MICROECONOMICS

CHAPTER 2:
DEMAND AND SUPPLY

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I. DEMAND II. SUPPLY

III. MARKET EQUILIBRIUM

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I. Demand

• Definitions
1

• Individual demand vs Market

2 demand

• Non-price determinants of demand

3
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I. Demand
1. Definitions
• Demand (D):
The amount of a good or service that buyers are
willing to buy and able to buy at all possible prices during
a certain time period, ceteris paribus.

q Assumption: Ceteris paribus

• QD = f(P) (other things equal/constant)
• Linear relationship
q Demand function: QD = aP + b (a < 0)

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I. Demand
1. Definitions
• Law of demand:
- Other things equal (=other things stay the same)
- When the price of a good rises, the quantity
demanded of that good falls.
- When the price falls, the quantity demanded rises.
P ↑ → QD ↓
P ↓ → QD ↑

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 I. Demand
1. Definitions
Demand schedule: a table that shows the relationship between
the price of a good and the quantity demanded

• Demand curve: downward-sloping

Price 60 70 Quantity
Quantity demanded 60 50 demanded (QD)
Demand equation/function:
QD = P

⇨P= Demand curve

A (D)
Demand: the whole demand curve
B
(Cầu là cả đường cầu)
D
Quantity demanded: a single point on
the demand curve (Lượng cầu là tại 1
0 QD
điểm trên đường cầu) 6
 Demand: The amount of a good or service
I. Demand that buyers are willing to buy and able to
buy at all possible prices during a certain
1. Definitions time period, ceteris paribus.

• Quantity demanded (QD):

The amount of a good or service that buyers are willing to buy
and able to buy at a price during a certain time period,
ceteris paribus.
P Quantity
Demand vs Quantity demanded
demanded?

Demand is the quantity Demand

demanded at all possible prices
D
(Cầu = lượng cầu tại các mức giá)
0 7
QD
I. Demand
1. Definitions
Quantity demanded:
a single point on the D
Movement along the Demand Curve Curve
P

Price
⇨ Change in the quantity A
Demand: the
changes demanded B
whole D Curve
(a movement along the D curve D
from point to point)
0 QD
+ Quantity demanded increases: A -> B
+ Quantity demanded decreases: B -> A
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I. Demand
1. Definitions

Shift in the Demand Curve

P
A non-price determinant
of demand changes
⇨ Change in demand
= Change in quantity demanded
at all possible prices
(a shift in the D Curve D
to the right or the left)
0 QD

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I. Demand
1. Definitions

Shift vs. Movement Along Demand Curve

• Movement along a fixed D curve:
- Change in ................................
- Occurs when ................................
• Shift in the D curve:
- Change in ....................................
- Occurs when ...................................
- D Curve shifts right: ................................
- D Curve shifts left: ......................................
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I. Demand
2. Market Demand vs Individual Demand
The quantity demanded in the market is the sum of
the quantities demanded by all buyers at each price.

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I. Demand
3. Non-price determinants of demand
(Demand Curve Shifters)
• The demand curve shows how price affects quantity
demanded, other things being equal.
• These “other things” are non-price determinants of
demand (i.e., things that determine buyers’ demand for a
good, other than the good’s price).
• Changes in them shift the D curve…

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Demand Curve Shifters: Number of Buyers

• Increase in Number of Buyers (NB)

increases quantity demanded at each price, shifts D
curve to the right.

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 Demand Curve Shifters: Number of Buyers

P Suppose the number

$6.00 of buyers increases.
$5.00 Then, at each P,
Qd will increase
$4.00 (by 5 in this example).
$3.00
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25 30
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Demand Curve Shifters: Income (I)

• Demand for a normal good is positively related to

income.
• Increase in income causes
increase in quantity demanded at each price, shifts
D curve to the right.
(Demand for an inferior good is negatively related
to income. An increase in income shifts D curves
for inferior goods to the left.)

