Lecture 5
DEMAND AND SUPPLY

1. The demand curve

• Shows the quantity demanded by a consumer at each price, holding other variables fixed (ceteris paribus)
• Negative slope
• Parameters?

• Obtained by "adding up" individual demand curves

• Shift caused by changes in:
  • Consumers' incomes
  • Consumers' tastes
  • Prices of related goods (substitutes, complements)
  • Population (market size)

2. The supply curve

• Shows the quantity supplied by a firm at each price, holding other variables fixed

• Positive slope

• Parameters?

2.1 Market supply

• Obtained by "adding up" supply curves of individual firms

• Shift caused by changes in:
  • Prices of inputs
  • Technology
  • Industry size (no. of firms)

3. Market equilibrium

• Equilibrium price and quantity

• Intersection of market demand and supply curves

• Causes of changes in eqbm price and quantity
  • Shift of the demand curve
  • Shift of the supply curve

4. Example 1

Demand: P = 12 - 2Q
Supply: Q = P/3 - 2/3

• Sketch the demand and supply curves.
• Obtain the values of eqbm price and quantity.
• Sketch the effects of an increase in consumers' incomes.

5. Price rigidities

• Price ceilings
  • Excess demand
  • Eg., Rent control

• Price floors
  • Excess supply
  • Eg., Minimum wages

6. Example 1 (contd.)

1. What is the excess demand or excess supply in the market if:
   1. The price is not allowed to rise above $6?
   2. The price is not allowed to fall below $9?

2. What is the quantity bought and sold in each case? Provide sketches.