Chapter 3
Demand, Supply, and
Market Equilibrium
Asst.Prof. Dr. Serdar AYAN
Law of Supply and Demand is the
fundamental tool of economic analysis
In this presantation
we describe the rudiments of supply and
demand analysis in steps
Demand in Product/Output Markets
A household’s decision about what
quantity of a particular output, or product,
to demand depends on a number of
factors, including:
The price of the product in question.
 The income available to the household.
 The household’s amount of
accumulated wealth.
 The prices of other products available to
the household.
 The household’s tastes and preferences.
 The household’s expectations about
future income, wealth, and prices.

3 of 49
Demand in Product/Output Markets
Changes in Quantity Demanded versus Changes in
Demand
The most important relationship in individual
markets is that between market price and quantity
demanded.
Changes in the price of a product affect the
quantity demanded per period. Changes in any
other factor, such as income or preferences,
affect demand. Thus, we say that an increase in
the price of Coca-Cola is likely to cause a
decrease in the quantity of Coca-Cola
demanded. However, we say that an increase in
income is likely to cause an increase in the
demand for most goods.
4 of 49
Demand in Product/Output Markets
Other Determinants of Household Demand
Income And Wealth
income
The sum of all a household’s
wages, salaries, profits, interest payments,
rents, and other forms of earnings in a
given period of time. It is a flow measure.
wealth or net worth The total value of what
a household owns minus what it owes. It is
a stock measure.
5 of 49
Demand in Product/Output Markets
Other Determinants of Household Demand
Income And Wealth
normal goods Goods for which demand goes
up when income is higher and for which
demand goes down when income is lower.
inferior goods Goods for which demand
tends to fall when income rises.
6 of 49
Demand in Product/Output Markets
Other Determinants of Household Demand
Prices of Other Goods and Services
substitutes Goods that can serve as
replacements for one another; when the
price of one increases, demand for the
other increases.
complements,
complementary
goods
Goods that “go together”; a decrease in
the price of one results in an increase in
demand for the other and vice versa.
7 of 49
Demand in Product/Output Markets
Other Determinants of Household Demand
Tastes and Preferences
Income, wealth, and prices of goods available are the
three factors that determine the combinations of
goods and services that a household is able to buy.
Changes in preferences can
themselves in market behavior.
and
do
manifest
Within the constraints of prices and incomes,
preference shapes the demand curve, but it is
difficult to generalize about tastes and preferences.
First, they are volatile.
Second, tastes are
idiosyncratic.
8 of 49
Demand in Product/Output Markets
Other Determinants of Household Demand
Expectations
What you decide to buy today certainly depends on
today’s prices and your current income and wealth.
There are many examples of the ways expectations
affect demand.
Increasingly, economic theory has come
recognize the importance of expectations.
to
It is important to understand that demand depends
on more than just current incomes, prices, and
tastes.
9 of 49
The Quantity Demanded : It is the number of
units consumers want to buy over a specified
period of time.
The Quantity Demanded of any product normally
depends on its price. Quantity demanded also
has a number of other determinants, including
population size, consumer incomes, tastes and
the prices of other products.
Demand Schedule is a table showing how the
quantity demanded of some product during a
specified period of time changes as the price of
that product changes, holding all other
determinants of quantity demanded constant
Demand Schedule For Milk
Price
Quantity Demanded
Label in Figure 1
-------------------------------------------------------------------------------------------------1.00
45
A
0.90
50
B
0.80
55
C
0.70
60
D
0.60
65
E
0.50
70
F
0.40
75
G
Demand Curve is a graphical depiction of a
demand schedule. It shows how the quantity
demanded of some product during a specified
period of time will change as the price of that
product changes, holding all other determinants
of quantity demanded constant
As the price of an item rises, the quantity
demanded normally falls. As the price falls, the
quantity demanded normally rises
Price
1.00
A
90
B
80
C
70
D
60
E
50
F
40
G
0
45
50
55
60
65
70
75
Quantity Demanded
The Quantity Supplied is the number of units
sellers want to sell over a specified period of
time.
As the price of an item rises, the quantity
supplied normally rises. As the price falls, the
quantity supplied normally falls
A supply schedule is a table showing how the
quantity supplied of some product during a
specified period of time changes as the price of
that product changes, holding all other
determinants of quantity supplied constant
Supply Schedule For Milk
Price
Quantity Supplied
Label İn Figure2.
