
DEMAND, SUPPLY AND
EQUILIBRUM PRICE
LEARN IT BECAUSE YOUR LIVES
REVOLES AROUND THIS NASTY
STUFFFFF !!!!!!

2. ©Natalya Brown 2010
ECON 1007 Introduction to Economics II
Demand, Supply and Market
Equilibrium
IGCSE : Economics (0455)

3. ©Natalya Brown 2008
LECTURE 3
Demand,
Supply and
Market
Equilibrium
Overview
• Demand & Supply
• Shifts in a Demand/Supply Curve and
Movements Along a Demand/Supply Curve.
• Market Equilibrium
• The Four “laws” of Demand and Supply
• Effect of a Sales Tax
• Elasticities of Demand and Supply

4. ©Natalya Brown 2008
LECTURE 3
Demand,
Supply and
Market
Equilibrium
Quantity Demanded
• Quantity demanded is the total amount of
any good or service that consumers wish
to purchase in some time period at a
particular price.
• The total amount consumers wish to
purchase may differ from what is actually
purchased.
• Quantity demanded is an example of a
flow variable.

5. ©Natalya Brown 2008
LECTURE 3
Demand,
Supply and
Market
Equilibrium
Demand
• Demand is the quantity of a good or service
that buyers wish to purchase at each given
price.
• Note the distinction between demand and
quantity demanded. Demand describes the
behaviour of buyers at every price, where as
quantity demanded describes behaviour at a
particular price.

6. ©Natalya Brown 2008
LECTURE 3
Demand,
Supply and
Market
Equilibrium
Quantity Demanded and Price
• The Law of Demand: the basic hypothesis is
that — other things being equal — the price of a
product and the quantity demanded are
negatively related. That is, the lower the price,
the higher the quantity demanded and vice
versa.
• This relationship between price and quantity
demanded is true for most goods in the
economy.

7. LECTURE 3
Demand Curve and Demand
Schedule
Price ($) Quantity
Demanded
800 200
1200 160
1600 120
1800 100
2000 80
2200 60
2400 40
2800 0
Monthly Demand of Sony VAIO Laptops in Noida, UP, India.
Demand Schedule
Price
Quantity Demanded
2800
2400
2000
1600
1200
800
400
40 60 80 100 120 140 160 180 200
Demand
Curve

8. LECTURE 3
Graphing Linear Demand Curves
Notice that price is on the y-axis and quantity on the x-axis.
Quantity
Price
QD
= 100 - 2p
10 20 30 40 50 60 70 80 90 100 110
50
40
30
20
10
0
Sometimes it is easier
to use the inverse
demand curve – price
as a function of
quantity demanded.
2p = 100 – QD
p = 50 – (1/2)QD
p= 50, QD
= 0
p= 0, QD
=100
The same method can be used for linear supply curves.

9. ©Natalya Brown 2008
LECTURE 3
Demand,
Supply and
Market
Equilibrium
Changes in Demand
• Demand curves are drawn assuming that all factors
affecting demand for a commodity other than the
price of the commodity are held constant. If these
other factors change, then we get a shift of the
demand curve, called “a change in demand”.
• Other factors:
– Consumer incomes and distribution of income
– Tastes and Networks
– The prices of related goods
– Expectations about the future
– Population and Demographic changes.

10. LECTURE 3
A rightward shift in the
demand curve from D0 to
D1 indicates an increase
in demand.
0 Quantity Demanded
Price
D2 D0
D1
A leftward shift from D0 to
D2 indicates a decrease
in demand.

11. LECTURE 3
A change in demand is a change in quantity demanded at
every price. That is, a change in demand is a shift of the
entire demand curve.
A change in quantity
demanded refers to a
movement from one
point on a demand
curve to another
point, either on the
same demand curve
or on a new one.
p3
p2
p0
q3 q0 q2 q1
D1
D0
Quantity
Price
Change in quantity
demanded
Change in
demand

12. ©Natalya Brown 2008
LECTURE 3
Demand,
Supply and
Market
Equilibrium
Quantity Supplied
• Quantity supplied is the total amount of
any good or service that producers wish to
sell in some time period at a particular
price.
• The total amount producers wish to sell
may differ from what is actually sold.
• Quantity supplied is also an example of a
flow variable.

13. ©Natalya Brown 2008
LECTURE 3
Demand,
Supply and
Market
Equilibrium
Supply
• Supply is the quantity of a good or service
that producers wish to sell at each given price.
• The distinction between supply and quantity
supplied is the same as the distinction
between demand and quantity demanded.
• The Law of Supply: the basic hypothesis is
that — other things being equal — the price of a
product and the quantity supplied are positively
related. That is, the higher the price, the higher
the quantity supplied.

