CHAPTER 1 DEMAND SUPPLY AND EQUILIBRIUM

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Demand
I. DEMAND: Wants, Need, Wish, Ability to Pay Demand, D Quantity demanded, Qd Price, P

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Demand
Demand Schedule
P ($/Kg) 0 1 2 3 4 5 6 Q (Kg) 18 15 12 9 6 3 0

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Demand
Demand Curve The law of negatively slope demand
P ($/Kg) D

Q (Kg)

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Demand
Demand function Q=a + bP, b<0 P=c + dQ, d<0

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Demand
Change in the quantity demanded A movement along a given demand curve for a commodity as a result of a change in its price Change in the demand A shift in the entire demand curve of a commodity resulting from a change in the individuals money income or taste, or price of other commodities.
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Demand
Demand for X increase Px constant, Qdx increase or Qdx constant, Px increase or the demand curve shift to the right. Demand for X increase by: +Change in the price of Y (Py) Py increase when X and Y: Substitute goods Py decrease when X and Y: Complement goods
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Demand
+Change in the Income (I) I increase when X : Normal goods I decrease when X: Inferior goods +Change in the Taste (T) Consistent taste =>Demand increase Inconsistent taste =>Demand decrease

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Demand
The individuals demand for a commodity and the market demand for a commodity Individuals demand (One Person) Q=a + bP, b<0 P=c + dQ, d<0 Market demand (K People) Q=K*(a + bP), b<0 P=c + (d/K)Q, d<0
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Demand
Mr. A have the demand function for X: Q=10-2P or P=5-(1/2)Q The market demand function for X with 10 people the same Mr. A have: Q=10*(10-2P) or P=5-((1/2)/10)Q

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Demand
Change in Demand Curve
D1=>D2:Demand increase; D2=>D1: Demand decrease
P ($/Kg) D2 D1

Q (Kg)

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SUPPLY
II. SUPPLY, S: Wants, Need Ability to produce Supply, S Quantity Supplied, Qs

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Supply
Supply Schedule
P ($/Kg) 0 1 2 3 4 5 6 Q (Kg) 0 3 6 9 12 15 18

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Supply
Supply Curve
P ($/Kg) S

Q (Kg)

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Supply
Supply function Q=a + bP, b>0 P=c + dQ, d>0

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Supply
Change in the quantity Supplied A movement along a given supply curve for a commodity as a result of a change in its price Change in the Supply A shift in the entire supply curve of a commodity resulting from a change in technology, the prices of the inputs necessary to produce the commodity, and climate and weather condition.
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Supply
Supply for X increase Px constant, Qsx increase or Qsx constant, Px decrease or the supply curve shift to the right. Supply for X increase by: +Technology Progress +The price of inputs: Decrease +Climate, Weather: Favorable
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Supply
A Company have the Supply function for X: Q=100-2P or P=50-(1/2)Q The market supply function for X with 10 company the same A company have: Q=10*(100-2P) or P=50-((1/2)/10)Q

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Supply
Change in Supply Curve
S1=>S2:Supply increase; S2=>S1: Supply decrease
P ($/Kg) S1 S2

Q (Kg)

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Equilibrium
P ($/Kg) 0 1 2 Qd (Kg) 18 15 12 Qs (Kg) 0 3 6 Qd and Qs Qd > Qs <=> Excess Demand Qd > Qs <=> Excess Demand Qd > Qs <=> Excess Demand

3 4 5
6

9 6 3
0

9 12 15
18

Qd = Qs <=> Equilibrium Qd < Qs <=> Excess Supply Qd < Qs <=> Excess Supply
Qd < Qs <=> Excess Supply

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Equilibrium
III. Equilibrium of Demand and Supply
P ($/Kg) Pe1 D1 E1 S1

Qe1
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Q (Kg)

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Equilibrium
No change in Supply; Demand Change
P ($/Kg) Pe2 Pe1 E1 D2 D1 E2 S1

Qe1

Qe2

Q (Kg)

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Equilibrium
No change in Demand, Supply change
P ($/Kg) D1 E1 E2 S1 S2

Pe1 Pe2

Qe1

Qe2

Q (Kg)

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Equilibrium
No change in the S D increase => Pe increase ; Qe increase D decrease => Pe decrease; Qe decrease No change in the D S increase => Pe decrease ; Qe increase S decrease => Pe increase; Qe decrease

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Price of Y

Price of inputs

Demand for X

Supply for X

Technology Income

Tastes

Pe

Qe

Climate, Weather

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