1. Tanvir Hossain
B.Com Hon’s, MBS (Accounting), MBA, PGDFM, PGdMC, ITP, CFC
MPA in International Economics Relations,
Management Counsellor, BIM
01726-134400, tanvir.fm@gmail.com
Theory of Supply and
Demand

2. Markets
● In economics, a market is not a place but rather a
group of buyers and sellers with the potential to trade
with each other
● Market is defined not by its location but by its
participants
● First step in an economic analysis is to define and
characterize the market or collection of markets to
analyze
● Economists think of the economy as a collection of
individual markets
2

3. How Broadly Should We Define The Market
● Defining the market often requires economists to
group things together
● Aggregation is the combining of a group of distinct
things into a single whole
● Markets can be defined broadly or narrowly,
depending on our purpose
● How broadly or narrowly markets are defined is one of
the most important differences between
Macroeconomics and Microeconomics
3

4. Defining Macroeconomic Markets
● Goods and services are aggregated to the highest
levels
● Macro models lump all consumer goods into the single
category “consumption goods”
● Macro models will also analyze all capital goods as one
market
● Macroeconomists take an overall view of the economy
without getting bogged down in details
4

5. Defining Microeconomic Markets
● Markets are defined narrowly
● Focus on models that define much more specific
commodities
● Always involves some aggregation
● But stops it reaches the highest level of generality that
macroeconomics investigates
5

6. Buyers and Sellers
● Buyers and sellers in a market can be
● Households
● Business firms
● Government agencies
● All three can be both buyers and sellers in the same market,
but are not always
● For purposes of simplification we will usually
follow these guidelines
● In markets for consumer goods, we’ll view business
firms as the only sellers, and households as only
buyers
● In most of our discussions, we’ll be leaving out the
“middleman”
6

7. Using Supply and Demand
● Supply and demand model is designed to
explain how prices are determined in
competitive markets
● Supply and demand is one of the most
versatile and widely used models in the
economist’s tool kit
7

8. Demand
● A household’s quantity demanded of a good
● Specific amount household would choose to buy over
some time period, given
● A particular price that must be paid for the good
● All other constraints on the household
✓Market quantity demanded (or quantity
demanded) is the specific amount of a good that
all buyers in the market would choose to buy over
some time period, given
● A particular price they must pay for the good
● All other constraints on households
8

9. Quantity Demanded
● Implies a choice
● How much households would like to buy when they take into
account the opportunity cost of their decisions?
● Is hypothetical
● Makes no assumptions about availability of the good
● How much would households want to buy, at a specific price, given
real-world limits on their spending power?
● Stresses price
● Price of the good is one variable among many that influences
quantity demanded
● We’ll assume that all other influences on demand are held
constant, so we can explore the relationship between price and
quantity demanded
9

10. The Law of Demand
● The price of a good rises and everything else remains
the same, the quantity of the good demanded will fall
● The words, “everything else remains the same” are
important
● In the real world many variables change simultaneously
● However, in order to understand the economy we must first
understand each variable separately
● Thus we assume that, “everything else remains the same,” in
order to understand how demand reacts to price
10

11. The Demand Schedule
● Demand schedule
● A list showing the quantity of a good that consumers
would choose to purchase at different prices, with all
other variables held constant
● Demand V.S. Quantities demanded
- demand is the entire relationship between price
and quantity
- quantities demanded are specific amount of
goods buyers want to buy at a specific price
11

12. The Demand Curve
● The market demand curve (or just demand curve)
shows the relationship between the price of a good
and the quantity demanded , holding constant all
other variables that influence demand
● Each point on the curve shows the total quantity buyers
would choose to buy at a specific price
● Law of demand tells us that demand curves virtually
always slope downward
12

13. Figure 1: The Demand Curve
13
Number of Bottles
per Month
Price per
Bottle
A
B
Tk.4.00
2.00
D
40,000 60,000
At Tk.2.00 per bottle,
60,000 bottles are
demanded (point B).
When the price is
Tk.4.00 per bottle,
40,000 bottles are
demanded (point A).

14. “Shifts” vs. “Movements Along” The
Demand Curve
●Move along the demand curve
● From a change in the price of the good we analyze
●In Figure 1
● A fall in price would cause a movement to the right along the
demand curve (point A to B)
●See figure 2 in the next slide
14

15. Figure 2: Movements Along and Shifts of The
Demand Curve
15
Quantity
Price
P
2
Q
2
Q
1
Q
3
P
1
P
3
Price increase moves us
leftward along demand
curve
Price decrease moves
us rightward along
demand curve

16. “Shifts” vs. “Movements Along” The
Demand Curve
● Shift of demand curve
● a change in other things than price of the good causes a
shift in the demand curve itself, for example, income
● In Figure 3
● Demand curve has shifted to the right of the old curve
as income has risen
● A change in any variable that affects demand—except
for the good’s price—causes the demand curve to shift
16

