"Comprehensive Overview of Demand and Supply: Understanding Market Dynamics, Equilibrium, Price Mechanisms, and the Laws Governing Consumer and Producer Behavior in Economics"

In the first chapter on **Demand and Supply** at Nottingham University, students are introduced to the foundational concepts of microeconomics, focusing on how markets function. **Demand** refers to the quantity of a good or service that consumers are willing and able to purchase at various prices, and the **Law of Demand** explains the inverse relationship between price and quantity demanded. As prices drop, demand typically rises, shown by a downward-sloping **demand curve**. Conversely, **Supply** describes how much producers are willing to offer at different prices, with the **Law of Supply** indicating a positive relationship: as prices rise, so does supply, represented by an upward-sloping **supply curve**. Market **equilibrium** occurs where demand equals supply, setting the market price. When prices are too high, a **surplus** results, while too low a price causes a **shortage**. Shifts in the demand or supply curves can happen due to factors like changes in income, production costs, or technology, distinct from movements along the curves, which are driven by price changes. Finally, students learn about **elasticity**, which measures the sensitivity of demand and supply to price changes. This chapter sets the stage for understanding how markets reach equilibrium and adjust to changes in economic conditions.

1. INTRODUCTION TO MICROECONOMICS
LECTURE 2: DEMAND AND SUPPLY

2. LESSON LEARNING OUTCOMES
After completing the lesson, students should be able to:
Demonstrate understanding of verbal, graphical and mathematical representation of
demand and supply analysis.
Apply mathematical, statistical and graphical techniques in appropriate manners.
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3. OVERVIEW
Factors determining demand and supply
Movement along and shifts of demand and supply curves
Market equilibrium
Numerical examples
Comparative statics
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4. SUPPLY AND DEMAND
In a market economy, pricesare key to determine allocation of resources.
-Other mechanisms (central planning) no longer considered viable.
Much of microeconomics is concerned with how prices are determined within a market (‘price
theory’).
The supply-and-demand model is the most important tool for this.
Here: A quick introduction to supply-and-demand analysis.
Rest of the course:
-Understand where demand and supply come from.
-Explore the limits of the basic supply-and-demand model.
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5. DEMAND CURVES
The supply-and-demand model states that prices and quantities are determined
by supply and demand.
Demand for a good (say, bread) depends on
-Price
-Prices of related goods (croissants, butter)
-Income (positive or negative influence?)
-Other factors (information, taste, government regulation…)
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6. DEMAND CURVES
The supply-and-demand model focuses on a good’s price, holding all other factor
constant.
-A ‘ceteris paribus’assumption.
-Exogenousvs. endogenousvariables (or factors).
-Yields a ‘demand schedule’ or ‘demand curve’.
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7. DEMAND CURVES
The supply-and-demand model focuses on a good’s price, holding all other factor
constant.
-A ‘ceteris paribus’assumption.
-Exogenousvs. endogenousvariables (or factors).
-Yields a ‘demand schedule’ or ‘demand curve’.
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8. DEMAND CURVES
8
Movement along the
demand curve
Shift of the demand
curve
Price
Quantity
Figure 1. Demand for bread

9. THE DEMAND CURVE (FIGURE 1)
Quantity demanded –the amount of good that consumers are willing to buy at a
given price, holding constant other factors that influence purchases.
Demand curve –shows the quantity demanded at each possible price, holding
constant other factors that influence purchases.
Law of demand:consumers demand more of a good the lower its price, holding
constant other factors that influence purchases.
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10. EXOGENOUS VARIABLES VS. ENDOGENOUS VARIABLES
Endogenous variables Exogenous variables
-Variablesthat arediscussina demand
function
-Example:price of a good itself
-Quantity demanded changes if price
changes
-Movement along the demand curve
-Variables that are not in a demand
function
-Example:prices of related goods,
income, etc.
-Demand changes if exogenous variables
change
-Shifts in the demand curve
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11. SUPPLY CURVES
Supply a good (say, bread) depends on
-Price
-Prices of inputs (labour, flour…)
-Conditions of production (e.g., technology)
-Other factors (e.g., government regulation)
Again focus on the good’s price
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12. SUPPLY CURVES
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Movement along the
supply curve
Shift of the supply
curve
Price
Quantity
Figure 2. Supply of bread

