Lecture 2 S

Business Economics
Lecture 2
Supply and Demand.
How Markets Work.
Our plan for this lecture
• Market Forces
• Markets and Competition
• Demand
• Supply
• Equilibrium
Market forces
• Supply and demand are the forces that make market

economies work.
• Supply and demand determine the quantity of each
good produced and the price at which it is sold.
• Price is the amount of money a buyer (a business or a
consumer) has to give up in order to acquire something.
• Price is different from cost.

• Cost refers to the payment to factor inputs in production.
Types of markets
• Markets exist in many forms.

• Market have buyers and sellers.
• Buyers and sellers don’t have to meet to make a
deal.
• A competitive market has many buyers and sellers,
none has a significant impact on determining the
market price.
• Price takers: Numerous buyers and sellers, each unable
to influence prices.
Perfectly competitive market
• Many Firms / Sellers

• Many Consumers / Buyers
• Homogenous Goods and Services – Sellers all
producing the same good or service
• Perfect Information
• Free Entry and Exit to the Industry
Other market structures
• Oligopoly: A few sellers not always aggressively

competing with each other (lecture 10)
• Imperfect or monopolistic market: Many sellers
each offering a slightly different product. (lecture
10)
• Monopoly: One supplier or buyer. (lecture 9)
Demand
Question
• What is Demand?
• Demand shows consumers willingness to pay for each unit
of good
• As the price of Cola increases, are you likely to buy

more or less?
• Activity “Demand”
Demand
• The quantity demanded is the amount of the good that buyers are
willing and able to purchase at each and every price level.
• Law of demand. When the price of a good:
• Rises, the quantity demanded of the good falls.
• Falls, the quantity demanded rises.
Price of chocolate Quantity of
(rmb per bar) chocolate (bars)
0
2
A demand
4
schedule shows the
6
relationship
between the price of 10
a good and the 15

quantity demanded.
Demand Curve
• The demand curve

is a graphical
display of the
demand schedule.
• This graph is
constructed from
the demand
schedule in the
following slide.
Market Demand Versus Individual Demand
• The market demand is the sum of all the

individual demands for a particular good or
service.
Market Demand Versus Individual Demand
The market demand curve shows how the total quantity demanded of
a good varies with the price of the good, holding constant all other
factors that affect how much consumers want to buy.
Movements Along the Demands Curve
• A movement along the demand curve occurs when there is

a change in price.
• If price of Pepsi rise, consumers will buy less.
• A fall in price will lead to an increase in the quantity

demanded because of:
• Income effect: a rise in prices makes consumers poorer as they can
now buy less with the same income.
• Substitution effect: a rise in price leads consumers to switch to
relatively cheaper goods, e.g. buy Coke instead of Pepsi
Movements Along the Demands Curve
Price (RMB)
Demand Curve, D1
15 40 Quantity
demanded
Shifts in the Demand Curve
Shift in the D curve

Price (RMB) means that for the
same price
consumption in the
market is lower/higher.
Why would you buy
less/more Coke than
3
Decrease in
demand
Increase in demand usual if price does not
change?
Demand Curve, Demand Curve, D1 Demand Curve, D2

D3
40 Quantity
demanded
Shifts in the Demand Curve
• A shift in the demand curve is caused by a factor

affecting demand other than a change in price.
• This includes…
• Income
• Prices of related goods
o Substitutes
o Price of Pepsi increases, what happens to D for Coke?
o Complements
o Price of petrol increases, what happens to D for cars?
• Tastes (is it cool? Fashion trends)
• Expectations (remember D for masks during Covid19)
• Number of Consumers
Practice: https://practice.mru.org/demand
Supply
Supply
• The quantity supplied is the amount that

firms (sellers/producers) are willing and
able to sell.
• Law of supply. When the price of a good:
• Rises, the quantity producers are
willing to supply also rises.
• Falls, the quantity supplied falls as well.
• The supply schedule shows the
relationship between price and the
quantity supplied.
• The supply curve is a graphical display of
the supply schedule.
Market Supply
• Market supply is the sum of

the supplies of all sellers.
• The behaviour of one individual business
may be different from the whole
industry.
Movement along the Supply Curve
Price
Supply Curve,
S1
The price variable is

3
represented by a
movement along the
supply curve
30 40 50 Quantity supplied
Changes in Supply
• A movement along the supply curve is caused by a

change in price.
• A shift in the supply curve is caused by a factor
affecting supply other than a change in price.
• Why would a company offer (want to sell) less goods at the same
price?
• Determinants of Supply
• Input prices
• Example:
Cheaper inputs will increase the supply at each and every price
level.
• Technology
• Expectations
• The number of sellers
• Natural / social factors
Shifts in the Supply Curve
Supply Curve, S3
Supply Curve,
Price S1
Supply Curve, S2
The price variable is Decrease in Increase in Supply

represented by a Supply
movement along the

supply curve whilst 3
change in the other

variables e.g.
technology,
expectations leads
to shift of the supply
curve.
30 40 50 Quantity supplied
Practice
Go to https://practice.mru.org/supply/ or scan the QR code

Market Equilibrium
Demand and Supply Together
Price
• Equilibrium: Price where quantity
supplied equals quantity
demanded (Qs = Qd).
• From where the supply and demand
curves intersect
• At this price, the amount that
people want to purchase is the
same as the amount that firms
want to sell
•Market Price = Equilibrium Price
Dis-equilibrium
• Qs ≠ Qd and therefore Market Price ≠ Equilibrium

Price
• If the market price was set:
Above the equilibrium Below the equilibrium
price there would be a price there would be a
surplus. shortage.
How does the

market return
to
equilibrium?
The law of supply and demand claims that price adjusts

so that the equilibrium point is reached
How to Analyze Changes in Equilibrium
• Decide whether the event shifts the supply or

demand curve or both.
• Decide in which direction the curve shifts.
• Use a supply and demand diagram to see how the
shift changes the equilibrium price and quantity.
Practice: https://practice.mru.org/equilibrium3/
Key takeaways
• The model of supply and demand is used to analyse

competitive markets
• The supply (S) curve shows how the quantity of a good
supplied depends on the price
• Law of S: as the price of a good rises, the quantity
supplied raises
• The demand (D) curve shows how the quantity of the good
demanded depends on the price
• Law of D: as the price of a good falls, the quantity
demanded raises
• The intersection of the D and S curves determines the market
equilibrium
Workshop
• Next time, we have 1 hour workshop.

• Please answer questions from the workshop
assignment before coming to the next lecture.

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Business Economics

• Supply and demand are the forces that make market

• Price is different from cost.

• Markets exist in many forms.

• Many Firms / Sellers

• Oligopoly: A few sellers not always aggressively

• As the price of Cola increases, are you likely to buy

a good and the 15

• The demand curve

• The market demand is the sum of all the

• A movement along the demand curve occurs when there is

• A fall in price will lead to an increase in the quantity

Shift in the D curve

Demand Curve, Demand Curve, D1 Demand Curve, D2

• A shift in the demand curve is caused by a factor

• The quantity supplied is the amount that

• Market supply is the sum of

The price variable is

• A movement along the supply curve is caused by a

The price variable is Decrease in Increase in Supply

movement along the

change in the other

Go to https://practice.mru.org/supply/ or scan the QR code

• Qs ≠ Qd and therefore Market Price ≠ Equilibrium

How does the

The law of supply and demand claims that price adjusts

• Decide whether the event shifts the supply or

• The model of supply and demand is used to analyse

• Next time, we have 1 hour workshop.

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