17. Figure 3: A Shift of The Demand Curve
17
B C
Tk.2.00
60,000 80,000
D
1
D
2
An increase in income
shifts the demand curve for
maple syrup from D1 to D2.
Number of Bottles
per Month
Price per
Bottle
At each price, more bottles
are demanded after the
shift

18. “Change in Quantity Demanded” vs.
“Change in Demand”
● Language is important when discussing demand
● “Quantity demanded” means
● A particular amount that buyers would choose to buy at a
specific price
● It is a number represented by a single point on a demand curve
● When a change in the price of a good moves us along a demand
curve, it is a change in quantity demand
● The term demand means
● The entire relationship between price and quantity demanded—
and represented by the entire demand curve
● When something other than price changes, causing the entire
demand curve to shift, it is a change in demand
18

19. Income: Factors That Shift The Demand
Curve
● An increase in income has effect of shifting demand
for normal goods to the right
● However, a rise in income shifts demand for inferior
goods to the left
● A rise in income will increase the demand for a
normal good, and decrease the demand for an inferior
good
● Normal good and inferior good are defined by the
relation between demand and income
19

20. Wealth: Factors That Shift The Demand
Curve
● Your wealth—at any point in time—is the total value
of everything you own minus the total dollar amount
you owe
- Example
● An increase in wealth will
● Increase demand (shift the curve rightward) for a
normal good
● Decrease demand (shift the curve leftward) for an
inferior good
20

21. Prices of Related Goods: Factors that Shift
the Demand Curve
● Substitute—good that can be used in place of
some other good and that fulfills more or less the
same purpose
● Example
● A rise in the price of a substitute increases the demand
for a good, shifting the demand curve to the right
● Complement—used together with the good we
are interested in
● Example
● A rise in the price of a complement decreases the
demand for a good, shifting the demand curve to the
left
21

22. Other Factors That Shift the Demand Curve
● Population
● As the population increases in an area
● Number of buyers will ordinarily increase
● Demand for a good will increase
● Expected Price
● An expectation that price will rise (fall) in the future shifts the
current demand curve rightward (leftward)
● Tastes
● Combination of all the personal factors that go into determining
how a buyer feels about a good
● When tastes change toward a good, demand increases, and the
demand curve shifts to the right
● When tastes change away from a good, demand decreases, and the
demand curve shifts to the left
22

23. Small Summary
-- Factors Affecting Demand
● Price (depends on good’s nature: normal, inferior or
Giffen)
● Income (depends on good’s nature: normal or
inferior)
● Wealth (depends on good’s nature)
● Prices of substitutes (positively related)
● Prices of complements (negatively related)
● Population (positively related)
● Expected price (positively related)
● Tastes (positively related)
23

24. Figure 4: Movements Along and Shifts of The
Demand Curve
24
Quantit
y
Price
D
2D
1
Entire demand curve shifts
rightward when:
• income or wealth ↑
• price of substitute ↑
• price of complement ↓
• population ↑
• expected price ↑
• tastes shift toward good

25. Figure 5: Movements Along and Shifts of The
Demand Curve
25
Quantity
Price
D
1D
2
Entire demand curve shifts
leftward when:
• income or wealth ↓
• price of substitute ↓
• price of complement ↑
• population ↓
• expected price ↓
• tastes shift toward good

26. Supply
● A firm’s quantity supplied of a good is the specific
amount its managers would choose to sell over
some time period, given
● A particular price for the good
● All other constraints on the firm
✓Market quantity supplied (or quantity supplied)
is the specific amount of a good that all sellers in
the market would choose to sell over some time
period, given
● A particular price for the good
● All other constraints on firms
26

27. Quantity Supplied
● Implies a choice
● Quantity that gives firms the highest possible profits when they
take account of the constraints presented to them by the real
world
● Is hypothetical
● Does not make assumptions about firms’ ability to sell the good
● How much would firms’ managers want to sell, given the price of
the good and all other constraints they must consider?
● Stresses price
● The price of the good is just one variable among many that
influences quantity supplied
● We’ll assume that all other influences on supply are held constant,
so we can explore the relationship between price and quantity
supplied
27

28. The Law of Supply
● States that when the price of a good rises and
everything else remains the same, the quantity of the
good supplied will rise
● The words, “everything else remains the same” are
important
● In the real world many variables change simultaneously
● However, in order to understand the economy we must first
understand each variable separately
● We assume “everything else remains the same” in order to
understand how supply reacts to price
28

29. The Supply Schedule and The Supply Curve
● Supply schedule—shows quantities of a good or
service firms would choose to produce and sell at
different prices, with all other variables held constant
● Supply curve—graphical depiction of a supply
schedule
● Shows quantity of a good or service supplied at various
prices, with all other variables held constant
29

