DEMAND & SUPPLY
CONTENT
Demand
 Supply
 Market equilibrium

1

Copyright © 2014 by Quan Hong NGUYEN


DEMAND & SUPPLY
I. Demand
1.
2.
3.
4.
5.

2

Definition
The law of demand
Demonstrating demand
Determinants in demand function
Movement and shift of demand curve

Copyright © 2014 by Quan Hong NGUYEN


DEMAND

1. Definition
- Demand (D): An economic principle describes the
quantity of goods/services that consumer is willing to
buy and afford to buy at various price level in a certain
time, ceteris paribus.
- Quantity demanded (QD): The quantity of goods and
services that consumer is willing to buy and afford to buy
at a price level in a certain time, ceteris paribus.
- Individual demand is the demand of one individual or
firm.
- Market demand is the sum of the individual demand
for a product from buyers in the market.
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Copyright © 2014 by Quan Hong NGUYEN


Market demand as the sum of individual demands
(demand schedule)
Price of ice-cream cone

Catherine

$0.00
0.50
1.00
1.50
2.00
2.50
3.00


12
10
8
6
4
2
0

Nicholas
+

7
6
5
4
3
2
1

Market
=

19
16
13
10
7
4
1


The quantity demanded in a market is the sum of the quantities demanded by all the
buyers at each price. Thus, the market demand curve is found by adding horizontally
the individual demand curves. At a price of $2.00, Catherine demands 4 ice-cream
cones, and Nicholas demands 3 ice-cream cones. The quantity demanded in the
market at this price is 7 cones.
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Market demand as the sum of individual demands
Catherine’s
Nicholas’s
Market
+
=
demand
demand
demand
Price of
Ice
Cream
Cones
$3.00

DCatherine

Price of
Ice
Cream
Cones

$3.00

Price of
Ice
Cream
Cones
$3.00

DNicholas

2.50

2.50

2.00

2.00

2.00

1.50

1.50

1.50

1.00

1.00


1.00

0.50

0.50

0.50

0

1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones

0

1 2 3 4 5 6 7
Quantity of
Ice-Cream Cones

2.50

0

DMarket

2 4 6 8 10 12 14 16 18
Quantity of Ice-Cream Cones
5



DEMAND
2. The law of demand
In a certain time, ceteris paribus, when the price of a good/service
rises, the quantity demanded of the good falls, and when the price
falls, the quantity demanded rises.

6

P

QD

P

QD

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DEMAND
3. Demonstrating demand
- Demand schedule (Ex: Lavie)
- Demand curve

- Demand function
QD = aP + b (a < 0)
P = cQD + d (c < 0)
General form:
QD = f (Px, Py, I, T, E, N)


P

A

P1
P2

B

Q1

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Q2

Q


DEMAND
4. Determinants in demand function
4.1. Price of related goods (PY)
- Substitutes goods: A and B are substitutes if the usage of A can
be replaced by the usage of B, provided that the initial
consumption target is unchanged

(Price of substitutes goods) PS ↑ → QDs ↓ → QDx ↑
(Price of substitutes goods) PS ↓ → QDs ↑ → QDx ↓
→ covariates


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DEMAND
4.1. Price of related goods (PY)
- Complement goods: A and B are complements if the usage of A
must go together with the usage of B to ensure the initial utility
of both goods.

PC ↑ → QDc ↓ → QDx ↓
PC↓ → QDc ↑ → QDx ↑
→ inverse

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DEMAND
4.2. Income of consumer (I)
(afford to buy)

10

I

QD


I

QD

I

QD

I

QD

Normal goods

Inferior goods

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DEMAND
4.2. Income of consumer (I)

- Engel curve: Attitude
toward any goods depends
on buyer’s income, not on
goods’ quality

I3


Inferior

I*
I2
Normal

I1
Q1

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Q3

Q2

Q


DEMAND
4.3. Taste of consumer (T)
The most obvious determinant of your demand is your tastes
(willing to buy)
Economists examine what happens when tastes change

4.4. Expectation of customers – E
Your expectations about the future may effect your demand for a
good/service at the present.
Ex: you have more income next month, you will spend more at the

present and future.
4.5. Number of consumers – N
In addition to the preceding factors, which influence the behavior
of individual buyers, market demand depends on the number of
these buyers.
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DEMAND
4.4. Expectation of customers – E
Your expectations about the future may effect your demand for a
good/service at the present.
Ex: you have more income next month, you will spend more at the

present and future.
4.5. Number of consumers – N
In addition to the preceding factors, which influence the behavior
of individual buyers, market demand depends on the number of
these buyers.
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DEMAND
5. Movement and shift of demand curve
- Movement): PX - endogenous variables
- Shift: The rest determinants - exogenous variables

P

P

A

P1

Q1
14

P

B

P2

Q2

Q

Q1

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Q2

Q



DEMAND & SUPPLY
I. Supply
1.
2.
3.
4.
5.

