Supply & Demand
True Pillars of Economics
Václav Šebek
2014
Václav Šebek (FSS MU) Introduction to Economics 1 / 22
1 Supply and Demand
2 The Market
3 Elasticity
Václav Šebek (FSS MU) Introduction to Economics 2 / 22
Supply and Demand
Outline
1 Supply and Demand
2 The Market
3 Elasticity
Václav Šebek (FSS MU) Introduction to Economics 3 / 22
Supply and Demand
Basic Terms
Good(s) - a thing satisfying a need. A thing scarce in its availability
(remember previous lecture).
Market - Group of buyers and sellers of particular good.
Competition Process,
clash of buyers to buy or sellers to sell (offering lowest price to
catch a customer)
More importantly: Particular structure of a market (ei competitive
market, monopoly etc.)
Quantity (Q) - the amount of good we are talking about.
Price (P) - relative scarcity of a good (usually compared with money
or other good).
Václav Šebek (FSS MU) Introduction to Economics 4 / 22
Supply and Demand
Quantity demanded
Demanded Q of a good is an amount of good one buys at certain
price.
Q demanded thus cannot be found without relation to price!
Set of all possible amounts demanded at all possible prices is the
demand.
Or equally by function:QD = f (P)
Price 1 2 3 4 5 6 7 8 9
Q 17 15 13 11 9 7 5 3 1
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Supply and Demand
Demand
Václav Šebek (FSS MU) Introduction to Economics 6 / 22
Supply and Demand
Quantity supplied
Supplied Q of a good is an amount of good one offers (sells) at
certain price.
Q supplied thus cannot be found without relation to price!
Set of all possible amounts sold at all possible prices is the supply.
Or equally by function:QS = f (P)
Price 1 2 3 4 5 6 7 8 9
Q 1 3 5 7 9 11 13 15 17
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Supply and Demand
Supply
Václav Šebek (FSS MU) Introduction to Economics 8 / 22
Supply and Demand
Some Remarks
Market supply is simply the sum of all personal supplies. Market
demand is analogy.
There are several factors determining QSand QD besides price such as
income, preferences, technology, expectations etc. However the basic
relation depicted in previous figures reflects changes of Q caused by
changes of P ceteris paribus, eg all other conditions unchanged.
Figures are turned upside down, P being independent variable but
occupying vertical axis and vice versa. Don’t ask me why’s that :-)
Václav Šebek (FSS MU) Introduction to Economics 9 / 22
Supply and Demand
Changes in S and D
Changing the price ceteris paribus (see previous slide) causes so called
“moves on the line” (left hand figure).
Changing other factors such as income, preferences, technology,
expectations etc. causes so called “move of the line” (right hand
figure)
Václav Šebek (FSS MU) Introduction to Economics 10 / 22
The Market
Outline
1 Supply and Demand
2 The Market
3 Elasticity
Václav Šebek (FSS MU) Introduction to Economics 11 / 22
The Market
Supply and Demand
Supply and Demand meet at the market
Set of interesting questions
What price will prevail?
What quantity of good will be offered and demanded?
What quantity will be actually traded?
What if the price is somehow disturbed?
Václav Šebek (FSS MU) Introduction to Economics 12 / 22
The Market
Reaching Equilibrium
Market equilibrium is defined by price when both supply and demand
are balanced
In other words: P∗when QS = QD
Václav Šebek (FSS MU) Introduction to Economics 13 / 22
The Market
Markets Not in Equilibrium
What happens, when the price on the market is not that of equilibrium
The price does not clear the market, P∗when QS = QD.
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The Market
Examples
Increase in demand ⇒Price↑and Quantity ↑
Decrease in supply ⇒Price↑and Quantity ↓
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The Market
Examples (cont.)
Simple international trade example Perloff [2012].
Ban (left hand figure) or quota (right hand figure) on wheat imports.
Both decreases wheat supply - S↓, P↑, Q ↓
When the quota is effective?
Václav Šebek (FSS MU) Introduction to Economics 16 / 22
Elasticity
Outline
1 Supply and Demand
2 The Market
3 Elasticity
Václav Šebek (FSS MU) Introduction to Economics 17 / 22
Elasticity
Motivation
Supply and Demand usually not linear
How to assess the quantity fall associated with price rise?
On of the crucial managerial questions
Substitute good gets cheaper
Václav Šebek (FSS MU) Introduction to Economics 18 / 22
Elasticity
Elasticity
Mathematical phenomenon, attribute of a function
e = percentual change of f (x)
percentual change of x
Not the same as difference (slope of a function)!
Elasticity is independent of used units so you can easily compare
apples with oranges
Intuition:
High elasticity = huge shift of f (x) (Q) in response to little shift of x
(P).
Low elasticity = little shift of f (x) (Q) in response to huge shift of x
(P).
Václav Šebek (FSS MU) Introduction to Economics 19 / 22
Elasticity
Elasticities
Which independent variables changes
Demand elasticities:
Price e
Income e
Cross e (other good)
Supply elasticity:
Price e
Including special cases (0, <1, 1, >1, ∞)
Václav Šebek (FSS MU) Introduction to Economics 20 / 22
Elasticity
Elasticity determinants
Necessary x luxury goods
Availability of substitutes
Market definition (apples x fruits x food)
Time scale
Share of income
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Elasticity
References
Jeffrey M. Perloff. Microeconomics. Addison-Wesley, 2012.
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