DEMAND, SUPPLY

and MARKET
EQUILIBRIUM
ECON 23 - BASIC MICROECONOMICS
Demand
Demand
Alfred Marshals, a pioneering economist
defined demand as the quantity of a good
or service consumers are willing and able to buy
at different prices within a specific time
frame. It stands for having both the need and the
means to purchase a specific commodity
or service.
Demand
Consider that a well-known tech corporation recently
introduced a brand-new smartphone. The initial cost
has been established by the corporation at $800. Many
individuals consider the new smartphone to be quite
pricey at this point and are unwilling to purchase it.
Because only a few consumers can afford to spend
$800 on a phone, there isn't much of a market for it.
Demand
Let's imagine that in response to consumer
complaints and competition from other phone makers,
the business decides to reduce the price to $600. More
consumers find the smartphone affordable at this
lower price, which dramatically increases demand for
it. Now that the price has increased, more users are
able and willing to purchase the smartphone.
Quantity Demand
Refers to a particular quantity or amount of a good or
service that consumers are willing and able to buy at a
particular price during a specific time frame. It displays
the volume of a commodity or service that people are
interested in purchasing at a certain price.
 Law of Demand
"The Law of Demand states that, all other factors
being equal (ceteris paribus), as the price of a product
or service decreases, the quantity demanded for that
product or service increases, and conversely, as the
price of the product or service rises, the quantity
demanded decreases."
Justification for the Law of Demand
1. Income Effect - The income effect describes the
change in the quantity of a good or
service that consumers demand due to changes in their
real income, which is influenced by changes in the
price of the good or service. Specifically, the income
effect explains how an increase or decrease in the price
of a product or service can impact the consumer's
purchasing power and, consequently, their buying
choices.
Justification for the Law of Demand
a. Normal Goods: For most goods, an increase in
income leads to an increase in the quantity demanded.
This means that when consumers have more
disposable income, they are likely to buy more of these
goods, even if their prices remain constant. Conversely,
a decrease in income typically results in a decreased
quantity demanded for these goods.
Justification for the Law of Demand
b. Inferior Goods: In the case of inferior goods, which
are of lower quality or less desirable than alternatives,
an increase in income can lead to a decrease in the
quantity demanded. Consumers might shift to
higher-quality goods when they can afford to do so. A
decrease in income can have the opposite effect,
increasing the quantity demanded for inferior goods.
Justification for the Law of Demand
c. Luxury Goods: Luxury goods are those for which an
increase in income causes a significant rise in the
quantity demanded. People tend to buy more luxury
goods when their income goes up, reflecting their
higher purchasing power.
Justification for the Law of Demand
2. Substitution Effect - The substitution effect is a
concept in economics that explains how changes in the
price of a good or service can influence consumer
behavior by leading them to substitute a cheaper or
more expensive alternative.
Justification for the Law of Demand
a. Price Decrease: When the price of a specific good or
service decreases while other prices remain constant,
consumers are more likely to purchase more of that
product because it has become relatively cheaper. This
is known as the substitution effect. It leads consumers
to switch from the more expensive alternatives to the
now cheaper product.
Justification for the Law of Demand
b. Price Increase: Conversely, if the price of a product
increases, consumers may choose to buy less of it and
switch to cheaper substitutes. This behavior is also
attributed to the substitution effect.
Factors Affecting Demand
1. Income (I). A change in income will cause a change in
demand. The direction in which the demand will
change in response to a change in income depends on
the following type of goods:
Factors Affecting Demand
a. Normal Goods (+). Normal goods are products for
which demand increases when income rises and
decreases when income falls. These are often essential
items that are closely tied to our basic needs. For
instance, when people's incomes increase, they tend to
spend more on necessities like rice, utilities (such as
electricity and water), and essential services like
medical and dental care.
Factors Affecting Demand
b. Inferior Goods (-). Inferior goods exhibit a contrasting
behavior. Demand for inferior goods tends to decrease
as income rises and increase as income falls. These are
typically goods that people use when they have limited
purchasing power and may switch to better
alternatives as their incomes grow.
Factors Affecting Demand
2. Price Expectation (Pe). The quantity of a good
demanded isn't solely determined by its current price
but also by expectations regarding future prices. Price
expectations can significantly affect consumer
behavior, and this effect can be observed in various
scenarios.
Factors Affecting Demand
3. Price of Related Products: The price of related
products, also known as cross-price elasticity, is
another important non-price determinant of demand.
This component examines how changes in one
product's price can affect the demand for a different
product. There are two primary scenarios related to
the price of related products:
Factors Affecting Demand
a. Substitute Product (+). Goods that can be used in
place of other goods. They are related in such a way
that an increase in the price of one good cause an
increase in the demand for the other good or vice
versa.
b. Complementary Goods (-). Goods that go together or
cannot be used without the other. They are related in
such a way that an increase in the price of one good
will cause a decrease in the demand for the other
good.
Factors Affecting Demand
4. Number of Consumers (N): The number of
consumers, or the size of the consumer population, is
another essential non-price determinant of demand. It
refers to the total count of individuals or households in
a market or area who are potential buyers of a
particular product or service.
Factors Affecting Demand
5. Taste and Preference (T): Consumers' taste and
preferences play a vital role in shaping the demand for
any product. Elements such as religion, culture,
traditions, and age can significantly influence these
factors. When consumer preference and taste lean
toward a specific product, or conversely, move away
from it, it can have a profound impact on its demand."
Factors Affecting Demand
6. Range of Available Goods (R): When there is an
abundance of goods or commodities serving the same
purpose, the overall market demand becomes
dispersed among these various options."
Demand Function
A demand function is a mathematical representation
or equation that expresses the relationship between
the quantity demanded of a product and various
factors influencing it. Typically, it relates the quantity
demanded to the price of the product and other
non-price determinants.
Demand Function
Demand Function
Demand Function