15

Definition
The law of supply
Demonstrating supply
Determinants in supply function
Movement and shift of supply curve

Copyright © 2014 by Quan Hong NGUYEN


SUPPLY
1. Definition
- Supply (S): An economic principle describes the
quantity of goods/services that supplier is willing to
supply and able to supply at various price level in a
certain time, ceteris paribus.
- Quantity supplied (QD): The quantity of goods and
services that supplier is willing to supply and able to
supply at a price level in a certain time, ceteris paribus.
- Individual supply is the supply of one individual or
firm.

- Market supply is the sum of the individual supply for
a product from sellers in the market.
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Copyright © 2014 by Quan Hong NGUYEN


Market supply as the sum of individual supplies
(supply schedule)

Price of ice-cream cone

Ben

$0.00
0.50
1.00
1.50
2.00
2.50
3.00

0
0
1
2
3
4
5


Jerry
+

0
0
0
2
4
6
8

Market
=

0
0
1
4
7
10
13

At a price of $2.00, Ben supplies 3 ice-cream cones, and Jerry supplies 4 icecream cones. The quantity supplied in the market at this price is 7 cones

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Market supply as the sum of individual supplies
Price of
Ice

Cream
Cones
$3.00

Ben’s
supply

+

SBen

Price of
Ice
Cream
Cones
$3.00

Jerry’s
supply

=
Price of
Ice
Cream
Cones

SJerry

$3.00


2.50

2.50

2.50

2.00

2.00

2.00

1.50

1.50

1.50

1.00

1.00

1.00

0.50

0.50

0.50


0

1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones

0

1 2 3 4 5 6 7
Quantity of
Ice-Cream Cones

0

Market
supply

SMarket

2 4 6 8 10 12 14 16 18
Quantity of Ice-Cream Cones
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SUPPLY
2. The law of supply
In a certain time, ceteris paribus, when the price of a good/service
rises, the quantity supplied of the good also rises, and when the
price falls, the quantity supplied also falls.

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P

QS

P

QS

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SUPPLY
3. Demonstrating supply

- Supply schedule
- Supply curve

P

- Supply function
QS = aP + b (a > 0)
P = cQS + d (c > 0)
General form:
QS = f (Px, Pi, Te, G, E, N)

P2
P1

Q1


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Q2

Q


SUPPLY
4. Determinants in supply function
4.1. Price of inputs - Pi
Pi
Pi

C

C

∏
∏

4.2. Technology - Te
4.3. Government’s policies - G
4.4. Expectation of suppliers – E
4.5. Number of suppliers – N

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QS

QS


SUPPLY
5. Movement and shift of the supply curve
- Movement: PX - endogenous variables
- Shift: The rest determinants - exogenous variables

P

S

S2

B

P2
A

P1

P1

Q1
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S1

P

Q2

Q

Q1

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Q2

Q


DEMAND & SUPPLY
III. Market equilibrium
1. Equilibrium status
2. Surplus and shortage
3. Price controlling

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Copyright © 2012 by Quan Hong NGUYEN


Market equilibrium
1. Equilibrium status

1.1. Definition
 Equilibrium - a situation
 Market price has reached the level :
 Quantity supplied = quantity demanded
 Equilibrium price - the price:
 Balances quantity supplied and quantity demanded
 Equilibrium quantity
 Quantity supplied and the quantity demanded at the
equilibrium price

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Market equilibrium
1. Equilibrium status
1.2. Method of determining
- Merger demand schedule and
supply schedule
- Intersection of (S) and (D)
- Solve the system of equations

{

QD = aP + b
QS = cP + d
=> E(PE, QE)

P

S

PE

E
D

QE

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Q