-----------------------------------------------------------------------------------1.00
90
A
0.90
80
B
0.80
70
C
0.70
60
D
0.60
50
E
0.50
40
F
0.40
30
G
A Supply Curve is a graphical depiction of a
supply schedule. It shows how the quantity
supplied of some product during a specified
period of time will change as the price of that
product changes, holding all other determinants
of quantity supplied constant.
Price
1.00
0.90
A
B
0.80
C
0.70
D
0.60
E
0.50
F
0.40
G
0
30
40
50
60
70
80
90
Quantity Supplied
EQUILIBRIUM OF SUPPLY AND DEMAND
Shortage : is an excess of quantity demanded
over quantity supplied. When there is a
shortage, buyers can not purchase the
quantities they desire
Surplus : is an excess of quantity demanded.
When there is surplus, sellers can not sell the
quantities they desire to supply
An Equilibrium : is a situation in which there are
no inherent forces that produce change.
The law of supply and demand states that, in a
free market, the forces of supply and demand
generally push the price toward the price at
which quantity supplied and quantity demanded
are equal
Determination of the Equilibrium Price And
Quantity of Milk
Price
Quantity D.
Quantity S
Surplus or Short.
Price
-------------------------------------------------------------------------------------------------1.00
45
90
Surplus
Fall
0.90
50
80
Suplus
Fall
0.80
0.70
55
60
70
60
Suplus
Neither
Fall
SAME
0.60
65
50
Shortage
Rise
0.50
70
40
Shortage
Rise
0.40
75
30
Shortage
Rise
Price
1.00
0.90
A
B
0.80
C
0.70
D
0.60
E
0.50
F
0.40
G
0
30
40
50
60
70
80
90
Quantity
Demand in Product/Output Markets
Shift of Demand versus Movement Along a Demand Curve
shift of a demand curve The change that takes place in a
demand curve corresponding to a new relationship between
quantity demanded of a good and price of that good. The
shift is brought about by a change in the original conditions.
movement along a demand curve The change in quantity
demanded brought about by a change in price.
Change in price of a good or service leads to
Change in quantity demanded (movement
along the demand curve).
Change in income, preferences, or prices of other
goods or services leads to
Change in demand (shift of the demand
curve).
24 of 49
Shifts Of The Demand Curve
• Consumer Incomes : If average incomes
increase, consumers may purchase more of
many goods.
Increases in income normally shift demand
curves outward to the right.
D1
Price
1.00
0.90
A
S
B
D2
0.80
C
0.70
D
0.60
E
0.50
0.40
0
F
D1
G
30
40
50
60
70
D2
80
90
Quantity
Any factor that causes the demand curve to shift
outward to the right or inward to the left does
not affect the supply curve, will raise the
equilibrium price and the equilibrium quantity
•Population : Population growth should affect
quantity demanded in more or less the same
way as increases in average incomes
• Consumer Prefences : A successfull
advertising campaign etc....
• Prices and Availability of related goods:
Increases in the prices of goods that are
substitutes ( Soda/milk ) move the demand
curve to the right,
Increses in the prices of goods that are normally
used together with ( tea/sugar) shift the demand
curve to the left.
Supply in Product/Output Markets
Shift of Supply versus Movement Along a Supply Curve
As with demand, it is very important to
distinguish between movements along supply
curves (changes in quantity supplied) and shifts
in supply curves (changes in supply):
Change in price of a good or service leads to
Change in quantity supplied (movement
along a supply curve).
Change in income, preferences, or prices of other
goods or services leads to
Change in supply (shift of a supply curve).
30 of 49
Shifts Of Supply Curve
• Size of Industry : For example if more milk
producers enter the milk industry, the quantity
supplied at any given price probably will
increase.
Any factor that shifts the supply curve outward
to the right or inward to the left does not affect
the demand curve.
S1
Price
1.00
0.90
A
B
0.80
C
0.70
0.60
S2
D
S1
0.50
E
F
0.40
G
0
S2
30
40
50
60
70
80
90
Quantity
• Technological Progress : Cost-reducing
technological progress shifts the supply curve
outward to the right
• Prices of Inputs : Increases in the prices of
inputs that suppliers must buy will shift the
supply curve inward to the left.
• Prices of Related Outputs : A change in the
price of one good produced by a multiproduct
industry may be expected to shift the supply
curves of all the other goods produced by that
industry