14. LECTURE 3
Supply Curve and Supply Schedule
Price ($) Quantity
Supplied
800 0
1200 0
1600 40
1800 60
2000 80
2200 100
2400 120
2800 160
Monthly Supply of VAIO Laptops in Noida, UP, India by SONY
Supply Schedule
Price
Quantity Supplied
2800
2400
2000
1600
1200
800
400
40 60 80 100 120 140 160 180 200
Supply
Curve

15. ©Natalya Brown 2008
LECTURE 3
Demand,
Supply and
Market
Equilibrium
Changes in Supply
• Supply curves are drawn assuming that all factors
affecting the supply of a commodity other than the
price of the commodity are held constant. If these
other factors change, then we get a shift of the
supply curve, called “a change in supply”.
• Other factors:
– Technology
– Input costs
– Competing Products
– Number of Suppliers
– Expectations about the future

16. LECTURE 3
A change in supply is a change in quantity supplied at
every price. That is, a change in supply is a shift of the
entire supply curve.
A change in quantity supplied refers to a movement from
one point on a supply curve to another point, either on the
same supply curve or on a new one.

17. ©Natalya Brown 2008
LECTURE 3
Demand,
Supply and
Market
Equilibrium
Market Equilibrium
• market is a set of arrangements where by buyers and
sellers exchange goods and services at various prices.
• The equilibrium price clears the market, so it is
sometimes called the market-clearing price because at
this price what the producer wants to sell is exactly
matched with what consumer wants to buy. It is the
price at which the quantity demanded equals the
quantity supplied.
• Excess Supply: this exists when the quantity supplied
exceeds the quantity demanded at the current price.
• Excess Demand: this exists when the quantity demanded
exceeds the quantity supplied at the current price.

18. LECTURE 3
Market Equilibrium
Price
($)
Qty.
Demanded
Qty.
Supplied
800 200 0
1200 160 0
1600 120 40
1800 100 60
2000 80 80
2200 60 100
2400 40 120
2800 0 160
The Market for VAIO Laptops in Noida, UP, India.
Price
Quantity
2800
2400
2000
1600
1200
800
400
40 60 80 100 120 140 160 180 200
Demand
Curve
Supply
Curve
Excess
Supply
Excess Demand

19. LECTURE 3
Changes in Market Prices
There are four “laws” of supply and demand.
1. An increase in demand
causes an increase in both
the equilibrium price and
equilibrium quantity.
S
Price
D1D0
•
•
q0 q1
p1
p0
Quantity
2. A decrease in demand
causes a decrease in both
equilibrium price and
equilibrium quantity.
E1
E0

20. LECTURE 3
3. An increase in supply
causes a decrease in the
equilibrium price and an
increase in the equilibrium
quantity.
4. A decrease in supply
causes an increase in the
equilibrium price and a
decrease in the
equilibrium quantity.
S1
Price
S0
D
•
q1q0
p0
p1
Quantity
•
E1
E0

21. LECTURE 3
Exercise 1
• Suppose that the demand function for
some product is given by:
And that the supply function for some
product is given by:
QD
= 100 - 4p
QS
= p

22. LECTURE 3
Equilibrium: QD
= QS
Price
Quantity
10
20
30
40
10 20 30 40 50 60 70 80 100
QS
= p
QD
= 100 - 4p
Graphically:

23. LECTURE 3
Numerically,
QD
= QS
implies that
100 – 4p = p
100 = 5p
p* = 20
Q* = p* = 20
or Q* = 100 – 4p* = 20

24. ©Natalya Brown 2008
LECTURE 3
Demand,
Supply and
Market
Equilibrium
Effect of a Sales Tax
• After the imposition of a sales tax, the price paid by consumers is
higher, whereas the price received by producers is lower. The new
equilibrium quantity is less than the quantity before the tax was
imposed.
• Let pc denote the price paid by consumers, and ps denote the price
received by suppliers.
• The difference between the consumer and seller prices is equal to
the tax (i.e. tax = pc – ps).
• The effect of sales tax on equilibrium price and quantity is the
same regardless of whether it is levied on producers or
consumers.

25. LECTURE 3
Quantity
S0
D0
Dtax
ps
p
pc
tax
Quantity
S0
D0
ps
p
pc
Stax
tax
In this case, the tax is
levied on consumers and
the demand decreases.
In this case, the tax is
levied on producers
and the supply
decreases.
tax = pc – ps
q1 q0 q1 q0

26. LECTURE 3
Price Elasticity of Demand
• Price elasticity of demand measures the
degree of responsiveness of quantity
demanded to a good by the consumer in
response to a change in the price of that good.
It is symbolized by the Greek letter eta: η..
η percentage change in quantity demanded
percentage change in price
=

27. LECTURE 3
• Since demand curves have negative slopes, price and
quantity demanded move in opposite directions along
the demand curve.
• Because the changes in price and quantity have
opposite signs, demand elasticity is negative.
• However, economists usually ignore the negative sign
and speak of the measure as a positive number — that
is, they emphasize the absolute value.

28. LECTURE 3
Determinants of Price Elasticity of Demand
• Availability of close substitutes: goods with close substitutes tend
to have more elastic demand because it is easier for consumers to
switch from that good to others.
• Necessities vs. Luxuries: necessities tend to have inelastic demands
whereas luxuries have elastic demands.
• Definition of the Market: narrowly-defined markets tend to have
more elastic demand than broadly-defined markets because it is
easier to find close substitutes for narrowly-defined goods.
• Time Horizon: goods tend to have more elastic demand over longer
time horizons.