The demand function provided can be restated as follows,

holding all other factors constant (ceteris paribus), with the
exception of the price determinant.
Demand Function

The expression above indicates that the quantity demanded for

good X depends on its price during a specific time frame, with
all other factors held constant (ceteris paribus)
Demand Function
A simplified functional expression can be used to create a linear
equation, which serves as a mathematical representation of the
quantity demanded for a particular product, denoted as "good
X," during a specific time period. This equation can be
expressed as follows:
Demand Schedule
A demand schedule is a tabular representation or
chart that outlines the relationship between the price
of a product and the quantity that consumers are
willing and able to purchase at those various price
levels, during a specified time frame. It provides a
structured view of how the quantity demanded
changes in response to changes in the product's price,
while other factors are held constant.
Demand Schedule
Demand Curve
A demand curve is a graphical representation that
shows the relationship between the price of a product
and the quantity of that product that consumers are
willing and able to purchase, assuming all other
relevant factors remain constant. Typically, a demand
curve slopes downward from left to right, indicating
that as the price of a product decreases, the quantity
demanded increases, and conversely, as the price
rises, the quantity demanded decreases.
Demand Curve
Movement along Demand Curve
A movement along the demand curve occurs when
there is a change in the quantity demanded of a
product or service in response to a change in its price
while keeping all other factors constant. This change
in price leads to a change in the quantity consumers
are willing to purchase. If the price decreases,
consumers typically move along the demand curve to
a higher quantity demanded, and if the price
increases, they move to a lower quantity demanded.
Movement along Demand Curve
Change in Demand
A change in demand refers to a shift in the entire
demand curve for a product or service, resulting from
alterations in factors other than the price of the
product. This shift can either increase or decrease the
overall quantity demanded at various price levels.
Change in Demand
Several factors can lead to a change in demand,
including shifts in consumer preferences, changes in
income, variations in the prices of related goods,
shifts in population and demographics, consumer
expectations, or even the influence of external events
like economic recessions or changes in government
policies.
Change in Demand
When there's an increase in demand, the entire
demand curve shifts to the right, indicating that
consumers are willing to buy more at every price
level. Conversely, a decrease in demand leads to a
shift of the demand curve to the left, signaling a
reduction in the quantity consumers want to
purchase at each price point.
Change in Demand
Supply
Supply
Supply, in economics, is the quantity of a good or
service that producers are willing and able to offer in
the market at various prices during a specific period.
It represents the relationship between the price of a
product and the quantity that producers are willing to
provide.
Quantity Supply
Quantity supplied refers to the specific amount or
quantity of a good or service that producers are
willing and able to offer to the market at a given price
during a particular time period. It represents the
production output or availability of a product at a
particular price point.
Law of Supply
"The Law of Supply states that, all other factors being
equal, as the price of a product or service increases,
the quantity supplied by producers also increases,
and conversely, as the price of the product or service
falls, the quantity supplied decreases."
Law of Supply
Consider a region where rice is a staple food. Rice
farmers cultivate and harvest rice to sell in the local
market. At the start of the planting season, the price
of rice is relatively high due to increasing demand
driven by population growth and changing dietary
preferences. In response to the higher prices, rice
farmers decide to expand their rice cultivation.
 Law ofSupply
They invest in additional land, purchase more seeds
and fertilizers, and employ more labor to maximize
their rice production. Consequently, the quantity of
rice supplied to the market increases significantly.
 Law ofSupply
Now, let's examine a different scenario in the next
planting season. Several factors, such as a bumper
rice crop, an influx of rice imports, or a decrease in
consumer demand, lead to a substantial drop in rice
prices. In response to these lower prices, the rice
farmers may decide to reduce their rice production.
They might use their resources for other more
profitable crops or even leave some of their fieldʼs
fallow.
Factors affecting Supply
Several factors can influence and affect the supply of
a product or service in the market. These factors
determine the quantity that producers are willing and
able to provide. Some of the key factors affecting
supply include:
1. Technology (T): Advances in technology can
enhance production efficiency and reduce costs,
leading to increased supply. Conversely, outdated
technology may hinder supply.
Factors affecting Supply
2. Cost of Production (C): The costs associated with
producing a product, including raw materials, labor,
and overhead, can significantly impact supply. Higher
production costs may discourage supply, while lower
costs can encourage increased supply.
3. Price Expectation (Pe): Producers' expectations
about future market conditions, such as price trends,
can influence their current supply decisions. If they
anticipate higher prices in the future, they may reduce
current supply to capitalize on those prices.
Factors affecting Supply
4. Price of Related Products (Pr): The price of related
products can have an indirect impact on the supply of
a particular product. This relationship is typically
observed in the context of complementary goods and
substitute goods:
a. Substitute goods (-): Substitute goods are items
that can be substituted for one another, with a change
in the price of one affecting the supply of the other in
an inverse manner.
Factors affecting Supply
a. Substitute goods (-): Substitute goods are items
that can be substituted for one another, with a change
in the price of one affecting the supply of the other in
an inverse manner. For example, if the price of pork
rises significantly, it might incentivize poultry farmers
to switch to hog farming due to the potentially higher
profitability.
Factors affecting Supply
b. Complementary goods (+): Complementary goods
are products that are interrelated or dependent on
each other, to the extent that an increase in the price
of one item leads to a corresponding increase in the
demand for the other. This means that these goods
are typically used together, and the consumption of
one is closely tied to the consumption of the other.
Factors affecting Supply
5. Government Regulation and Taxes (Tx): It is
anticipated that government-imposed taxes raise
production costs, subsequently dissuading producers
due to diminished earnings. Increased regulatory
measures can lead to reduced supply in the market. For
instance, aspiring medical professionals are required to
pass government-conducted licensure exams to ensure
they meet the necessary qualifications before practicing
legally. This undoubtedly restricts the supply of medical
services in the market.
Factors affecting Supply
6. Government Subsidies (Sb): Government subsidies, in
the form of financial assistance, serve to lower
production costs and thereby stimulate increased
supply. For instance, in Japan, the government provides
subsidies to support its agricultural sector. In cases
where agricultural products remain unsold in the
market, the government steps in to purchase them from
the farmers. This practice ensures a consistent and
uninterrupted supply of commodities in the market.
Factors affecting Supply
7. Number of Sellers (Se): The quantity of producers in a
market can influence supply. More producers entering a
market can increase supply, while a decline in the
number of producers may reduce supply.
8. Availability of Inputs (A): The availability of key
resources, such as land, labor, and raw materials, can
affect supply. A shortage of resources may limit supply,
while an abundance can boost it.
Factors affecting Supply
9. Weather and Natural Disasters (W): Weather
conditions and natural disasters can impact the supply
of agricultural products. For example, droughts can
reduce the supply of crops like wheat and corn.
Supply Function
A supply function is a mathematical representation that
describes the relationship between the quantity of a
good or service that producers are willing and able to
supply and the various factors that influence their
supply decisions. Typically, it relates the quantity
supplied to the price of the product and other relevant
determinants, such as the cost of production,
technological advancements, and government policies.
Supply Function

