Demand Supply and Market Equilibrium

Topics: Supply and demand, Economic equilibrium, Microeconomics Pages: 13 (628 words) Published: April 21, 2015
Introduction –Demand supply and market
equilibrium
• It is the belief of many that the principles of demand
and supply is very important to microeconomics.
• However, the concepts that underline these
principles are often confused. This presentation will
outline the core principles behind these concepts.

Demand


Demand can be defined as : the want or desire to possess a good or service with the necessary goods, services, or financial instruments necessary to make a legal transaction for those goods or services.



However it is important to distinguish between demand and quantity demanded.



Quantity demanded can be defined as the quantity of goods which consumers are willing and able to buy during a period giving the price and available income.



Thus demand is the desire to want something. Quantity demanded is the desire to want plus the ability to pay.

The Demand Curve
• The Demand curve is downward sloping and its slope can be characterized as being elastic or inelastic. (to be discussed later in the unit).
• The demand curve can be defined as the graph depicting the relationship between the price of a certain commodity, and
the amount of it that consumers are willing and able to
purchase at that given price.
• Figure 1 depicts a typical demand curve.

The Demand Curve
• Figure 1

The Demand Curve
The demand curve, represents the amount
of a good that buyers are willing and able
to purchase at various prices, assuming all
other non-price factors remain the same.
The demand curve is almost always
represented as downwards-sloping,
meaning that as price decreases,
consumers will buy more of the good. This
is shown by the line D1 in Figure 1.

Demand shift Vs. Movement
• There are various factors that results in a shift or a
movement along the demand curve.
• Factors that cause shift in demand
– Change in Income
– Taste
– Price of substitute
– Price of compliments
That is any other factor than the price of the good itself will result in a shift in the demand curve.

Demand shift Vs. Movement
• A movement along the demand curve is caused
by a increase or a decrease in the price of the
good.
• A movement along the demand curve result in
a change in Quantity demanded. A shift in the
Demand curve lead to a change in Demand.

Supply
• Supply is the total amount of a good or service available for purchase.
• The supply curve is the relationship between the quantity of goods supplied by the producers of a good and the current
market price.
• It is commonly represented as directly proportional to price, and thus is upward sloping. There may be a movement along
the Supply Curve or a Shift in the Supply Curve.

Supply Curve
• A movement along the curve occurs when there is a change in supply due to a change in price of the commodity.
• In the figure below, if there would be a price change, then there will a movement along the S1 Curve. Shift occurs when
supply changes due to reasons other than price.
The movement from S1 to S2 represents a shift in the Demand
Curve, which can occur due to reasons other than price
change.
• Figure 2 explains this.

Supply Curve (Figure 2)

Market Equilibrium
• Economists believe that all markets must eventually be in equilibrium. That is there is no shortage or surplus.
• Supply = Demand.


The equilibrium price (the price at which all sellers are able to find a willing buyer, also known as market clearing price) and the equilibrium quantity (the amount of that good or
service that will be produced and bought without
surplus/excess supply or shortage/excess demand) of that
market.

Graphical representation of Equilibrium
condition

S

Eq.P

D
Eq.Q

Conclusion
• The theory of Equilibrium will be discussed in
the following week.

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