DSP Revision Part 1

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Demand, Supply and Price (Part 1)
Market
I. Demand Curve
II. Supply Curve
III. Equilibrium Price Quantity
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I. Demand
6
5
4
3
3
4
5
6
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The Law of Demand states that when the price of a
good increases, the quantity demanded for the
good will decrease, vice versa and ceteris
paribus.
P ? ? Qd ?
P ? ? Qd ?
Demand curve will be downward sloping.
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It is wrong to say that
P ? ? D ? or P ? ? D ?
D represents the entire demand curve. Its shifts
are not caused by any change in the price of the
good.
It should be
P ? ? Qd ? or P ? ? Qd ?
? Movement along the same demand curve.
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Demand ? Quantity demanded
Be careful!
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Quantity Demanded ? Quantity purchased
Quantity bought
Quantity transacted
Be careful!
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IV. Market demand
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6
8
10
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II. Supply
6
5
4
3
2
3
4
5
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The Law of Supply states that when the price of a
good increases, the quantity supplied of the good
will increase, vice versa and ceteris paribus.
P ? ? Qs ?
P ? ? Qs ?
Supply curve will be upward sloping.
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It is wrong to say that
P ? ? S ? or P ? ? S ?
It should be
P ? ? Qs ? or P ? ? Qs ?
Supply ? Quantity supplied
Quantity supplied ? Quantity sold
Quantity transacted
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IV. Market supply
27
5
9
13
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III. Equilibrium price and quantity
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Excess supply
P
When P 6,
Qd 3 units and Qs 5 units.
There will be an excess supply of 2 units ( 5 -
3).
The price will decrease until no excess supply at
all.
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Excess demand
P
When P 3,
Qd 6 units and Qs 2 units.
There will be an excess demand of 4 units ( 6 -
2).
The price will increase until no excess demand at
all.
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P
Equilibrium
When P 5,
Qd 4 units and Qs 4 units.
Equilibrium will appear, where 5 and 4 units are
equilibrium price and quantity respectively.
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Definitions
Excess supply or surplus means that the quantity
supplied is greater than the quantity demanded at
a price which is above the equilibrium price.
Excess demand or shortage means that the quantity
demanded is greater than the quantity supplied at
a price which is below the equilibrium price.
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Definitions
Equilibrium appears when the quantity demanded is
equal to the quantity supplied there will be no
tendency for the price to change.
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Demand, Supply and Price (Part 1) The End