Introduction to

Macroeconomics

Chapter 2 :
Supply and
Demand
By: Dr. Tarek Safwat

2025
Teaching the Terms

Market
Demand
Supply
Determinants
Surplus
Shortage

2
Markets

A market facilitates the interaction of a

buyer and a seller as they complete a
transaction

Buyers, as a group, determine

the demand
Sellers, as a group,
determine the supply
3
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.
4
Demand

Law of demand
Quantity demanded
Demand schedule
Demand curve
Determinants of demand

5
 Demand

Demand is a schedule or curve that

shows the various amounts of a product
that consumers will buy at each of a
series of possible prices during a
specific period.

6
 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.

7
Demand in Output Markets

ANNA'S DEMAND
A demand schedule is a
SCHEDULE FOR table showing how
TELEPHONE CALLS much of a given
QUANTITY product a household
PRICE DEMANDED would be willing to buy
(PER (CALLS PER at different prices.
CALL) MONTH)
$ 0 30 Demand curves are
0.50 25 usually derived from
3.50 7 demand schedules.
7.00 3
10.00 1
15.00 0

8
The Demand Curve

ANNA'S DEMAND
SCHEDULE FOR
The demand curve is a
TELEPHONE CALLS graph illustrating how
QUANTITY much of a given
PRICE DEMANDED
(PER (CALLS PER
product a household
CALL) MONTH) would be willing to buy
$ 0 30
0.50 25 at different prices.
3.50 7
7.00 3
10.00
15.00
1
0
A curve illustrating the
inverse relationship
between the price of a
product and the
quantity demanded of
it, other things equal,
is the demand curve. 9
The Law of Demand

The law of demand

states that there is a
negative, or inverse,
relationship between
price and the quantity
of a good demanded
and its price.

• This means that

demand curves slope
downward.

10
The Law of Demand

As the price
rises,

the quantity
demand falls.

11
Change in Demand

A demand curve is only accurate as long as there are

no changes other than price that could affect a
consumer’s decision
When factors other than price (non-price factors)
affect the demand curve, the entire curve shifts to
the left or to the right

12
Demand

Demand for ____

Price Quantity
6

$5 10 5
4
$4 20

Price
3

$3 30 2
1
$2 40 0
10 20 30 40 50
$1 50 Quantity

13
Determinants of Demand

Income
Price of related goods
Complements
Substitutes
Tastes or preferences
Expectations
Number of buyers

14
Non-Price Factors that effect
Demand
These factors will cause the demand curve to shift to
the left (less quantity demanded) or to the right
(more quantity demanded)

15
1. Change in Income

As people earn more money, the demand for luxury

goods will increase
As people earn less money, the demand for luxury
goods will decrease

Ex. When consumers’ income increases, they tend to

buy more luxury goods. Conversely, if incomes
decrease due to a recession, the demand for luxury
goods is likely to fall as consumers essential goods
and services over luxury items.

16
2. Substitution Effect

If there is a substitute product, demand for an item

may be influenced by the price of the substitute

Ex. If the price of coffee increases significantly,

consumers may reduce their consumption of coffee
and switch to a substitute, such as tea, which might
be relatively cheaper. As a result, the demand for
tea increases because consumers are substituting
tea for coffee due to the price change.

17
3. Complimentary Products

The demand for an item will increase or decrease if

the price of a complimentary product (something
that goes with it) increases or decreases

Ex. Smartphones and phone cases are

complementary products — they are used together.
If the demand for smartphones increases due to a
price drop or new technological features, the
demand for phone cases will also increase.

18
4. Change in Tastes or Preferences

Tastes or preferences refer to consumers' desires,

attitudes, and perceptions toward a product or
service.
When these preferences change, they can
significantly impact the demand for certain goods
or services.
If consumer preferences shift in favor of a product,
its demand will increase, even if the price remains
unchanged.If preferences shift away from a product,
its demand will decrease, regardless of its price.
Ex. Fashion, music, food

19
Shifting Demand

8
7
6
5
Price

4
3
2
1
0
10 20 30 40 50
Quantity

20
Supply

Law of supply
Quantity supplied
Supply schedule
Supply curve
Determinants of supply

21
SUPPLY

the amount of a good or

service that producers are
willing and able to produce
at different prices

22
QUANTITY SUPPLIED-

the amount of a good or

service PRODUCERS will
PRODUCE at a specific
price on the supply curve

23
Supply in Output Markets

CLARENCE BROWN'S • A supply schedule is a table

SUPPLY SCHEDULE showing how much of a product
FOR SOYBEANS
firms will supply at different
QUANTITY
SUPPLIED prices.
PRICE (THOUSANDS
(PER
BUSHEL)
OF BUSHELS
PER YEAR)
• Quantity supplied represents the
$ 2 0 number of units of a product that
1.75 10
2.25 20
a firm would be willing and able to
3.00 30 offer for sale at a particular price
4.00 45 during a given time period.
5.00 45

24
The Law of Supply

The law of supply

Price of soybeans per bushel ($)

6
5 states that there is a
4 positive relationship
3 between price and
2 quantity of a good
1 supplied.
0 This means that supply
0 10 20 30 40 50 curves typically have
Thousands of bushels of soybeans
produced per year a positive slope.

