Demand and Supply cont. 2.1
Lecturer: Assoc Prof Ergin Akalpler

Definition:The Market Supply function tells
us how the quantity of a good supplied by
the sum of all producers in the market
depends on various factors
Qs = f (p,po,w,…)
2

Definition:The Supply Curve plots the
aggregate quantity of a good that will be
offered for sale at different prices
Qs = Q (p)
3

4
Example: Supply Curve for Wheat in Canada
0 Quantity (billions of
bushels per year)
Price (dollars per bushel)
Supply curve for wheat
in Canada
0.15

Definition:The Law of Supply Curve states
that the quantity of a good offered
increases when the price of this good
increases.
 Empirical regularity
5

The supply curve shifts when factors other than own
price change…
 If the change increases the willingness of producers to
offer the good at the same price, the supply curve
shifts right
 If the change decreases the willingness of producers
to offer the good at the same price, the supply curve
shifts left
6

A move along the supply curve for a good can only
be triggered by a change in the price of that good.
A shift in the supply curve for a good can be
triggered by a change in any other factor
A change that affects the producers’ willingness to
offer the good.
7

8
Example: Canadian Wheat
• QS = p + .05r
• QS = quantity of wheat (billions of bushels)
• p = price of wheat (dollars per bushel)
• r = average rainfall in western Canada (inches)
• Suppose price is $2
• Quantity supplied no rainfall = $2
• Quantity supplied with rainfall of 3” = $2.15
• As rainfall increases, supply curve shifts right
• (e.g., r = 4 => Q = p + 0.2)

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Price ($)
Quantity,
Billion bushels
0

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Price ($)
Quantity,
Billion bushels
0
r = 0
Supply with
no rain

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Price ($)
Quantity,
Billion bushels
0
r = 0
r = 3
.15
Supply with
no rain
Supply with 3” rain
Price ($)
Quantity,
Billion bushels
0
r = 0
r = 3
.15
Supply with
no rain
Supply with 3” rain

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Law of Demand
Definition: The Law of demand Curve states that
the quantity of a good offered increases when the
price of this good decreases

13
Law of Demand
Shift can be caused on the figure:
Increases in demand are shown by a shift to
the right in the demand curve. This could be
caused by a number of factors, including a rise in
income (right figure ),
a rise in the price of a substitute or a fall in the
price of a complement (left figure).

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Definition:A market equilibrium is a price
such that, at this price, the quantities
demanded and supplied are the same.
Demand and supply curves intersect at
equilibrium.
15

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Example: Market for Cranberries
• Suppose
• QD = 500 – 4P
• QS = –100 + 2P
• Where
• P = price of cranberries (euros per barrel)
• Q = demand or supply (in millions of barrels/year)

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Example: Market for Cranberries
• The equilibrium price is calculated by equating
demand to supply:
QD = QS or
500 – 4P = –100 + 2P
• Solving for P: P* = 100
• To get equilibrium quantity, plug equilibrium price
into either demand or supply
• Into demand: Q* = 500 – 4(100) = 100
• Into supply: Q* = –100 + 2(100) = 100

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Example: The Market For Cranberries
Price
Quantity
Market Supply: QS = -100 + 2P
50

19
Price
Quantity
Price
Quantity
Market Demand: Qd = 50 – 4P
125
Example: The Market For Cranberries
Market Supply: QS = -100 + 2P
50

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Price
Quantity
Q* = 100
P*=100
125
•
Example: The Market For Cranberries
Market Supply: QS = -100 + 2P
50
Market Demand: Qd = 50 – 4P

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Definition: If at a given price, sellers cannot sell as
much as they would like, there is excess supply.
Definition: If at a given price, buyers cannot
purchase as much as they would like, there is
excess demand.

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Price
Quantity
Market Demand
Market Supply
50
125
Example: Excess Supply in the Market For Cranberries

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Price
Quantity
Market Demand
Market Supply
Q*
50
125
QS
Qd
Example: Excess Supply in the Market For Cranberries

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Price
Quantity
Market Demand
Market Supply
Q*
125
Excess Supply
•
•
QS
Qd
50
Example: Excess Supply in the Market For Cranberries

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 If there is no excess supply or excess demand,
there is no pressure for prices to change and we
are in equilibrium.
 When a change in an exogenous variable causes
the demand curve or the supply curve to shift,
the equilibrium shifts as well

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Definition: The own price elasticity of demand is
the percentage change in quantity demanded
brought about by a one-percent change in the
price of the good
Q,P= (% Q) = (Q/Q) = dQ . Pt-1
(% P) (P/P) dP Qt-1

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 Elasticity is not the slope
 Slope is the ratio of absolute changes in
quantity and price. (= dQ/dP).
 Elasticity is the ratio of relative (or
percentage) changes in quantity and price.

