Demand and

Supply Analysis
 Demand and supply analysis

The price mechanism:

effect of a rise in demand
the goods market
 The price mechanism:
the effect of a rise in
demand
Goods Market
Sg↑
Dg↑ shortage Pg↑ until Dg = Sg
(Dg > Sg) Dg↓
 Demand and supply analysis

The price mechanism:

effect of a rise in demand
factor markets
 The price mechanism:
the effect of a rise in
demand
Goods Market
Sg↑
Dg↑ shortage Pg↑ until Dg = Sg
(Dg > Sg) Dg↓

Factor Market
Sf ↑
Sg↑ Df ↑ shortage Pf ↑ until Df = Sf
(Df > Sf) Df ↓
Demand and supply analysis

The demand curve

 The demand curve:
The demand for potatoes (monthly)
 Market demand for potatoes (monthly)
Point Price Market demand
100 (pence per kg) (tonnes 000s)
A 20 700
Price (pence per kg)

80

60

40

A
20
Demand

0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
 Market demand for potatoes (monthly)
Point Price Market demand
100 (pence per kg) (tonnes 000s)
A 20 700
Price (pence per kg)

80 B 40 500

60

B
40

A
20
Demand

0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
 Market demand for potatoes (monthly)
Point Price Market demand
100 (pence per kg) (tonnes 000s)
A 20 700
Price (pence per kg)

80 B 40 500
C 60 350
C
60

B
40

A
20
Demand

0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
 Market demand for potatoes (monthly)
Point Price Market demand
100 (pence per kg) (tonnes 000s)
A 20 700
D
Price (pence per kg)

80 B 40 500
C 60 350
C D 80 200
60

B
40

A
20
Demand

0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
 Market demand for potatoes (monthly)
E Point Price Market demand
100 (pence per kg) (tonnes 000s)
A 20 700
D
Price (pence per kg)

80 B 40 500
C 60 350
C D 80 200
60 E 100 100

B
40

A
20
Demand

0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Demand and supply analysis

Shifts in the
demand curve
 An increase in demand

P
Price

D0 D1

O Q0 Q1
Quantity
 A decrease in demand

P
Price

D1 D0

O Q0 Q1
Quantity
Demand and supply analysis

The supply curve

 The supply curve:
The supply of potatoes (monthly)
 Market supply of potatoes (monthly)
100
Supply
P Q
80
a 20 100
Price (pence per kg)

60

40

a
20

0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
 Market supply of potatoes (monthly)
100
Supply
P Q
80
a 20 100
Price (pence per kg)

b 40 200
60

b
40

a
20

0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
 Market supply of potatoes (monthly)
100
Supply
P Q
80
a 20 100
Price (pence per kg)

b 40 200
c c 60 350
60

b
40

a
20

0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
 Market supply of potatoes (monthly)
100
Supply
d P Q
80
a 20 100
Price (pence per kg)

b 40 200
c c 60 350
60
d 80 530

b
40

a
20

0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
 Market supply of potatoes (monthly)
100 e
Supply
d P Q
80
a 20 100
Price (pence per kg)

b 40 200
c c 60 350
60
d 80 530
e 100 700
b
40

a
20

0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Demand and supply analysis

Shifts in the
supply curve
 Shifts in the supply curve
P
S0

O Q
 Shifts in the supply curve
P
S0 S1

Increase

O Q
 Shifts in the supply curve
P
S2 S0 S1

Decrease Increase

O Q
Demand and supply analysis

Market equilibrium
 Equilibrium price and output:
The Market Demand and Supply of Potatoes (Monthly)
 The determination of market equilibrium
(potatoes: monthly)

E e
100
Supply
D d
80
Price (pence per kg)

Cc
60

b B
40

a A
20

Demand
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
 The determination of market equilibrium
(potatoes: monthly)

E e
100
Supply
D SURPLUS d
80
Price (pence per kg)

(330 000)
Cc
60

b B
40

a A
20

Demand
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
 The determination of market equilibrium
(potatoes: monthly)

E e
100
Supply
D d
80
Price (pence per kg)

Cc
60

b SHORTAGE B
40
(300 000)
a A
20

Demand
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
 The determination of market equilibrium
(potatoes: monthly)

E e
100
Supply
D d
80
Price (pence per kg)

60

b B
40

a A
20

Demand
0
0 100 200 300 Qe 400 500 600 700 800
Quantity (tonnes: 000s)
 Demand and supply analysis

Effect of shift in the

demand curve
 Effect of a shift in the demand curve
P
S

An increase
in demand
g
Pe1

D1
O Qe1 Q
 Effect of a shift in the demand curve
P
S

g
Pe1

D1
O Qe1 Q
 Effect of a shift in the demand curve
P
S

g
Pe1

D2

D1
O Qe1 Q
 Effect of a shift in the demand curve
P
S

i
Pe2

g h
Pe1

D2

D1
O Qe1 Qe2 Q
 Effect of a shift in the demand curve
P
S

A decrease
in demand
g
Pe1

D2 D1
O Qe1 Q
 Effect of a shift in the demand curve
P
S

m g
Pe1

n
Pe2

D2 D1
O Qe2 Qe1 Q
 Demand and supply analysis

Effect of shift in the

supply curve
 Effect of a shift in the supply curve
P

S1

A decrease
in supply
g
Pe1

D
O Qe1 Q
 Effect of a shift in the supply curve
P

S1

g
Pe1

D
O Qe1 Q
 Effect of a shift in the supply curve
P
S2

S1

g
Pe1

D
O Qe1 Q
 Effect of a shift in the supply curve
P
S2

S1

k
Pe3

j g
Pe1

D
O Qe3 Qe1 Q
 Effect of a shift in the supply curve
P

S1
S2

An increase
in supply
g
Pe1

D
O Qe1 Q
 Effect of a shift in the supply curve
P

S1
S2

g p
Pe1
q
Pe2

D
O Qe1 Qe2 Q