Markets:

Demand and Supply Analysis

 Demand Theory

Lesson Supply Theory

Outline Elasticity of Demand

Forecasting Demand
 Commonly Used Terms

 Demand - pertains to the quantity of a good or service that

people are ready to buy at a given price within a given period
 Demand Curve - a graph of the relationship between the
price of a good and the quantity demanded
 Demand Schedule - a table that shows the relationship
between the price of a good and the quantity demanded
 Quantity Demanded - The amount of a good or service
consumers are willing and able to purchase during a given
period of time
 Commonly Used Terms

 Complementary Goods - two goods for which an increase in

the price of one lead to a decrease in the demand for the other
 Substitute Goods - two goods for which an increase in the
price of one lead to an increase in the demand for the other
 Supply – refers to how much of a product a business owner can
supply to buyers and at what price.
 Supply Curve – a graph that shows the relationship between
the price of the product sold or the factor of production and
the quantity supplied per period.
 Commonly Used Terms

 Quantity Supplied – the amount of a goods or services

that sellers are willing and able to sell during a given period
of time
 Equilibrium - A situation in which, at the prevailing price,
consumers can buy all of a good they wish and producers
can sell all of the good they wish. The price at which Qd=Qs.
 Equilibrium Price - The price at which Qd=Qs.
 Equilibrium Quantity - The amount of a good bought and
sold in market equilibrium.
 Commonly Used Terms

 Surplus - Exists when quantity supplied exceeds

quantity demanded
 Shortage - a situation in which quantity
demanded is greater than quantity supplied
 Determinants of demand - Variables that change
the quantity demanded at each price
 Determinants of supply - Variables that cause a
change in supply (i.e., a shift in the supply curve).
Law of Demand
Quantity demanded
increases when price
falls, and quantity
demanded decreases
when price rises, other
things held constant.
Market Demand
What Determines the Quantity an Individual Demands?
 Price
 Income
 Prices of related goods
 Tastes and preferences
 Expectation of future price
 Occasional or seasonal products
 Population change
Shift in Demand Curve
Shift in Demand Curve
Law of Supply
All other factors being
equal, as the price of a
good or service increases,
the quantity of that good
or service that suppliers
offer will increase, and vice
versa.
Market Supply
What Determines the Quantity an Individual Supplies?
 Price
 Input prices
 Technology
 Future expectations
 Number of sellers
 Weather conditions
 Government policy
Shift in the Supply Curve
Shift in the Supply Curve
Market Equilibrium
 The price at which the demand and supply
curve meet is called the equilibrium price
and the quantity is called the equilibrium
quantity.
 At the equilibrium price, the quantity of the
good that buyers are willing and able to
buy is the same as the quantity that sellers
are willing and able to sell.
Market Equilibrium
 The equilibrium price sometimes called the
market-clearing price because, at this
price, everyone in the market has been
satisfied.
 Buyers have bought all they want to buy,
and the sellers have sold all they want to
sell.
Market Equilibrium
 The behavior of buyers and sellers naturally
drives markets toward their equilibrium.
 When the market price is above the equilibrium
price, there is a surplus of the good, which
causes the market price to fall.
 When the market price is below the equilibrium
price, there is a shortage, which causes the
market price to rise.
Market Equilibrium
Market Equilibrium
Shift in the Equilibrium
Decide whether the event shifts the
supply curve or the demand curve (or
both).
Decide which direction the curve shifts
– to the right or to the left.
Compare the new equilibrium with the
old equilibrium
Shift in the Equilibrium
ELASTICITY OF DEMAND
 Elasticity – is a measure of flexibility. It tells you
how flexible customers are to change.
 Elastic Demand – A slight change in the price
will lead to a drastic change in the demand for
the product.
 Price Elasticity of Demand – a measure of
how much the quantity demanded of a good
response to a change in the price of that good.
ELASTICITY OF DEMAND
 Income Elasticity of Demand – a measure of
how much the quantity demanded of a good
response to a change in consumers' income.
 Cross-Price Elasticity of Demand – a
measure of how much the quantity demanded
of one good response to a change in the price
of another good.
PRICE ELASTICITY OF DEMAND
PRICE ELASTICITY OF DEMAND
PRICE ELASTICITY OF DEMAND
You may interpret your computed elasticity as follows:
 Elastic – The result is greater than 1 (Ed >1), which means
that spending is relatively priced sensitive.
 Inelastic – The result is less than 1 (Ed <1), which means the
slight or no change in quantity demanded when the price of
the commodity gets changed.
 Unitary Elasticity – The result is equal to 1 (Ed =1), which
means that the spending changes are proportionate with
price changes.
PRICE ELASTICITY OF DEMAND
You may interpret your computed elasticity as follows:
 Perfectly Elastic – The result is infinite (Ed = ∞), which
means that a change in price leads to an unlimited
change in the quantity demanded.
 Perfectly Inelastic – The result is equal to zero (Ed=0),
which means that quantity demanded/supplied remains
the same when price increases or decreases.
Income Elasticity of Demand
Example:
Consider a local car dealership that gathers data
on changes in demand and consumer income for
its cars for a particular year. When the average
real income of its customers falls from $50,000
to $40,000, the demand for its cars plummets
from 10,000 to 5,000 units sold, all other things
unchanged.
Types of Income Elasticity of Demand
• High: A rise in income comes with bigger increases in
the quantity demanded.
• Unitary: The rise in income is proportionate to the
increase in the quantity demanded.
• Low: A jump in income is less than proportionate to
the increase in the quantity demanded.
• Zero: The quantity bought/demanded is the same
even if income changes
• Negative: An increase in income comes with a
decrease in the quantity demanded.
CROSS PRICE ELASTICITY
Cross Price Elasticity
 When the cross-price elasticity is positive, Good A
and B are substitutes. An increase in the price of
Good B will cause consumers to purchase more of
Good A as the substitute good, thus causing the
quantity of Good A to increase.
 If cross-price elasticity is negative, Goods A and B
are complements and are used together. If the price
of Good B increases, the demand for Good A
decreases.
THANK YOU!