Transcript DSP Revision Part 1

Demand, Supply and Price (Part 1)
Market
Price
D
S
P*
0
Q*
Quantity
I.
Demand Curve
II. Supply Curve
III. Equilibrium Price & Quantity
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I.
Demand
P
Demand curve shows the
quantities demanded at all prices.
D
6
5
4
P ($) Qty demanded
3
0
3
4
5
6
Demand
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Q
6
3
5
4
4
5
3
6
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The Law of Demand states that when the
price of a good increases, the quantity
demanded for the good will decrease, vice
versa and ceteris paribus.
P
D
P   Qd 
P   Qd 
0
Q
Demand curve will be downward sloping.
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It is wrong to say that:
D
PD
or
P   D
D represents the entire demand curve.
Its shifts are not caused by any change
in the price of the good.
It should be:
P   Qd  or
P   Qd 
 Movement along the same demand
curve.
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Demand  Quantity demanded
The entire plan of
purchase: quantities
demanded at all prices.
The quantity planned
to buy at a particular
price.
It is represented by the
entire demand curve.
It is represented by a
point on the X-axis.
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Quantity Demanded  Quantity purchased
Quantity bought
Quantity transacted
The quantity
planned to buy.
The quantity has
been bought actually.
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IV.
Market demand
Market demand curve is the horizontal
summation of all individual demand curves.
P
D
6
8
Da
0
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Db
Dc
Q
7
II.
Supply
Supply curve shows the quantities
supplied at all prices.
P
S
6
5
4
P ($) Qty supplied
3
0
2
3
4
5
Supply
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Q
6
5
5
4
4
3
3
2
8
The Law of Supply states that when the
price of a good increases, the quantity
supplied of the good will increase, vice
versa and ceteris paribus.
P
S
P   Qs 
P   Qs 
0
Q
Supply curve will be upward sloping.
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It is wrong to say that:
P  S 
or
PS 
It should be:
P   Qs  or
P   Qs 
Supply  Quantity supplied
Quantity supplied  Quantity sold
Quantity transacted
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IV.
Market supply
Market supply curve is the horizontal
summation of all individual supply curves.
P
Sf
5
0
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Sg
9
Sh
13
S
27
Q
11
III. Equilibrium price and quantity
P ($) Qty demanded
6
5
4
3
Qty supplied
3
4
5
6
P
5
4
3
2
D
S
6
5
4
3
0
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3
4
5
6
Q
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P
D Excess supplyS
P= 6
5
4
3
0
When P = $6,
2
3
4
Qd
5
6
Q
Qs
Qd = 3 units and Qs = 5 units.
There will be an excess supply of 2 units (= 5 - 3).
The price will decrease until no excess supply at all.
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P
D
S
6
5
4
Excess demand
P= 3
0
When P = $3,
2
3
4
Qs
5
6
Q
Qd
Qd = 6 units and Qs = 2 units.
There will be an excess demand of 4 units (= 6 - 2).
The price will increase until no excess demand at all.
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P
D
S
6
P= 5
Equilibrium
4
3
0
When P = $5,
2
3
4
Qs
5
6
Q
Qd
Qd = 4 units and Qs = 4 units.
Equilibrium will appear, where $5 and 4 units are
equilibrium price and quantity respectively.
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Definitions:
Excess supply or surplus means
that the quantity supplied is greater
not S > D
than the quantity demanded at a
price which is above the equilibrium
price.
the condition
Excess demand or shortage means
that the quantity demanded is
not D > S
greater than the quantity supplied at
a price which is below the
equilibrium price.
the condition
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Definitions:
Equilibrium appears when the
quantity demanded is equal to the
quantity supplied; there will be no
tendency for the price to change.
not D = S
no internal force to
change the price
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Demand, Supply and Price
(Part 1)
The End
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