13. THE SUPPLY CURVE (FIGURE 2)
Quantity supplied –the amount of good that firms want to sell at a given price,
holding constant other factors that influence firms’ supply decisions, such as costs
and government actions.
Supply curve –shows the quantity supplied at each possible price, holding constant
other factors that influence firms’ supply decisions.
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14. THE SUPPLY CURVE (FIGURE 2): EXERCISE 1
Suppose that workers’ wage has increased by 10 percent. How would you explain the
change in the production of bread?
Solution
Keywords: cost of input increases, exogenous variable, ceteris paribus (or the price of
bread is constant), supply falls (or the production of bread falls).
Diagram (if you include one): shows a leftward shift in supply curve, a constant price.
Do explain your diagram (e.g., the supply curve shifts leftward from S to S’ while the
price remains constant at P).
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15. EQUILIBRIUM
Intersection of demand and supply determines the equilibriumprice P
eand
quantity Q
e. (e.g., bread)
What happens if we are below P
e(‘excess demand’)?
What happens if we are above P
e(‘excess supply’)?
What happens if something changes? (exogenous variables change)
-e.g., the price of ingredients goes up.
-‘Comparative statics’ analysis
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16. EQUILIBRIUM
Central role of prices
-Prices convey information.
-Prices ration scarce resources.
-Prices determine income.
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17. EQUILIBRIUM
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Price
Quantity
Figure 3. Equilibrium
SupplyDemand
Q
eQ
s
Q
d
P
e
P
1

18. COMPARATIVE STATICS: EQUILIBRIUM CHANGES
18
Price
Quantity
Figure 3. Equilibrium
SupplyDemand
Q
eQ’
e
P
e
P’
e
Demand’

19. DEMAND: NUMERICAL EXAMPLE
The market for fish
I
N=171−UC +20
E+3
L+U2
I
N= quantity of fish demanded (million kg per year)
= price of fish (in $ per kg)

E= price of beef, a substitute good (in $ per kg)

L= price of chicken, another substitute (in $ per kg)
2= consumers’ income (in $ per year)
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20. DEMAND CURVES: NUMERICAL EXAMPLE
The market for fish
I
N=171−UC +20
E+3
L+U2
I
N= quantity of fish demanded (million kg per year)
= price of fish (in $ per kg)

E= price of beef, a substitute good (in $ per kg)

L= price of chicken, another substitute (in $ per kg)
2= consumers’ income (in $ per year)
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Hold everything but price of
fish constant:

E=$4 ⁄;
L$3.33 ⁄;
2=$12.5 compling

21. DEMAND CURVES: NUMERICAL EXAMPLE
21
Inverse demand:
Price
Q, million kg of fish per year
14.30
4.30
3.30
2.30
200
220
240286
I
N=171−UC +20
E+3
L+U2
=171−UC +204+33.33+212.5
=286−UC
I
N=286−UC
=14.3−0.05I
N
Demand curve for fish

22. DEMAND CURVES: NUMERICAL EXAMPLE
22
Inverse demand:
Price
Q, million kg of fish per year
14.30
4.30
3.30
2.30
200
220
240286
I
N=171−UC +20
E+3
L+U2
=171−UC +204+33.33+212.5
=286−UC
I
N=286−UC
=14.3−0.05I
N
Demand curve for fish

23. SUPPLY: NUMERICAL EXAMPLE
The market for fish
I
,=178+AC −60
N
I
,= quantity of fish supplied (million kg per year)
= price of fish (in $ per kg)

N= price of diesel, an input (in $ per litre)
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Hold everything but price of
fish constant:

N=$1.50 ⁄
I
,=178+AC −60(1.50)
=88+A
=−2.2+0.025I
,

24. SUPPLY CURVES: NUMERICAL EXAMPLE
24
Price
Q, million kg of fish per year
5.30
3.30
220 300
Supply curve for fish

25. EQUILIBRIUM: NUMERICAL EXAMPLE
Equilibrium is the intersection of demand and supply
Given I
N=286−UC and I
,=88+40
286−UC =88+40
=$3.30
Insert solution back into demand and supply equations:
I
N=286−203.30=220=88+403.30=I
,
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26. EQUILIBRIUM: NUMERICAL EXAMPLE
26
Price
Q, million kg of fish per year
3.95
3.30
220 246
S
2.65
e
233207194
D
Excess supply = 39
Excess demand = 39

27. EQUILIBRIUM: EXERCISE 2
What will be the new equilibrium price and quantity for fish if price of diesel
increases to $1.75/litre?
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28. COMPARATIVE STATICS: EXERCISE 3
Refer to Exercise 2
Price of diesel increases from $1.50/litreto $1.75/litre.
-Which curve would change?
-What would be the change in the equilibrium price and equilibrium quantity for
fish?
-How would you illustrate the comparative statics analysis in a diagram?
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