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Demand Curve Shifters: Prices of
Related Goods (PXY)

• Two goods are substitutes if

an increase in the price of one
causes an increase in demand for the other.
• Example: pizza and hamburgers.
An increase in the price of pizza
increases demand for hamburgers,
shifting hamburger demand curve to the right.
• Other examples: Coke and Pepsi,
laptops and desktop computers,
CDs and music downloads
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Demand Curve Shifters: Prices of
Related Goods (PXY)

• Two goods are complements if

an increase in the price of one
causes a fall in demand for the other.
• Example: computers and software.
If price of computers rises,
people buy fewer computers,
and therefore less software.
Software demand curve shifts left.
• Other examples:
bagels and cream cheese, eggs and bacon
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Demand Curve Shifters: Tastes (J)

• Anything that causes a shift in tastes toward a good

will increase demand for that good
and shift its D curve to the right.
• Example:
The Atkins diet became popular in the ’90s,
caused an increase in demand for eggs,
shifted the egg demand curve to the right.

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Demand Curve Shifters: Expectations (EB)

• Expectations affect consumers’ buying decisions.

• Expect an increase in income
▪ Leads to an increase in today’s demand
• If people expect their incomes to rise,
their demand for meals at expensive restaurants may
increase now.
• If the economy sours and people worry about their
future job security, demand for new autos may fall now.
• Expect higher prices
▪ Leads to an increase in today’s demand
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 Summary: Variables That Influence Buyers

Variable A change in this variable…

Price …..................

Number of buyers ….................

Income …...................
Price of
related goods …....................
Tastes ….......................
Expectations ….....................
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ACTIVE LEARNING 1
Demand curve
Draw a demand curve for DVDs.
What happens to it in each of
the following scenarios? Why?
A. The price of DVDs
falls.
B. The price of movie
tickets falls.
C. The price of TV
screens falls.
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ACTIVE LEARNING 1
A. Price of DVDs falls

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ACTIVE LEARNING 1
B. Price of movie tickets falls

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ACTIVE LEARNING 1
C . Price of TV screens falls

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II. Supply
1. Definitions
• Supply (S):
The quantity of goods and services that sellers is
willing to sell and able to sell at all possible prices
during a certain time period, ceteris paribus.
• Quantity supplied (QS):
The quantity of goods and services that seller is
willing to sell and able to sell at a price during a
certain time period, ceteris paribus.
• Supply equation/function:
Qs = cP + d (c>0)
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II. Supply
1. Definitions
• Law of supply:
- Other things equal
- When the price of a good rises, the quantity
supplied of that good also rises
- When the price falls, the quantity supplied falls as
well

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II. Supply
1. Definitions
§Supply schedule: A table that shows the
relationship between the price of a good and the
quantity supplied.
Price 60 70
Quantity supplied 20 30
• Supply equation/function:

• Supply curve:

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II. Supply
1. Definitions
Shift vs. Movement along Supply Curve
• Movement along a fixed supply curve:

• Shift in the supply curve

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II. Supply
2. Market Supply vs Individual Supply

• The quantity supplied in the market is the sum of

the quantities supplied by all sellers at each price.
Price Starbucks Peet’s Market Qs
$0.00 0 + 0 = 0
1.00 3 + 2 = 5
2.00 6 + 4 = 10
3.00 9 + 6 = 15
4.00 12 + 8 = 20
5.00 15 + 10 = 25
6.00 18 + 12 = 30 29
II. Supply
3. Non-price determinants of supply
(Supply Curve Shifters)
• The supply curve shows how price affects quantity
supplied, other things being equal.
• These “other things” are non-price determinants of
supply.
• Changes in them shift the S curve…

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Supply Curve Shifters: Input Prices (Pi)

• Examples of input prices:

wages, prices of raw materials.
• A fall in input prices makes production
more profitable at each output price,
so firms supply a larger quantity at each price,
and the S curve shifts to the right.

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 Supply Curve Shifters: Input Prices
P Suppose the
$6.00 price of milk falls.
At each price,
$5.00
the quantity of
$4.00 lattes supplied
will increase
$3.00
(by 5 in this
$2.00 example).
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
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Supply Curve Shifters: Technology (T)

• Technology determines how much inputs are

required to produce a unit of output.
• A cost-saving technological improvement has
the same effect as a fall in input prices,
shifts S curve to the right.

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Supply Curve Shifters: Number of Sellers (NS)

• An increase in the number of sellers increases the

quantity supplied at each price,
shifts S curve to the right.

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Supply Curve Shifters: Expectations (ES)

• Example:
• Events in the Middle East lead to expectations of
higher oil prices.
• In response, owners of Texas oilfields reduce
supply now, save some inventory to sell later at
the higher price.
• S curve shifts left.
• In general, sellers may adjust supply* when their
expectations of future prices change.
(*If good not perishable)
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Supply Curve Shifters: Government’s policies

• Subsidies and taxes:

§If the government subsidizes the good more
heavily, supply will increase.
§If the government increases taxation, supply
will decrease.

