Essentials of Economics, 3rd ed

1
Demand and Supply Analysis
2
Demand and supply analysis

• The price mechanism effect of a rise in demand
• the goods market

3
The price mechanism the effect of a rise in
demand
Goods Market
until Dg Sg
4
Demand and supply analysis

• The price mechanism effect of a rise in demand
• factor markets

5
The price mechanism the effect of a rise in
demand
Goods Market
Sg

Dg
shortage (Dg gt Sg)
Pg


until Dg Sg
Dg

Factor Market
until Df Sf
6
Demand and supply analysis

• The demand curve

7
The demand curveThe demand for potatoes
(monthly)
8
Market demand for potatoes (monthly)
Market demand (tonnes 000s) 700
Price (pence per kg) 20
Point
A
Price (pence per kg)
A
Demand
Quantity (tonnes 000s)
9
Market demand for potatoes (monthly)
Market demand (tonnes 000s) 700 500
Price (pence per kg) 20 40
Point
A B
Price (pence per kg)
B
A
Demand
Quantity (tonnes 000s)
10
Market demand for potatoes (monthly)
Market demand (tonnes 000s) 700 500 350
Price (pence per kg) 20 40 60
Point
A B C
C
Price (pence per kg)
B
A
Demand
Quantity (tonnes 000s)
11
Market demand for potatoes (monthly)
Market demand (tonnes 000s) 700 500 350 200
Price (pence per kg) 20 40 60 80
Point
A B C D
D
C
Price (pence per kg)
B
A
Demand
Quantity (tonnes 000s)
12
Market demand for potatoes (monthly)
Market demand (tonnes 000s) 700 500 350 200 100
Price (pence per kg) 20 40 60 80 100
Point
E
A B C D E
D
C
Price (pence per kg)
B
A
Demand
Quantity (tonnes 000s)
13
Demand and supply analysis

• Shifts in the
• demand curve

14
An increase in demand
P
Price
O
Q0
Q1
Quantity
15
A decrease in demand
P
Price
O
Q0
Q1
Quantity
16
Demand and supply analysis

• The supply curve

17
The supply curveThe supply of potatoes (monthly)
18
Market supply of potatoes (monthly)
Supply
P 20
Q 100
a
Price (pence per kg)
a
Quantity (tonnes 000s)
19
Market supply of potatoes (monthly)
Supply
P 20 40
Q 100 200
a b
Price (pence per kg)
b
a
Quantity (tonnes 000s)
20
Market supply of potatoes (monthly)
Supply
P 20 40 60
Q 100 200 350
a b c
c
Price (pence per kg)
b
a
Quantity (tonnes 000s)
21
Market supply of potatoes (monthly)
Supply
d
P 20 40 60 80
Q 100 200 350 530
a b c d
c
Price (pence per kg)
b
a
Quantity (tonnes 000s)
22
Market supply of potatoes (monthly)
e
Supply
d
P 20 40 60 80 100
Q 100 200 350 530 700
a b c d e
c
Price (pence per kg)
b
a
Quantity (tonnes 000s)
23
Demand and supply analysis

• Shifts in the
• supply curve

24
Shifts in the supply curve
P
S0
Q
O
25
Shifts in the supply curve
P
S0
Increase
Q
O
26
Shifts in the supply curve
P
S0
S1
Increase
Decrease
Q
O
27
Demand and supply analysis

• Market equilibrium

28
Equilibrium price and outputThe Market Demand
and Supply of Potatoes (Monthly)
29
The determination of market equilibrium
(potatoes monthly)
E
e
Supply
d
D
c
C
Price (pence per kg)
b
B
a
A
Demand
Quantity (tonnes 000s)
30
The determination of market equilibrium
(potatoes monthly)
E
e
Supply
d
D
c
C
Price (pence per kg)
b
B
a
A
Demand
Quantity (tonnes 000s)
31
The determination of market equilibrium
(potatoes monthly)
E
e
Supply
d
D
c
C
Price (pence per kg)
b
B
a
A
Demand
Quantity (tonnes 000s)
32
The determination of market equilibrium
(potatoes monthly)
E
e
Supply
d
D
Price (pence per kg)
b
B
a
A
Demand
Qe
Quantity (tonnes 000s)
33
Demand and supply analysis

• Effect of shift in the demand curve

34
Effect of a shift in the demand curve
P
S
g
Pe1
D1
O
Qe1
Q
35
Effect of a shift in the demand curve
P
S
g
Pe1
D1
O
Qe1
Q
36
Effect of a shift in the demand curve
P
S
g
Pe1
D2
D1
O
Qe1
Q
37
Effect of a shift in the demand curve
P
S
Pe2
g
Pe1
D2
D1
O
Qe1
Qe2
Q
38
Effect of a shift in the demand curve
P
S
g
Pe1
D1
O
Qe1
Q
39
Effect of a shift in the demand curve
P
S
g
Pe1
Pe2
D2
D1
O
Qe1
Qe2
Q
40
Demand and supply analysis

• Effect of shift in the supply curve

41
Effect of a shift in the supply curve
P
S1
g
Pe1
D
O
Qe1
Q
42
Effect of a shift in the supply curve
P
S1
g
Pe1
D
O
Qe1
Q
43
Effect of a shift in the supply curve
P
S2
S1
g
Pe1
D
O
Qe1
Q
44
Effect of a shift in the supply curve
P
S2
S1
Pe3
g
Pe1
D
O
Qe3
Qe1
Q
45
Effect of a shift in the supply curve
P
S1
g
Pe1
D
O
Qe1
Q
46
Effect of a shift in the supply curve
P
S1
S2
g
p
Pe1
Pe2
D
O
Qe2
Qe1
Q