25
 Law of Supply

Part 1. As PRICE increases, SUPPLY increases

SUPPLY goes
PRICE goes

up
up

Then…

Part 2. As PRICE decreases, SUPPLY decreases

SUPPLY goes
PRICE goes

Then…
down
down

26
Example of a Supply Schedule

Market Supply Price per Slices

Schedule for a slice slice of supplied
of pizza: Pizza per day
$.50 1,000
$1.00 1,500
$1.50 2,000
$2.00 2,500
$2.50 3,000
$3.00 3,500
27
 Supply Curves
• A supply $3.50

Price per slice of Pizza

$3.00
curve is a $2.50 Supply
of Pizza
$2.00
graph of the $1.50

quantity $1.00
$0.50
supplied of a $0.00

good at
00

00
00

00
00
0
50
10

20
25

30
35
1,
Slices of Pizza Supplied
different prices. Per day

28
 Change in Supply
• A supply curve is only accurate as long as
there are no changes other than price that
could affect a consumer’s decision
• When factors other than price (non-price
factors) affect the supply curve, the entire
curve shifts to the left or to the right

29
Shifting Supply

8
7
6
5
Price

4
3
2
1
0
10 20 30 40 50
Quantity

30
 Determinants of Supply
• 1.Price of Inputs or Factors
• The price of inputs or the factors of
production such as land, labor, capital,
and entrepreneurship also determine the
supply of the goods. When the price of
inputs is low the cost of production is also
low.
• Thus, at this point, the firms tend to supply
more goods in the market and vice-versa.

31
 Determinants of Supply
• 2.Technology
• When a firm uses new technology it saves
the inputs and also reduces the cost of
production. Thus, firms produce more and
supply more goods.

32
 Determinants of Supply
• 3. Government Policy
• The taxation policies and the subsidies given by
the government also impact the supply of goods.
• When the taxes are high the producers are
unwilling to produce more goods and thus, the
supply will decrease.
• On the other hand, when the government grants
various subsidies and gives financial aids to the
producers, they increase the production of
goods. Thus, the supply also increases.

33
 Determinants of Supply
• 4. Expectations
• When the producers or suppliers expect
that the price shall increase in future they
hoard the goods so that they can sell them
at higher prices later. This will result in a
decrease in the supply of goods.
• Similarly, in case they expect a fall in
price, they will increase the supply of
goods.
34
 Determinants of Supply
• 5. Prices of other Commodities
• When the price of complementary goods
increases their supply also increases.
Thus, this results in the increase in the
supply of commodity also and vice-versa.
• Also, when the price of the substitutes
increases their supply also increases. This
results in a decrease in the supply of
goods.
35
 Determinants of Supply
• 6. Number of Firms
• When the number of firms in the market
increase the supply of goods also
increases and vice-versa.

36
A Change in Supply Versus
a Change in Quantity Supplied

• A change in supply is
not the same as a
change in quantity
supplied.
• In this example, a higher
price causes higher
quantity supplied, and
a move along the
demand curve.
• In this example, changes in determinants of supply, other
than price, cause an increase in supply, or a shift of the
entire supply curve, from SA to SB. 37
A Change in Supply Versus
a Change in Quantity Supplied

• When supply shifts

to the right, supply
increases. This
causes quantity
supplied to be
greater than it was
prior to the shift, for
each and every price
level.

38
A Change in Supply Versus
a Change in Quantity Supplied
To summarize:

Change in price of a good or service

leads to

Change in quantity supplied

(Movement along the curve).

Change in costs, input prices, technology, or prices of

related goods and services
leads to

Change in supply
(Shift of curve). 39
Supply

Supply of ____
Price Quantity
6

$5 50 5

4
$4 40

Price
3

$3 30 2

1
$2 20 0
10 20 30 40 50
$1 10 Quantity

40
Market Equilibrium

Equilibrium in a market occurs when the price

balances the plans of buyers and plans of sellers.
The equilibrium price is the price at which the
quantity demanded equals the quantity supplied.
The equilibrium quantity is the quantity bought & sold
at the equilibrium price .

41
Price as a Regulator

The price of a good regulates the quantity demands

and supplied.
If price is too low , the quantity demanded > the
quantity supplied , and we have a shortage . The
shortage bids up price till we reach equilibrium.
If price is too high , the quantity supplied > the
quantity demanded , and we have a surplus . The
surplus e bids down the price till we reach
equilibrium.

42
 A Figure Shows Equilibrium
P
D S
P2 A Surplus

P*

P1
A Shortage
q* Q
43
 Price Qd Qs Shortage (−)
per unit Or
Surplus (+)

millions of bars per week

0.5 22 0 − 22
1 15 6 −9
1.5 10 10 0
2 7 13 +6
2.5 5 15 +10 44
Market Equilibrium

Quantity Quantity
Price
Demanded Supplied
$5 10 50
$4 20 40
$3 30 30
$2 40 20
$1 50 10
45
Market Equilibrium

6
Supply
5

4
Price

1
Demand
0
10 20 30 40 50
Quantity

46
Market Equilibrium

• Quantity demanded is less than

Surplus quantity supplied Qd < Qs

• Quantity demanded is equal to

Equilibrium quantity supplied Qd = Qs

• Quantity demanded is greater than

Shortage quantity supplied Qd > Qs

47
Thank You