29. LECTURE 3
Exercise 2
• If the price of a commodity increases by 3% and quantity
demanded decreases by 6%, then the price elasticity of
demand is 2.
• If the price elasticity of demand for a commodity is 0.5, a 10%
decrease in price leads to a 5% increase in quantity
demanded.
η =
% change in QD
% change in P
= 6% = 2
3%
η = 0.5 =
% change in QD
% change in P
= 5% = 0.5
10%

30. LECTURE 3
Elastic: If the percentage change in quantity demanded is
greater than the percentage change in price, then
demand is elastic and η > 1.
Unit
Elastic:
If the percentage change in quantity demanded is
equal to the percentage change in price, then
demand is unit elastic and η = 1.
Inelastic: If the percentage change in quantity demanded is
less than the percentage change in price, then
demand is inelastic and 0 < η < 1.
η = ∞η = 0 η = 1

31. LECTURE 3
Price Elasticity of Supply
• Price elasticity of supply measures the degree
of responsiveness of the quantity supplied to
a change in the product’s own price. It is
denoted by ηs, and is defined as:
ηS =
percentage change in quantity supplied
percentage change in price

32. LECTURE 3
Determinants of Price Elasticity of Supply
• The price elasticity of supply will depend on the flexibility
of sellers to change the amount of the good they
produce.
• Technical ease of substitution in production: if it is easy
for firms to switch inputs from the production of one
good to another, then supply will be more elastic.
• Time horizon: supply is usually more elastic in the long
run than in the short run
• The nature of production costs: if production costs rise
sharply as firms’ output increases, then supply will tend
to be inelastic.

33. LECTURE 3
Income Elasticity of Demand
• The income elasticity of demand measures the
degree of responsiveness of quantity
demanded to a change in income.
• Normal goods: Higher the income higher will
be the quantity demanded.
• Inferior goods: Higher income lowers the
quantity demanded.
ηY = percentage change in quantity demanded
percentage change in income
ηY > 0
ηY < 0
Sign
Matters

34. LECTURE 3
The more necessary an item is in the consumption
pattern of consumers, the lower its income elasticity.
Income elasticities for any one product also vary with the level
of a consumer’s income.
The distinction between luxuries and necessities also helps to
explain differences in income elasticities between countries.
Determinants of Income
Elasticity of Demand

35. LECTURE 3
Cross-Price Elasticity of Demand
• The cross-price elasticity of demand measures how the
quantity demanded of one good changes as the price
of another good changes.
ηXY = percentage change in quantity demanded of good X
percentage change in price of good Y
Substitutes are goods that are typically used in place of one
another (e.g. margarine and butter). Complements are goods
that are typically used together (such as computers and
software).
If ηXY > 0, then X and Y are substitutes. (+ value)
If ηXY < 0, then X and Y are complements.(- value)
Sign
Matters

36. LECTURE 3
Elasticity of formula in alternative forms
A. Elasticity of demand
Δ Q P where ηd = demand elasticity
ηd = ------ . --- Δ Q = change in quantity
demanded
Δ P Q Δ P = change in price
P = original price
Q= original quantity demanded
B. Elasticity of Supply
Δ Q P where ηs = supply elasticity
ηs = ------ . --- Δ Q = change in quantity
demanded
Δ P Q Δ P = change in price
P = original price
Q= original quantity demanded

37. LECTURE 3
INCOME ELASTICITY
Δ Q Y where ηY = income elasticity
ηY = ------ . --- Δ Q = change in Quantity
Δ Y Q Δ Y= change in income
Y = original income
Q= original quantity
CROSS PRICE ELASTICITY
ΔQx Py where ηC = cross elasticity
ηC = -------- . ---- Δ Qx = change in Quantity of
X
ΔPy Qx Δ Py= change in price of
Y
Py = original price of Y
Qx= original quantity of X

38. LECTURE 3
Exercises:
Price Quantity
demanded/month Revenue
$1.60 4000
$1.20 8000
$0.80 12000
1.Calculate total revenue at each price.
2.If a product has a price elasticity of 1.3, what would happen to total revenue if the price
decreased?
3.Price Quantity Revenue Find the dollar value of total revenue at
$ 6 0 each of the six prices. At what price
will
$ 5 1 total revenue be the greatest? How
many
$ 4 2 will sell at that price?
$ 3 3
$ 2 4
$ 1 5

39. LECTURE 3
5. When price of a product rises from £60 to £90, demand contracts from 800
to 600. Calculate Ed, what type of Ed is this?
6. A consumer buys 80 units of a good at a price of $4 per unit. When the
price falls he buys 100 units. If price elasticity of demand is -1, find out the
new price.
Elasticity of demand and expenditure on the
product
1. Price of a product falls, but expenditure on the product by the
consumer falls! What idea do you get about the elasticity of demand of that
product?
2. Price of a product falls, but expenditure on the product rises! What
sort of elasticity does the product have?
3. Price of the product rises, expenditure rises too! ηd=………….
4. Price of the product rises, expenditure fall, ηd=………….

40. LECTURE 3