30. Figure 6: The Supply Curve
30
F
G
2.00
S
40,000 60,000
Tk.4.00
At Tk.4.00 per bottle,
quantity supplied is
60,000 bottles (point G).
When the price is Tk.2.00
per bottle, 40,000 bottles
are supplied (point F).
Number of Bottles
per Month
Price per
Bottle

31. Shifts vs. Movements Along the Supply Curve
● A change in the price of a good causes a
movement along the supply curve
● In Figure 6
● A rise (fall) in price would cause a rightward (leftward)
movement along the supply curve
● A drop in transportation costs will cause a shift in
the supply curve itself
● In Figure 7
● Supply curve has shifted to the right of the old curve as
transportation costs have dropped
● A change in any variable that affects supply—except for the
good’s price—causes the supply curve to shift
31

32. Figure 7: A Shift of The Supply Curve
32
S
2
G
J
S
1
60,000
Tk.4.00
80,000
A decrease in transportation
costs shifts the supply curve for
maple syrup from S1 to S2.
Number of Bottles
per Month
Price per
Bottle
At each price, more bottles
are supplied after the shift

33. Factors That Shift the Supply Curve
● Input prices
● A fall (rise) in the price of an input causes an increase
(decrease) in supply, shifting the supply curve to the
right (left)
● Price of Related Goods
● When the price of a related good rises (falls), the supply
curve for the good in question shifts leftward (rightward)
● Technology
● Cost-saving technological advances increase the supply
of a good, shifting the supply curve to the right
33

34. Factors That Shift the Supply Curve
● Number of Firms
● An increase (decrease) in the number of sellers—with
no other changes—shifts the supply curve to the right
(left)
● Expected Price
● An expectation of a future price increase (decrease)
shifts the current supply curve to the left (right)
34

35. Factors That Shift the Supply Curve
● Changes in weather
● Favorable weather
● Increases crop yields
● Causes a rightward shift of the supply curve for that crop
● Unfavorable weather
● Destroys crops
● Shrinks yields
● Shifts the supply curve leftward
● Other unfavorable natural events may effect all
firms in an area
● Causing a leftward shift in the supply curve
35

36. Figure 8: Changes in Supply and in Quantity
Supplied
36
P2
Q
3
Q
1
Q2
P1
P3
Quantity
Price Price increase moves
us rightward along
supply curve
S
Price decrease
moves us leftward
along supply curve

37. Figure 9: Changes in Supply and in Quantity
Supplied
37
Quantity
Price
S
2
S
1
Entire supply curve shifts
rightward when:
• price of input ↓
• price of related good ↓
• number of firms ↑
• expected price ↑
• technological advance
• favorable weather

38. Figure 10: Changes in Supply and in Quantity
Supplied
38
Quantity
Price
S
1
S
2
Entire supply curve shifts
leftward when:
• price of input ↑
• price of related good ↑
• number of firms ↓
• expected price ↑
• unfavorable weather

39. Summary: Factors That Shift The Supply
Curve
● The short list of shift-variables for supply that we
have discussed is far from exhaustive
● In some cases, even the threat of such events can
cause serious effects on production
● Basic principle is always the same
● Anything that makes sellers want to sell more or less of
a good at any given price will shift supply curve
39

40. Equilibrium: Putting Supply and Demand
Together
● When a market is in equilibrium
● Both price of good and quantity bought and sold have
settled into a state of rest
● The equilibrium price and equilibrium quantity are
values for price and quantity in the market but, once
achieved, will remain constant
● Unless and until supply curve or demand curve shifts
● The equilibrium price and equilibrium quantity
can be found on the vertical and horizontal axes,
respectively
● At point where supply and demand curves cross
40

41. Figure 11: Market Equilibrium
41
E
H
J1.00
Tk.3.00
D
S
50,000 75,00025,000
Excess
Demand
4. until price reaches its
equilibrium value of
Tk.3.00 .
2. causes the price
to rise . . .
3. shrinking the
excess demand . . .
1. At a price of Tk.1.00 per
bottle an excess demand
of 50,000 bottles . . .
Number of Bottles
Price per
Bottle

42. Excess Demand
● Excess demand
● At a given price, the excess of quantity demanded over
quantity supplied
● Price of the good will rise as buyers compete with
each other to get more of the good than is available
● Example: does the irrational fare structure of the
CNGs in Dhaka represent excess demand?
42

43. Figure 12: Excess Supply and Price Adjustment
43
3. shrinking the
excess supply . . .
K L
E
3.00
D
S
Tk.5.00
50,00035,000 65,000
Excess Supply at Tk.5.00
2. causes the
price to drop,
4. until price reaches its
equilibrium value of
Tk.3.00.
Number of Bottles
per Month
Price per
Bottle
1. At a price of Tk.5.00 per
bottle an excess supply
of 30,000 bottles . . .

