Chapter 2
Supply and Demand
2.1 Supply and Demand Analysis
• Real Price
– Price of product relative to the price of other
goods and services
• Law of Demand
• Law of Supply
2.2 Equilibrium Quantity and Price
• Excess supply
• Excess demand
2.3 Adjustment to Equilibrium
• The equilibrating process
2.4 Some Welfare Properties of Equilibrium
• When in equilibrium, no reallocation can
improve some person’s position without
harming the position of at least some others.
2.5 Competitive Markets and Equity
• Efficiency does not necessarily lead to a
desirable state.
• Equity
Rent Control
• A price ceiling
– Government set maximum price
2.6 Price Supports
• Government fixed minimum price
2.7 Rationing and Allocative Functions of Prices
Price serves two functions
1. Rationing function
2. Allocative function
2.8 Determinants of
S&D
Demand
Qx = f(Px, Py, I, T, Exp, Pop)
Supply
Qx= f(Px, Tec, Pi, Nsup, Esp, Wea)
Changes in demand versus changes in quantity
demanded
Changes in supply versus changes in quantity
supplied
2.9 Predicting and Explaining Changes in Price
and Quantity
• 4 propositions
Seasonal Consumption
• The price of apples falls during the
months of heaviest consumption.
Why?
• The price of beachfront cottages rises during
the months of heaviest consumption. Why?
2.10 The Algebra of Supply and
Demand
Example:
P = 3 + .5Q
P = 12 - .4 Q
Which is the demand and which is supply?
2.11 Taxes
Imposing taxes changes
equilibrium outcomes
Taxes are collected from either the
buyer or the seller