The supply function above can be rewritten as follows if

all determinants except price are kept constant (ceteris
paribus).
Supply Function
A simplified functional expression can be used to create
a linear equation, which serves as a mathematical
representation of the quantity supplied for a particular
product, denoted as "good X," during a specific time
period. This equation can be expressed as follows:
Supply Schedule
A supply schedule is a tabular representation or chart
that outlines the relationship between the price of a
product and the quantity that producers are willing and
able to supply to the market at those various price
levels, during a specified time frame. It provides a
structured view of how the quantity supplied changes in
response to changes in the product's price, while other
factors are held constant.
Supply Schedule
Supply Curve
A supply curve is a graphical representation that
illustrates the relationship between the price of a
product and the quantity that producers are willing and
able to supply to the market at various price levels,
while keeping other factors constant. The supply curve
typically slopes upward from left to right, indicating
that as the price of a product increases, the quantity
supplied also increases, and as the price decreases, the
quantity supplied decreases.
Supply Curve
Movement along Supply Curve
Movement along a supply curve refers to a change in
the quantity supplied of a product in response to a
change in its price, while all other factors that affect
supply remain constant. In this scenario, the only factor
causing a change in the quantity supplied is the price of
the product.
Movement along Supply Curve
Change in Supply
A change in the supply curve occurs when there is an
alteration in the entire supply relationship for a product
due to shifts in factors other than the price of the
product. These shifts can lead to changes in the
quantity supplied at various price levels.
Change in Supply
An increase in supply results in a rightward shift of the
supply curve. This indicates that, at each price level,
producers are willing to supply more of the product.
Conversely, a decrease in supply leads to a leftward shift
of the supply curve. This means that at each price level,
producers are willing to supply less of the product.
Change in Supply