Demand and
Supply Analysis
Demand and supply analysis
The price mechanism:
effect of a rise in demand
the goods market
The price mechanism:
the effect of a rise in demand
Goods Market
Sg
Dg shortage Pg until Dg = Sg
(Dg > Sg) Dg
Demand and supply analysis
The price mechanism:
effect of a rise in demand
factor markets
The price mechanism:
the effect of a rise in demand
Goods Market
Sg
Dg shortage Pg until Dg = Sg
(Dg > Sg) Dg
Factor Market
Sf
Sg Df shortage Pf until Df = Sf
(Df > Sf) Df
Demand and supply analysis
The demand curve
The demand curve:
The demand for potatoes (monthly)
(1) (2) (3) (4)
Price Tracey's Darren's Total market
(pence per kg) demand demand demand
(kg) (kg) (tonnes: 000s)
A 20 28 16 700
B 40 15 11 500
C 60 5 9 350
D 80 1 7 200
E 100 0 6 100
Market demand for potatoes (monthly)
Point Price Market demand
100 (pence per kg) (tonnes 000s)
A 20 700
Price (pence per kg)
80
60
40
A
20
Demand
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Market demand for potatoes (monthly)
Point Price Market demand
100 (pence per kg) (tonnes 000s)
A 20 700
Price (pence per kg)
80 B 40 500
60
B
40
A
20
Demand
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Market demand for potatoes (monthly)
Point Price Market demand
100 (pence per kg) (tonnes 000s)
A 20 700
Price (pence per kg)
80 B 40 500
C 60 350
C
60
B
40
A
20
Demand
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Market demand for potatoes (monthly)
Point Price Market demand
100 (pence per kg) (tonnes 000s)
A 20 700
D
Price (pence per kg)
80 B 40 500
C 60 350
C D 80 200
60
B
40
A
20
Demand
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Market demand for potatoes (monthly)
E Point Price Market demand
100 (pence per kg) (tonnes 000s)
A 20 700
D
Price (pence per kg)
80 B 40 500
C 60 350
C D 80 200
60 E 100 100
B
40
A
20
Demand
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Demand and supply analysis
Shifts in the
demand curve
An increase in demand
P
Price
D0 D1
O Q0 Q1
Quantity
A decrease in demand
P
Price
D1 D0
O Q0 Q1
Quantity
Demand and supply analysis
The supply curve
The supply curve:
The supply of potatoes (monthly)
Price of Farmer X's Total Market
potatoes supply supply
(pence per kg) (tonnes) (tonnes: 000s)
a 20 50 100
b 40 70 200
c 60 100 350
d 80 120 530
e 100 130 700
Market supply of potatoes (monthly)
100
Supply
P Q
80
a 20 100
Price (pence per kg)
60
40
a
20
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Market supply of potatoes (monthly)
100
Supply
P Q
80
a 20 100
Price (pence per kg)
b 40 200
60
b
40
a
20
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Market supply of potatoes (monthly)
100
Supply
P Q
80
a 20 100
Price (pence per kg)
b 40 200
c c 60 350
60
b
40
a
20
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Market supply of potatoes (monthly)
100
Supply
d P Q
80
a 20 100
Price (pence per kg)
b 40 200
c c 60 350
60
d 80 530
b
40
a
20
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Market supply of potatoes (monthly)
100 e
Supply
d P Q
80
a 20 100
Price (pence per kg)
b 40 200
c c 60 350
60
d 80 530
e 100 700
b
40
a
20
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Demand and supply analysis
Shifts in the
supply curve
Shifts in the supply curve
P
S0
O Q
Shifts in the supply curve
P
S0 S1
Increase
O Q
Shifts in the supply curve
P
S2 S0 S1
Decrease Increase
O Q
Demand and supply analysis
Market equilibrium
Equilibrium price and output:
The Market Demand and Supply of Potatoes (Monthly)
Price of Potatoes Total Market Demand Total Market Supply
(pence per kilo) (Tonnes: 000s) (Tonnes: 000s)
20 700 (A) 100 (a)
40 500 (B) 200 (b)
60 350 (C) 350 (c)
80 200 (D) 530 (d)
100 100 (E) 700 (e)
The determination of market equilibrium
(potatoes: monthly)
E e
100
Supply
D d
80
Price (pence per kg)
Cc
60
b B
40
a A
20
Demand
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
The determination of market equilibrium
(potatoes: monthly)
E e
100
Supply
D SURPLUS d
80
Price (pence per kg)
(330 000)
Cc
60
b B
40
a A
20
Demand
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
The determination of market equilibrium
(potatoes: monthly)
E e
100
Supply
D d
80
Price (pence per kg)
Cc
60
b SHORTAGE B
40
(300 000)
a A
20
Demand
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
The determination of market equilibrium
(potatoes: monthly)
E e
100
Supply
D d
80
Price (pence per kg)
60
b B
40
a A
20
Demand
0
0 100 200 300 Qe 400 500 600 700 800
Quantity (tonnes: 000s)
Demand and supply analysis
Effect of shift in the
demand curve
Effect of a shift in the demand curve
P
S
An increase
in demand
g
Pe1
D1
O Q e1 Q
Effect of a shift in the demand curve
P
S
g
Pe1
D1
O Q e1 Q
Effect of a shift in the demand curve
P
S
g
Pe1
D2
D1
O Q e1 Q
Effect of a shift in the demand curve
P
S
i
Pe2
g h
Pe1
D2
D1
O Q e1 Qe 2 Q
Effect of a shift in the demand curve
P
S
A decrease
in demand
g
Pe1
D2 D1
O Q e1 Q
Effect of a shift in the demand curve
P
S
m g
Pe1
Pe2
n
D2 D1
O Q e2 Q e1 Q
Demand and supply analysis
Effect of shift in the
supply curve
Effect of a shift in the supply curve
P
S1
A decrease
in supply
g
Pe1
D
O Qe 1 Q
Effect of a shift in the supply curve
P
S1
g
Pe1
D
O Qe 1 Q
Effect of a shift in the supply curve
P
S2
S1
g
Pe1
D
O Qe 1 Q
Effect of a shift in the supply curve
P
S2
S1
k
Pe3
j g
Pe1
D
O Q e3 Qe 1 Q
Effect of a shift in the supply curve
P
S1
S2
An increase
in supply
g
Pe1
D
O Qe 1 Q
Effect of a shift in the supply curve
P
S1
S2
g p
Pe1
q
Pe2
D
O Qe1 Qe2 Q