THE LAW OF
SUPPLY
AND DEMAND
DEFINITION
is a key economic principle that explains how the
price and quantity of goods in a market are
determined by their availability and consumers'
desire for
Today, we willthem.
discuss these laws of supply and demand:
Law of Demand
Law of Supply When the price goes up,
Equilibrium
When something becomes sellers are willing to produce It's the "perfect match", where
cheaper, more people want to and sell more. When the price buyers and sellers agree on
buy it. When it becomes more goes down, they produce and the price, and there's no
expensive, people buy less. sell less. shortage or surplus.
THE LAW OF EXAMPLE
SUPPLY
A bakery sells cupcakes for $2
As prices rise, producers each and produces 100 cupcakes a
are willing to supply more day. The price rises to $4 per
of a product; as prices cupcake, so the bakery starts
making 200 cupcakes daily to take
fall, producers are less
advantage of the higher price.
willing to supply it.
This demonstrates that as
price increases, supply
increases.
Qs=c+dP
SUPPLY
FUNCTION
If Qs=20+3P, and the
Qs= Quantity supplied price is $10,
c = Minimum quantity Qs=20+3(10)=50
supplied when the price is
d0 = Sensitivity of So, 50 units will be
to price changes
supply supplied at a price of
P = Price of the good $10.
THE LAW OF DEMAND
As prices rise, people tend to buy less of a product;
as prices fall, people tend to buy more.
Example:
A new smartphone is released for $1,500, and few people buy it.
The company lowers the price to $1,000, and suddenly, more
customers start purchasing it.
This shows that as price decreases, demand
increases.
Everyone loves a
good bargain!
DEMAND FUNCTION
Qd = Quantity
If Qd=100-2P, and the
demanded
a = Minimum quantity price is 20,
when price is 0
demanded
Qd=100-2(20)=60
b = Sensitivity of
to price changes
demand So, 60 units will be
P = Price of the good demanded at a price of 20.
MARKET EQUILIBRIUM
The point where supply and demand meet is called
equilibrium. At this price, the quantity supplied equals the
quantity demanded, meaning there is neither a surplus nor
a shortage.
Example:
It’s the sweet spot
A store sells sneakers at $50 per pair, matching supply and demand where buyers and
at 100 pairs per week. Raising the price to $70 creates a surplus, sellers high-five!
while dropping it to $30 causes a shortage.
Demand Function Supply Function Equilibrium
Qd=a−bP Qs=c+dP a−bP=c+dP
To find the equilibrium price (P*) and quantity (Q), you
solve the supply and demand equations simultaneously.
Rearrange to solve for P* Substitute P* into either the
(equilibrium price) demand or supply
a-c
P*= Q*=a−bP* or
b+d
Q*=c+dP*
FOUR MARKET BEHAVIORS
Market behavior refers to how supply and demand interact to
determine prices and product availability. The four key behaviors
are:
Equilibrium Surplus Shortage Shifts
External factors change
Supply equals demand, Excess supply leads to High demand with low
supply or demand,
stabilizing prices. price drops. supply raises prices.
affecting prices.
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