44. Excess Supply
● Excess Supply
● At a given price, the excess of quantity supplied over
quantity demanded
● Price of the good will fall as sellers compete with each
other to sell more of the good than buyers want
44

45. Solve for Equilibrium Algebraically
● Suppose that demand is given by the equation
,
● where is quantity demanded, P is the price of the
good. Supply is given by where is
quantity supplied.
● What is the equilibrium price and quantity?
45

46. Income Rises: What Happens When Things
Change
● Income rises, causing an increase in demand
● Rightward shift in the demand curve causes rightward
movement along the supply curve
● Equilibrium price and equilibrium quantity both rise
● Shift of one curve causes a movement along the other
curve to new equilibrium point
46

47. Figure 13
47
1. An increase in
demand . . .E
F'
3.00
D
1
D
2
S
Tk.4.00
50,000 60,000
3. to a new
equilibrium.
5. and equilibrium quantity
increases too.
2. moves us along
the supply
curve . . .
Number of Bottles of
Maple Syrup
Price per
Bottle
4. Equilibrium
price
increases

48. A Cyclone Hits: What Happens When Things
Change
● A cyclone causes a decrease in supply
● Weather is a shift variable for supply curve
● Any change that shifts the supply curve leftward in a market
will increase the equilibrium price
● And decrease the equilibrium quantity in that market
48

49. Figure 14: A Shift of Supply and A New Equilibrium
49
E
'
E3.00
D
Tk.5.00
50,00035,000
S
2
S
1
Number of Bottles
Price per
Bottle

50. Using Supply and Demand: The Invasion of
Kuwait
● Why did Iraq’s invasion of Kuwait cause the price of
oil to rise?
● Immediately after the invasion, United States led a
worldwide embargo on oil from both Iraq and Kuwait
● A significant decrease in the oil industry’s productive
capacity caused a shift in the supply curve to the left
● Price of oil increased
50

51. Figure 15: The Market For Oil
51
P
2
D
E
'
P
1
E
Q
2
Q
1
S
2
S
1
Barrels of Oil
Price per
Barrel of Oil

52. Using Supply and Demand: The Invasion of
Kuwait
● Why did the price of natural gas rise as well?
● Oil is a substitute for natural gas
● Rise in the price of a substitute increases demand for a
good
● Rise in price of oil caused demand curve for natural gas
to shift to the right
● Thus, the price of natural gas rose
52

53. Figure 16: The Market For Natural Gas
53
Cubic Feet of
Natural Gas
Price per Cubic
Foot of Natural
Gas
P
4
P
3
F
Q
3
Q
4
S
D
2
F
'
D
1

54. Figure 17: Changes in the Market for Handheld PCs
54
1. An increase in
supply . . .
2. and a decrease
in demand . . .
5. and quantity
decreased as well.
A
B
Tk.400
D2003
S2002
S2003
D2002
Tk.500
2.45 3.33 Millions of Handheld PCs
per Quarter
Price per
Handheld
PC
4. Price
decreased . . .
3. moved the market to
a new equilibrium.

55. Summaries
Through the study of the chapter, we are now able to
● Characterize a market.
● Use a demand schedule and a demand curve to demonstrate the
law of demand.
● Explain the difference between a change in demand (shift of the
curve) and a change in quantity demanded (movement along the
curve).
● List the factors that will lead to a change in demand, and give
examples of each.
● Similar analysis for supply side.
● Explain how equilibrium price and quantity are determined in a
competitive market.
● Explain what will happen in a competitive market after a shift in
the supply curve, the demand curve, or both.
55

56. Task 1
● If the demand function is
Q = 200 – 10P
what is the quantity demanded if the price is Taka
12?
56

57. Task 2
● If the supply function is
Q = -100 + 10P
what is quantity supplied if the price is Taka 12?
57

58. Task 3
Is there a gap between the supply price and
the demand price?
If yes, how much?
what is the impact of such gap?
what should be the equilibrium price?

59. Task 4
●the following function describes the demand
for a company that makes shopping bags.
Q = 1000 – 50P ; where Q is number of bags
sold and P is price.
a) how many bags could be sold at
Taka 12 each?
b) what price would the consumers pay to
buy 500 bags?
59

60. Task 5
● the following relations describe monthly demand and
supply for a good “X”.
Qd = 3000 – 10P
Qs = -1000 + 15P
a) at what price would the quantity demanded equal zero?
b) at what price would the quantity supplied equal zero?
c) plot the supply and demand curves
d) what is the equilibrium price?
e) if the demand shifts to Qd = 3500 – 10P, then what is the
new equilibrium price?
60

61. THANK YOU