demand (d), supply (s) & equilibrium...

Krzysztof Kołodziejczyk, PhD

DEMAND (D), SUPPLY (S) & EQUILIBRIUM (E)

https://flic.kr/p/rShkq8

https://flic.kr/p/rShkq8

Agenda

1. Demand & supply - components of each

market

2. Determinants of demand and supply

3. Law of demand and supply

4. Ceteris paribus

5. Equilibrium and market imbalance

D, S & E - keywords

demand (D) supply (S)

law of D & Sdeterminants of D & S

ceteris paribusshifts in D & S

equilibriummarket imbalancesurplus of D over Ssurplus of S over D

D, S & E – todays questions

What are the demand and supply?

How does the law of demand and supply work?

When the market is in equilibrium and when in imbalance?

Is market equilibrium the best option for market players?

Why do we buy and consume so many goods and services?

• First step is consumer’s desire.

• Of course, the producers won’t give you their goods just

because you want to satisfy your desires. So, the second

step is the ability to pay. Prices and incomes are just as

relevant to the consumption decision as are basic desires

and preferences.

Economists focus on the demand for goods and services.

Demand entails the willingness and ability to pay for goods

and services.

What are the demand and supply?– micro in theory

How much of certain good we are willing to buy at any particular

price?

• Demand for specific product is determined by: tastes (desire

for this and other goods), incomes (of the consumer),

expectations (for income, prices, tastes), other goods (their

availability and prices).

• Rather than try to explain all these forces at once, however,

let us focus on the relationship between the price of the

good and the amount of it we are willing to buy.

This simplification is common to economic analysis. If we want

to focus on on the relathionship price – consumption, we ignore

everything else. This assumption is typically referred to by it’s

Latin term, ceteris paribus.


How do we use ceteris paribus in the definition of demand?

• Demand refers to a person’s readiness to buy a good at some

price(s). Is it thus two-dimensional relationship linking price

and quantity demanded.

• But that relationship depends on determinants of demand

(f.e. tastes). If any of these determinants of demand were to

change, the relationship between quantity and price would

change as well .

By assuming „nothing else changing” (ceteris paribus), we

simplify the problem greatly.



Why do we sell many goods and services?

• For money, for fun sometimes

Economists focus on the supply for goods and services.

Supply entails the willingness and ability to supply goods and

services.


How much of certain good we are willing to sell at any particular

price?

• Supply is determined by: technology, factor costs, taxes,

expectations, number of sellers, other goods

• Rather than try to explain all these forces at once, however, let

us focus on the relationship between the price of the good and

the amount of it we are willing to sell.

Law of demand and supply– micro in theory

Demand schedule - a table that shows the quantity

demanded at each price.

Example: gasoline market

Price (gallon) Quantity demanded (millions of

gallons)

$1.00 800

$1.20 700

$1.40 600

$1.60 550

$1.80 500

$2.00 460

$2.20 420

https://www.khanacademy.org

https://www.khanacademy.org/


Demand curve - a graph that shows the quantity

demanded at each price.





The downward slope of the demand curve again

illustrates the law of demand — the inverse relationship

between prices and quantity demanded.

The law of demand assumes that all other variables that

affect demand are held constant.

Remember

Demand is not the same as quantity demanded.

When economists talk about demand, they mean the

relationship between a range of prices and the quantities

demanded at those prices, as illustrated by a demand

curve or a demand schedule.

When economists talk about quantity demanded, they

mean only a certain point on the demand curve or one

quantity on the demand schedule. In short, demand

refers to the curve, and quantity demanded refers to a

specific point on the curve.

Demand curves can shift– micro in theory

Changes in factors like average income and preferences can

cause an entire demand curve to shift right or left. This

causes a higher or lower quantity to be demanded at a given

price. (no ceteris paribus)


Supply schedule - a table that shows the quantity

supplied at each price.



Price (gallon) Quantity supplied (millions of gallons)

$1.00 500

$1.20 550

$1.40 600

$1.60 640

$1.80 680

$2.00 700

$2.20 720



Supply curve - a graph that shows the quantity supplied

at each price.





Economists call this positive relationship between price

and quantity supplied—that a higher price leads to a

higher quantity supplied and a lower price leads to a lower

quantity supplied — the law of supply.

The law of supply assumes that all other variables that

affect supply are held constant.

Remember

Supply is not the same as quantity supplied.

When economists refer to supply, they mean the

relationship between a range of prices and the quantities

supplied at those prices—a relationship that can be

illustrated with a supply curve or a supply schedule.

When economists refer to quantity supplied, they mean

only a certain point on the supply curve, or one quantity

on the supply schedule. In short, supply refers to the

curve, and quantity supplied refers to a specific point on

the curve.

Supply curves can shift– micro in theory

Changes in production cost and related factors can cause an

entire supply curve to shift right or left. This causes a higher

or lower quantity to be supplied at a given price. (no ceteris

paribus)

Conclusion (quote)

Most startups actually start down and only go up

if they catch the winds of market demand.”

(Ryan Lilly)

demand (d), supply (s) & equilibrium...

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