Deamnd and Supply Analysis
Chiu Yu Ko∗
November 1, 2009
Abstract
This discussion note intended to use Price-Quantity diagram to illustrate the concepts of demand and supply basic analysis. In particular, we define the following
concepts: (1) quantity demanded, (2) demand, (3) quantity supplied and (4) supply.
We further investigate the graphical implications when they change. Finally, we define
the concept of equilibrium in demand and supply framework.
1
Demand
Quantity demanded (given price) is the amount of good consumer(s) willing to pay (to
have that quantity of good). It is a point in the price-quantity diagram.
P
P
Q
QD
Figure 1: Quantity Demanded is a point on Price-Quantity diagram.
∗
E-mail:[email protected]
1
Demand is quantity demanded at every price. Hence, demand is the amount of good
consumer(s) willing to pay (to have that quantity of good) at every price. It is represented
by a curve in price-quantity diagram: called demand curve. In most of the cases, quantity
demanded and price is inversely related (so-called Law of Demand): this is embodied by
downward slopping demand curve.
P
D
Q
Figure 2: Demand is a curve in Price-Quantity Diagram
Change in Quantity Demanded is the change of the amount of good consumer(s) willing
to pay (due to change in price or other factors). Holding other factors constant, change in
quantity demanded must be due to change in price.1 Hence, in Price-Quantity diagram, it
is represented by movement along demand curve.
P
P1
P2
D1
QD
1
QD
2
Q
Figure 3: When price drops, quantity demanded goes up.
1
Usually comes from change in supply.
2
Change in Demand is change in quantity demanded at every price. Hence, it is in fact
a shift in demand curve in Price-Quantity diagram. May be due to change in preference,
income, price of substitutes and price of complement.
P
D1
D2
Q
Figure 4: Increase in demand will shift demand curve to right.
2
Supply
Quantity supplied (given price) is the amount of good producer(s) willing to sell (to have
that quantity of good). It is a point in the price-quantity diagram.
P
P
QS
Q
Figure 5: Quantity supplied is a point on Price-Quantity diagram.
3
Supply is quantity supplied at every price. In the other words, it is collection of quantity
supplied at various prices. Hence, supply is the amount of good consumer(s) willing to pay
(to have that quantity of good) at every price. It is represented by a curve in price-quantity
diagram: called supply curve. In most of the cases, quantity supplied and price is positively
related (so-called Law of Supply): this is embodied by upward slopping supply curve.
P
S
Q
Figure 6: Supply is a curve in Price-Quantity Diagram
Change in Quantity Supplied is the change of the amount of good producer(s) willing
to sell (due to change in price or other factors). Holding other factors constant, change in
quantity supplied must be due to change in price.2 Hence, in Price-Quantity diagram, it is
represented by movement along supply curve.
P
S
P2
P1
QS1
QS2
Q
Figure 7: When Price goes up, quantity supplied increases.
2
Usually comes from change in demand.
4
Change in Supply is change in quantity supplied at every price. Hence, it is in fact a shift
in supply curve in Price-Quantity diagram. May be due to change in cost of production,
production technology and weather condition.
P
S2
S1
Q
Figure 8: Increase in supply will shift demand curve to left.
3
Equilibrium
Equilibrium is a state where there would be no further changes. In demand and supply
framework, this means the quantity demanded is equal to quantity supplied. Why? It is
because when quantity demanded is greater than quantity supplied, there is excess demand so
that consumers would bid the market price up for limited quantity of good. Similarly, when
quantity demanded is less than quantity supplied, there is excess supply so that producers
would try to sell by cutting price. Therefore, only when forces from consumers and producers
equalize, there would be an equilibrium.
P
S1
PE
D1
QE
Q
Figure 9: Equilibrium is achieved when quantity demanded equals to quantity supplied.
Hence, equilibrium is the intersection between supply and demand curves.
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