Chapter 3 Market
Demand
and Supply
KEY CONCEPTS
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demand
direct demand
utility
derived demand
demand function
demand curve
change in the
quantity demanded
• shift in demand
• Supply
• supply function
• supply curve
• change in the quantity
supplied
• shift in supply
• equilibrium
• market equilibrium
price
• surplus
• shortage
• comparative statics
analysis
OVERVIEW
• Basis for Demand
• Market Demand Function
• Demand Curve
• Basis For Supply
• Market Supply Function
• Supply Curve
Market Equilibrium
一. Basis for Demand
• 1.Direct Demand versus derived demand
– Demand is the quantity customers are
willing to buy under current market
conditions.
– Direct demand is demand for consumption.
**Derived Demand
– Derived demand is input demand.
– Firms demand inputs that can be
profitably employed.
2. Market Demand Function
• 1.Determinants of Demand
– Demand is determined by price, prices of
other goods, income, and so on.
• 2.Industry Demand Versus Firm
Demand
– Industry demand is subject to general
economic conditions.
– Firm demand is determined by economic
conditions and competition.
3.Demand Curve
• Demand Curve Determination
• The price-quantity demanded relation.
• All non-price variables are held
constant.
4.Relation Between the Demand
Curve and Demand Function
• Move along demand curve when price
changes.
• Shift to another demand curve when
non-price variables change.
A summary of what can cause
an increase in demand
a. Favorable change in consumer tastes.
b. Increase in the number of buyers.
c. Rising income if product is a normal good.
d. Falling incomes if product is an inferior
good.
e. Increase in the price of a substitute good.
f. Decrease in the price of a complementary
good.
g. Consumers expect higher prices in the
future.
二.Basis For Supply
• 1.How Output Prices Affect Supply
– Firms offer supply to make profits.
• Higher prices boost the quantity supplied.
• Lower prices cut the quantity supplied.
• 2.Other Factors That Influence
Supply
– Everything that affects marginal
production costs affects supply.
• If MC falls, supply rises.
• If MC rises, supply falls.
2.Market Supply Function
• Determinants of Supply
– Supply is determined by price, prices
of other goods, technology, and so on.
The determinates of supply = supply
shifters
1.Resource prices
2.Price of related goods
3. Technology
4.Number of sellers
5.Taxes and subsidies
6.Expected future prices
7.Nature, ‘random shocks’ and other
unpredictable events
• Industry Supply Versus Firm
Supply
– Firm supply is determined by
economic conditions and
competition.
– Industry supply is the horizontal
sum of firm supply.
3.Supply Curve
• Supply Curve Determination
• The price-quantity supplied
relation.
• All non-price variables are held
constant.
4.Relation Between Supply
Curve and Supply Function
– Move along supply curve when price
changes.
– Shift to another curve when non-price
variables change.
What effect will each of the following
have on the supply of product B?
a. A technological advance in the methods of
producing B.
b. A decline in the number of firms in industry B.
c. An increase in the price of resources required
in the production of B.
d. The expectation that the equilibrium price of B
will be lower in the future than it is currently.
e. A decline in the price of product A, a good
whose production requires substantially the
same techniques as does the production of B.
f. The levying of a specific sales tax upon B.
g. The granting of a 50-cent per unit subsidy for
each unit of B produced.
三.Market Equilibrium
• 1. Surplus and Shortage
– Surplus is excess supply.
– Shortage is excess demand.
2.Comparative Statics:
Changing Demand
– Equilibrium changes with demand
shifts.
– Comparative Statics: Changing
Supply
• Equilibrium changes with supply shifts.
– Comparative Statics: Changing
Demand and Supply
Effects of changes in demand
and supply
Change in D Change in S Effect on
Pe
Increase
Fixed
Decrease
Fixed
Fixed
Increase
Fixed
Decrease
Decrease
Increase
Effect on
Qe
Increase
Increase
Decrease
Uncertain
Decrease
Increase
Decrease
Uncertain
Uncertain
Uncertain
Three steps for analyzing
changes in equilibrium
• 1. To decide whether the event
shifts supply or demand curve (or
perhaps both).
• 2. To decide in which direction the
curve shifts.
• 3. To use the supply- demand
diagram to see how the shift
changes the equilibrium price and
quantity.
The effects of the following changes have on
Pe and Qe:
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A. Supply decreases and demand is constant.
B. Demand decreases and supply is constant.
C. Demand increases and supply increases.
D. Supply increases and demand decreases.
E. Demand decreases and supply decreases.
F. Supply decreases and demand increases
• “Prices are the automatic regulator
that tends to keep production and
consumption in line with each other.”
Explain.
• Advanced analysis: Assume that the demand
for a commodity is represented by the
equation P = 10 - .2Qd and supply by the
equation P = 2 + .2Qs, where Qd and Qs are
quantity demanded and quantity supplied,
respectively, and P is price. Using the
equilibrium condition Qs = Qd, solve the
equations to determine equilibrium price.
Now determine equilibrium quantity. Graph
the two equations to substantiate your
answers.
Demand is P  10  2Q
Therefore 5P  50  Q d  50  5P
Supply is P  2  2 Q s
Therefore 5P  10  Q s and Q s  10  5P
Substitute Q d and Q s into Q s  Q d equilibriu m condition
50  5P  10  5P
60  10 P and 6  P
Now substitue P  6 in either Q d or Q s to determine equilibriu m quantity :
Q d  50  5P  50  56   20
or
Q s  10  5P  10  56   20
• Discuss the economic aspects of
ticket scalping, specifying the
gainers and losers