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Summary: Variables that Influence Sellers

Variable A change in this variable…

Price …

Input Prices …
Technology …
Number of Sellers …
Expectations …
Gvt’s policies …
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ACTIVE LEARNING 2
Supply curve

Draw a supply curve for minivans.

What happens to it in each
of the following scenarios?
A. The price of minivans rises.
B. Engineers develop new automated machinery for
the production of minivans.
C. A strike by steelworkers raises steel prices.
D. People decide to have more children.

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ACTIVE LEARNING 2
A. Price of minivans rises

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ACTIVE LEARNING 2
B. Engineers develop new automated machinery for the
production of minivans

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ACTIVE LEARNING 2
C. A strike by steelworkers raises steel prices

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ACTIVE LEARNING 2
D. People decide to have more children

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 III. Market equilibrium
Buyers (Demand) Sellers (Supply)
QD = QS =

Bên mua (cầu) – Bên bán (cung) giao dịch

(Thị trường là gì?)
- Điều kiện cân bằng thị trường (Market equilibrium)
- Trạng thái dư thừa or thiếu hụt (Shortage or surplus)
- Kiểm soát giá của chính phủ: giá trần or giá sàn (price
ceilings or price floors)
- Thay đổi điểm cân bằng thị trường (Changes in market
equilibrium)
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III. Market equilibrium
Market: a group of buyers and sellers of a particular
good or service

Buyers (Demand) Sellers (Supply)

QD = QS =
Market Equilibrium (E): P has reached the level
where quantity supplied equals quantity demanded
QD = QS= QE
Þ E (PE và QE)
Þ Intersection of S and D curves
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 Shortage (a.k.a. excess demand):
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Example:
If P =…… ,
$5.00
then
$4.00 QD = ……..
$3.00 and
QS = ………
$2.00
resulting in a
$1.00 shortage of ……..
$0.00 Shortage Q
0 5 10 15 20 25 30 35
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 Shortage (a.k.a. excess demand):
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Facing a shortage,
sellers raise the price,
$5.00
causing QD to fall
$4.00 and QS to rise,
$3.00 …which reduces the
$2.00 shortage.
$1.00
Shortage
$0.00 Q
0 5 10 15 20 25 30 35
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 Shortage (a.k.a. excess demand):
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Facing a shortage,
sellers raise the price,
$5.00
causing QD to fall
$4.00 and QS to rise.
$3.00 Prices continue to rise
$2.00 until market reaches
equilibrium.
$1.00
Shortage
$0.00 Q
0 5 10 15 20 25 30 35
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 Surplus (a.k.a. excess supply):
when quantity supplied is greater than
quantity demanded
P Example:
$6.00 D Surplus S
If P = …….
$5.00 ,.
then
$4.00 QD = ………
$3.00 and
QS = ……..
$2.00
resulting in a
$1.00
surplus of ……..
$0.00 Q
0 5 10 15 20 25 30 35
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 Surplus (a.k.a. excess supply):
when quantity supplied is greater than
quantity demanded
P
$6.00 D Surplus S Facing a surplus,
sellers try to increase sales
$5.00
by cutting price.
$4.00 This causes
$3.00 QD to rise and QS to fall…
$2.00 …which reduces the
$1.00
surplus.

$0.00 Q
0 5 10 15 20 25 30 35
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 Surplus (a.k.a. excess supply):
when quantity supplied is greater than
quantity demanded
P
$6.00 D Surplus S Facing a surplus,
sellers try to increase sales
$5.00
by cutting price.
$4.00 This causes
$3.00 QD to rise and QS to fall.
$2.00 Prices continue to fall
until market reaches
$1.00
equilibrium.
$0.00 Q
0 5 10 15 20 25 30 35
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 III. Market equilibrium
Shortage Surplus
P1 < PE P2 > PE
What happens? What happens?

Price tends to fall or rise? Price tends to fall or rise?

Price is above or below Price is above or below

equilibrium price? equilibrium price?

Chức năng điều chỉnh giá của thị trường đối với 1 hàng hóa?
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 III. Market equilibrium
Price controls - Government
Price ceiling Price floor
When? When

What happens? What happens?

