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Demand and Supply

Topic 1

Demand and supply

1. Demand

2. Supply

3. Market Equilibrium

4. Consumer & Producer Surplus

Demand

A relationship between price and quantity

demanded in a given time period, ceteris

paribus.

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Demand curve

Law of demand

An inverse relationship exists between the

price of a good and the quantity demanded in

a given time period, ceteris paribus.

Reasons:

substitution effect

income effect

Determinants of demand

tastes and preferences

prices of related goods and services

income

number of consumers

expectations of future prices and income

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Supply

the relationship that exists between the price of agood and the quantity supplied in a given timeperiod, ceteris paribus.

Law of supply

A direct relationship exists between the price

of a good and the quantity supplied in a

given time period, ceteris paribus.

Reason for law of supply

The law of supply is the result ofthe law of increasing cost. As the quantity of a good produced

rises, the marginal opportunity costrises.

Sellers will only produce and sell anadditional unit of a good if the pricerises above the marginal opportunitycost of producing the additional unit.

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Determinants of supply

the price of resources, technology and productivity,

the expectations of producers,

the number of producers, and

the prices of related goods and services

note that this involves a relationship in production,

not in consumption

Market equilibrium

4. 1 Consumer Surplus

the difference between what the consumers are

willing to pay (shown on the demand curve)

and what they actually pay (the market price)

In other words, Consumer surplus is the area

between the Demand curve and the Price line

http://localhost/var/Local%20Settings/mod%202%20dd%20and%20ss/dd&supply/Consumer%20Surplus.ppthttp://localhost/var/Local%20Settings/mod%202%20dd%20and%20ss/dd&supply/Consumer%20Surplus.ppt

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fig

Consumer surplus

D

P1

Q1

P

QO

Copyright 2001 Pearson Education Australia

fig

Consumer surplus

D

Total

consumer

expenditure

P1

Q1

P

QO

Copyright 2001 Pearson Education Australia

fig

Consumer surplus

D

Total

consumer

expenditure

Total

consumer

surplusP1

Q1

P

QO

Copyright 2001 Pearson Education Australia

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Consumer Surplus

CS is the area between the demand curve andthe market price line.

It measures how much the consumer gains

from buying goods in the market

4.2 Producer surplus

the amount producers receive (market price)

above the minimum price required to make

them supply the good (shown on the supply curve)

Producer surplus is the area between the Price

line and the Supply curve

fig

Producer surplus

P1

Q1

P

QO

Copyright 2001 Pearson Education Australia

S

ProducerSurplus

Total Producer surplus

Market price

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4.3 CS and PS Economic efficiency

CS and PS are an important tool for measuringthe performance of an economic system

or for assessing the impact of alternative

government policies in that system.