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1. Q,P = 0  Perfectly inelastic demand
 Quantity demanded is completely insensitive
to changes in price
2. Q,P  (-1, 0)  Inelastic demand
 Quantity demanded is relatively insensitive
to changes in price
3. Q,P = -1  Unitary elastic demand
 Percentage increase in quantity demanded
equals percentage decrease in price

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4. Q,P  (-, -1)  Elastic demand
 Quantity demanded is relatively sensitive to
changes in price
5. Q,P = -   Perfectly elastic demand
 Any increase in price results in quantity
demanded decreasing to zero
 Any increase in price results in quantity
demanded increasing to infinity.

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Example: Linear Demand Curve
• Suppose QD = a – bP
• a, b : positive constants
• P: price
• Notes:
• -b is the slope
• a/b is the choke price

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Example: Linear Demand Curve
• The elasticity is
Q,P= dQ . P = – b . P
dP Q Q
• So for linear demand curves
• Slope is constant.
• Elasticity falls from 0 to - along the demand curve.
• E.g., suppose Q = 400 – 10P
• At P = 30, Q = 100, so
Q,P= dQ . P = – b . P = –10 . 30 = –3 (elastic)
dP Q Q 100

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0
P
Q
Example: Elasticity with a Linear Demand Curve

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0
P
Q
a/2 a
a/2b
a/b
•
Example: Elasticity with a Linear Demand Curve

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0
P
Q
a/2 a
a/2b
a/b
• Q,P = -1
Inelastic region
Elastic region
Q,P = -
Q,P = 0
Example: Elasticity with a Linear Demand Curve

FOR NON LINEAR
CURVE
FLATTER PART OF
CURVE BECOMES
MORE ELASTIC
AND VERTICAL
PART OF THE
CURVE IS
INELASTIC
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Example: Constant Elasticity Demand Curve
• Suppose QD = Apε
• A: constant
• P: price
• ε : elasticity of demand
• The elasticity is
Q,P= dQ . P = εApε-1 . P = ε
dP Q Q
• So for Constant Elasticity demand curves
• Elasticity is constant.
• Slope falls from 0 to - along the demand curve.

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Quantity
Price
0 Q
P •
Observed price and quantity
Example: A Constant Elasticity
versus a Linear Demand Curve

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Quantity
Price
0 Q
P •
Observed price and quantity
Linear demand curve
Example: A Constant Elasticity
versus a Linear Demand Curve

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Quantity
Price
0 Q
P •
Observed price and quantity
Constant elasticity demand curve
Example: A Constant Elasticity
versus a Linear Demand Curve

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Quantity
Price
0 Q
P •
Observed price and quantity
Constant elasticity demand curve
Linear demand curve
Example: A Constant Elasticity
versus a Linear Demand Curve

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Quantity
Price
0
Example: A Constant Elasticity
versus a Linear Demand Curve
•

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 Factors that determine price elasticity of
demand
 Demand tends to be more price-elastic when
there are good substitutes for the good
 Demand tends to be more price-elastic when
consumer expenditure in that good is large
 Demand tends to be less price-elastic when
consumers consider the good as a necessity.

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Price Elasticity of Demand
for Selected Grocery
Products, Chicago, 1990s
Category Estimated Q,P
Soft Drinks -3.18
Canned Seafood -1.79
Canned Soup -1.62
Cookies -1.6
Breakfast Cereal -0.2
Toilet Paper -2.42
Laundry
Detergent
-1.58
Toothpaste -0.45
Snack Crackers -0.86
Frozen Entrees -0.77
Paper Towels -0.05
Dish Detergent -0.74
Fabric Softener -0.73

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Model Price Estimated
Q,P
Mazda 323 $5,039 -6.358
Nissan
Sentra
$5,661 -6.528
Ford
Escort
$5,663 -6.031
Lexus
LS400
$27,544 -3.085
BMW 735i $37,490 -3.515
Source: Berry, Levinsohn and
Pakes, "Automobile Price in
Market Equilibrium,"
Econometrica 63 (July 1995),
841-890.
Example: Price Elasticities of Demand for Automobile Makes, 1990.