Demand, supply and equilibrium

For fifth year under graduate

pharmacy students
 objectives
• Understanding different decision making units
• To understand definition of demand, supply
and equilibrium
• To understand the determinants of demand
and supply
 The Basic Decision-Making Units
A firm is an organization that transforms resources
(inputs) into products (outputs).
Firms are the primary producing units in a market
economy.
An entrepreneur is a person who organizes,
manages, and assumes the risks of a firm, taking a
new idea or a new product and turning it into a
successful business.
Households are the consuming units in an economy.
The Circular Flow of Economic Activity
 The Circular Flow…
• The circular flow of economic activity above shows the
connections between firms and households in input and
output markets.
• Output, or product, markets are the markets in which
goods and services are exchanged.
• Input markets are the markets in which resources—
labor, capital, and land—used to produce products, are
exchanged.
 The Concept of Demand
• Demand is a Schedule of the different quantities
of a good or service that a consumer is willing
and able to purchase at each and every possible
price.
• Demand - a relationship between price and
quantity demanded.
 Determinants of Demand
The main factors which influence an individual
consumer’s demand for good A(dA):
a) The price of the good itself (PA)
b) The Price of the Substitutes of the Good (PS)
c) The Price of the Complements Good (PC)
d) Change in income of the consumer (Y)
e) Change in taste of the good (T)
f) The consumers expectations about future price
change(E)
 Determinants of Demand …
• In a mathematical form we can express the
demand function for a good as:
dA=f(PA, PS, PC, Y, T, E)
• Assuming that all factors except the price of the
good itself are kept constant, the individual
demand for a good depends up on its price.
 Determinants of Demand …
 The demand for a given product will rise if:
1. incomes rise for a normal good or fall for an inferior
good
2. the price of a complement falls
3. the price of a substitute rises
4. people like the product better
5. people expect the price to rise soon
6. people expect the product not to be available soon
7. people expect their incomes to rise in the near future
8. there are more buyers.
 The opposite will cause the demand for the product to
fall.
 Determinants of Demand …
• Normal Goods are goods for which demand goes up
when income is higher and for which demand goes down
when income is lower.
• Inferior Goods are goods for which demand falls when
income rises.
• Substitutes are goods that can serve as replacements for
one another; when the price of one increases, demand
for the other goes up. Perfect substitutes are identical
products.
 Determinants of Demand …
• Complements are goods that “go together”; a
decrease in the price of one results in an increase
in demand for the other, and vice versa.
 Determinants of Demand …
3 Ways of presenting the demand relationship
The relationship between quantity purchased
/demanded and alternative prices may be
presented in 3 ways:
I. Demand curve – in graphical form
II. Demand schedule –in tabular form.
III. Demand function – in equation form
 Quantity Demanded
• Quantity demanded is the amount (number of
units) of a product that a household would buy in
a given time period if it could buy all it wanted at
the current market price.
Demand schedule and demand curve
The Law of Demand
• The law of demand states
that there is a negative, or
inverse relationship between
the quantity of a good
demanded and its price.
• This means that demand
curves slopes downward.
 Reading assignment
• Influences (shift) of determinants of demand
on demand curve.
 From Household to Market Demand
• Demand for a good or service can be defined for an
individual household, or for a group of house holds
that make up a market.
• Market demand is the sum of all the quantities of a
good or service demanded per period by all the
households buying in the market for that good or
service.
• Market demand can be calculated based on the number of
buyers in the market.
Example, assuming that there are only two buyers in
the market: At a price $3 per unit, if the first consumer
buys 4 units of a good, and the second consumer buys
6 units of the good the total quantity demanded in the
market at $ 3 per unit is 10 units of the good.
 Supply
• The various quantities of a good a seller is willing
and able to offer for sale at each specific price
,over some given period of time , is known as
supply.
• Supply - a relationship between price and quantity
supplied.
 Determinants of Supply
 Factors affecting the supply of a good or service,
Let it be supply of good A:
a)the price of good A(PA)
b)the price of substitutes(PS)
c)the price of complements(PC)
d)cost of production(C) and
e)expectation about future price change(E)
 In symbolic form , we can write the following
supply function for good A(SA).
SA=F(PA, PS, PC,C, E)
Supply in Output Markets
• A supply schedule is a table
showing how much of a
product firms will supply at
different prices.

• Quantity supplied represents

the number of units of a
product that a firm would be
willing and able to offer for
sale at a particular price
during a given time period.
 Supply in Output Markets
A supply curve is a graph illustrating how much of a product a firm
will supply at different prices.
The Law of Supply
 The law of supply states that
there is a positive relationship
between price and quantity of
a good supplied.
 This means that supply curves
typically have a positive slope.
Influences (shift) of determinants of supply on
supply curve?
From Individual Supply to Market Supply
• The supply of a good or service can be defined for
an individual firm, or for a group of firms that
make up a market or an industry.
• Market supply is the sum of all the quantities of a
good or service supplied per period by all the firms
selling in the market for that good or service.
 Market Equilibrium
• An equilibrium is the condition that exists when
the two economic variables quantity supplied
and quantity demanded are equal.
• The equilibrium price clears the market, so it is
sometimes called the market-clearing price because at
this price what the producer wants to sell is exactly
matched with what consumer wants to buy.
It is the price at which the quantity demanded equals
the quantity supplied.
 Market Disequilibria
• Excess demand, or shortage, is the condition that
exists when quantity demanded exceeds quantity
supplied at the current price.
• When quantity demanded exceeds quantity
supplied, price tends to rise until equilibrium is
restored.
 Market Disequilibria…
• Excess supply, or surplus, is the condition that
exists when quantity supplied exceeds quantity
demanded at the current price.
• When quantity supplied exceeds quantity
demanded, price tends to fall until equilibrium is
restored.