BUS017 Economics for Business

Supply and Demand

Dr. Lucia Corno
Lecture 2
Chapter 4
20th January 2015

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Program
1. Economic principles
2. Supply and demand
3. Elasticities
4. Firm behaviour
5. Production, pricing and market structures
6. Macroeconomic aggregates
7. Aggregate demand and aggregate supply
8. Unemployment
9. Inflation
10.Fiscal, monetary and supply-side policies
11.Revision
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Market forces of Supply & Demand

2 key components in any market economy: Supply
and Demand

Supply and demand determine the quantity of each

good produced and the price at which it is sold

Price = amount of money a buyer has to give up to

acquire something

Cost = refers to payment to factor input in production

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Markets and Competition

Market = group of sellers and buyers of a particular good and

service
Sellers = determine the supply of a product
Buyers = determine the demand of a product

Buyers and sellers dont have to meet (physically) to make a deal

Markets exist in many forms

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Different types of markets

Competition = 2 or more firms are rivals for customers

A competitive market has many buyers and sellers, so that none
has a significant impact on determining the market price
Characteristics of a perfectly competitive market:
1. Homogenous goods (buyers have no preference bw sellers)
2. Price takers (numerous buyers and sellers, each unable to influence
prices)

Monopoly: One seller (who sets the price) or one buyer (ex: local
water company)
Oligopoly: A few sellers not always aggressively competing with
each other (ex: airlines)
Monopolistic competition: Many sellers each offering a slightly
different product (ex: magazines)
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Different types of markets II

We will start by studying supply and demand in competitive

market

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The Supply Curve:

The Relationship Between Price & Quantity Supplied

The quantity supplied of any good or

service is the amount that sellers are willing
and able to sell
Law of supply: other things being equal,
when the price of a good rises, the quantity
producers are willing to supply also rises
(because is profitable), and when the price
falls, the quantity supplied falls as well
The supply schedule is a table showing
the relationship between the price of
a good and the quantity supplied
The supply curve is a graphical display of
the supply schedule

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The Supply Curve for a seller

upward sloping

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The Supply Curve for the market

Market supply = is the (horizontal) sum of the

supplies of all sellers
The behaviour of one single business may be different
from the whole industry

MOVEMENT OF THE SUPPLY CURVE

A movement along the supply curve is caused by

a change in price

A shift or movement in the supply curve is caused

by a factor affecting supply other than a change in
price
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Causes of Shifts in the Supply Curve

Input prices

Cheaper inputs => S

Technology
More advanced technology increases productivity with fewer input
=> cost decreases => S

Expectations
Expectations for an increase in prices in the future => product in
stock and S

N. of sellers

More sellers= S

Natural / social factors

Bad weather will reduce the supply of crops S
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The Demand Curve:

The Relationship Between Price & Quantity Demanded

The quantity demanded of any good is the

amount of the good that buyers are willing and
able to purchase at each price level
Law of demand: other things being equal, when
the price of a good rises, the quantity demanded
of the good falls, and when the price falls, the
quantity demanded rises
A demand schedule is a table that shows the
relationship between the price of a good
and the quantity demanded
The downward sloping line relating price
and quantity demanded is called
the demand curve

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The Demand Curve downward sloping

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The Demand Curve

The market demand = is the (horizontal) sum of

all the individual demands for a particular good or
service

MOVEMENT OF THE SUPPLY CURVE

A movement along the demand curve occurs

when there is a change in price

A shift or movement in the demand curve is

caused by a factor affecting demand other than a
change in price
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Movement along the Demand Curve

=> Q

If P , => two reasons for Q

1. Income effect = If income constant and P =>
buyers can afford to buy more with their income =>
Demand increases
2. Substitution effect = buyers will choose to
substitute the more expensive good with cheaper
one => Demand increases

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Causes of Shifts in the Demand Curve

Income
Normal goods: Income => D
Inferior: Income => D
Prices of related goods, a and b

Substitutes: if Pa => Db

Complements : if Pa => Db
Tastes

Expectations
Size and structure of the population:
a larger population will mean a higher demand for good and
services
A change in the age distribution of the population influences
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demand

Demand & Supply Together

Equilibrium is a situation where the price has reached the level where quantity
supplied equals quantity demanded. This price is called the equilibrium price
Drawing a horizontal line from the equilibrium point where the supply and
demand curves intersect provides the equilibrium price
Drawing a vertical line from where the supply and demand curves intersect
provides the equilibrium quantity bought and sold
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Demand & Supply Together II

If the market price was above the equilibrium price there would be
a surplus (higher supply compared to demand)
If the market price was set below the equilibrium price there would
be a shortage (lower supply compared to demand)
The law of supply and demand claims that price adjusts so that
the equilibrium point is reached
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Changes in the equilibrium

3 steps:
1.
Shift in the supply curve? in the demand curve? both?
2.
Shift to the right or to the left?
3.
Use the diagram to show how the new equilibrium afftect equilibrium
quantity and price?
Example: research find that seed oil help to reduce heart disease
Affect the demand: people wants more seed oil
Demand curve shift to the right: at the same price, people demand
more => shortage of seeds
Shortage start to increase the price and so sellers will start to produce
more
=> New equilibrium with higher prices and higher quantity

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