Example? Example?

Above or below equilibrium Above or below equilibrium

price? price?
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Change in market equilibrium

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Ví dụ

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Case 1: An increase in demand –
No change in supply
• Nguyên nhân cầu tăng? Vẽ đồ thị

è Kết luận PE và QE

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Case 2: A decrease in demand –
No change in supply
• Nguyên nhân cầu giảm? Vẽ đồ thị

è Kết luận PE và QE

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Case 3: An increase in Supply –
No change in demand
• Nguyên nhân cung tăng? Vẽ đồ thị

è Kết luận PE và QE

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Case 4: A decrease in supply –
No change in demand
• Nguyên nhân cung giảm? Vẽ đồ thị

è Kết luận PE và QE

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Case 5: An increase in demand –
An increase in supply
• Nguyên nhân? Vẽ đồ thị

è Kết luận PE và QE

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Case 6: An increase in demand –
A decrease in supply
• Nguyên nhân? Vẽ đồ thị

è Kết luận PE và QE

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Case 7: A decrease in demand –
An increase in supply
• Nguyên nhân? Vẽ đồ thị

è Kết luận PE và QE

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Case 8: A decrease in demand –
A decrease in supply
• Nguyên nhân? Vẽ đồ thị

è Kết luận PE và QE

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ACTIVE LEARNING 3
Shifts in supply and demand

Use the three-step method to analyze the effects of

each event on the equilibrium price and quantity of
oranges.
Event A: Scientists reveal that eating oranges
decreases the risk of diabetes.
Event B: Farmers use a new fertilizer that makes
orange trees produce more oranges.
Event C: Events A and B both occur at the same
time.
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ACTIVE LEARNING 3
A. Scientists reveal that eating oranges decreases the risk of
diabetes

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ACTIVE LEARNING 3
B. Farmers use a new fertilizer that makes orange trees produce
more oranges

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ACTIVE LEARNING 3
C. Scientists reveal that eating oranges decreases the risk of
diabetes AND Farmers use a new fertilizer that makes orange
trees produce more oranges

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ACTIVE LEARNING 4

Using supply-and-demand diagrams, show the effect of the

following events on the market for sweatshirts.
a. A hurricane in South Carolina damages the cotton crop.
b. The price of leather jackets falls.
c. All colleges require morning exercise in appropriate attire.
d. New knitting machines are invented.

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ACTIVE LEARNING 5

Market research has revealed the following information about the

market for potatoes: The demand schedule can be represented by
the equation QD = 1,000 – 250P, where QD is the quantity
demanded and P is the price per bag of potatoes. The supply
schedule can be represented by the equation QS = 150P, where
QS is the quantity supplied.
Calculate the equilibrium price and quantity in the market for
potatoes, then illustrate your answer graphically.

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What Happens to Price and Quantity When Supply
or Demand Shifts?

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 SUMMARY
Cầu (Demand) Cung (Supply)
- Phương trình (Equation) -
Phương trình (Equation)
- Hệ số góc à luật cầu (Slope -> Law of demand) -
Hệ số góc à luật cung (Slope -> Law of
- Biểu cầu (Demand schedule) supply)
- - Biểu cung (Supply schedule)
Cầu cá nhân và cầu thị trường (Individual
demand vs market demand) - Cung cá nhân và cung thị trường
- Phân biệt lượng cầu vs cầu (Quantity (Individual supply vs market supply)
demanded vs Demand) - Phân biệt lượng cung vs cung (Quantity
o Di chuyển trên đường cầu (Movement supplied vs Supply)
along demand curve) o Di chuyển trên đường cung (Movement
o Dịch chuyển đường cầu (Shift in demand along supply curve)
curve) o Dịch chuyển đường cung (Shift in
o Các yếu tố tác động đến cầu ngoài giá supply curve)
(Non-price determinants of demand) o Các yếu tố tác động đến cung ngoài giá
(Non-price determinants of supply)
CÂN BẰNG CUNG CẦU (MARKET EQUILIBRIUM)

- Điều kiện cân bằng thị trường (Condition for Market equilibrium)
- Trạng thái dư thừa; thiếu hụt (Surplus, shortage)
- Thay đổi điểm cân bằng thị trường (Changes in market equilibrium)
- Kiểm soát giá của chính phủ: Giá trần; giá sàn (Price controls of government: Price ceiling, price
floor) 70