EC1101E:

Introduction to
Economic Analysis
 How Markets Work
§ Demand
Lecture 2
§ Supply
§ Supply and Demand

There are four typees of conditional statements, Statement, Converse, Inverse and Contrapostive
Supply and Demand
§ The supply and demand model shows
§ how supply and demand determine prices
in a market economy
§ how prices allocate the economy’s scarce resources
Markets and Competition
§ A market economy allocates resources
through the decentralized decisions of households and firms
as they interact in markets for goods and services.

§ A market
is a group of buyers and sellers of a particular good or service.

§ In perfectly competitive markets:

§ Goods and services are practically identical.
§ Buyers and sellers are so numerous
that no one can affect the market price
— everyone is a price taker.
Demand
Demand
§ The quantity demanded of any good
is the amount of the good
that buyers are willing and able to purchase.

§ Law of demand:
As the price of a good é,
the quantity demanded ê,
ceteris paribus.

People Respond to Changes in Costs and Benefits

The Demand Schedule
§ Demand schedule: Price Quantity
of of lattes
a table that shows
lattes demanded
the relationship between
$0.00 16
the price of a good and
1.00 14
the quantity demanded
2.00 12
§ Example: 3.00 10
Tom’s demand for lattes 4.00 8
§ Notice that Tom’s preferences 5.00 6
obey the Law of Demand. 6.00 4
The Demand Curve
P Price Quantity
of of lattes
$6.00 lattes demanded
$5.00 $0.00 16
1.00 14
$4.00
2.00 12
$3.00 3.00 10
$2.00 4.00 8
5.00 6
$1.00
6.00 4
$0.00 Q
0 5 10 15
Market Demand vs. Individual Demand
§ The quantity demanded in the market is the sum of the
quantities demanded by all buyers at each price.
§ Suppose Tom and Jerry are the only two buyers in the latte
market.
Price Tom’s Q D Jerry’s Q D Market Q D
$0.00 16 + 8 = 24
1.00 14 + 7 = 21
2.00 12 + 6 = 18
3.00 10 + 5 = 15
4.00 8 + 4 = 12
5.00 6 + 3 = 9
6.00 4 + 2 = 6
The Market Demand Curve for Lattes
P
QD
P
$6.00 (Market)
$0.00 24
$5.00
1.00 21
$4.00
2.00 18
$3.00 3.00 15
$2.00 4.00 12
5.00 9
$1.00
6.00 6
$0.00 Q
0 5 10 15 20 25
Demand Curve Shifters
§ The demand curve shows
how price affects quantity demanded,
other things equal.

§ These “other things”

are the non-price determinants of demand
(i.e., things that affect buyers’ demand for a good
other than the good’s price).

§ Changes in them shift the D curve …

Demand Curve Shifters: Number of Buyers

§ An increase in the number of buyers

§ é quantity demanded at each price
§ shifts D curve to the right
Demand Curve Shifters: Number of Buyers

$6.00 Suppose the number

$5.00 of buyers increases.

$4.00 At each price,

the quantity of lattes
$3.00 demanded will é.
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25
Demand Curve Shifters: Income

§ Demand for a normal good

is positively related to income.

§ An increase in income
§ é quantity demanded at each price
§ shifts D curve to the right
Demand Curve Shifters: Income

§ Demand for an inferior good

is negatively related to income.

§ An increase in income
§ ê quantity demanded at each price
§ shifts D curve to the left
Demand Curve Shifters: Prices of Related Goods

§ Two goods are substitutes if

an increase in the price of one good
causes a(n) increase in the demand for the other good.

§ For example,
§ Nasi lemak and chicken rice.
§ iPhones and Android phones.
§ Coke and Pepsi.
Demand Curve Shifters: Prices of Related Goods

§ Two goods are complements if

an increase in the price of one good
causes a(n) decrease in the demand for the other good.

§ For example,
§ Nasi lemak and teh tarik.
§ Video game consoles and video games.
§ Burgers and fries.
Demand Curve Shifters: Tastes

§ Anything that causes a shift in tastes toward a good

will é demand for that good
and shift its D curve to the right.

§ For example, Steven Spielberg’s film Jurassic Park appeared to

kindle a powerful, if previously latent, preference among
children for toy dinosaurs.
Demand Curve Shifters: Expectations

§ Expectations affect consumers’ buying decisions, e.g.,

§ If people expect their incomes to rise, their demand for
meals at expensive restaurants may é now.
§ If the economy sours and people worry about their future
job security, their demand for new cars may ê now.
Summary: Variables that Influence Buyers

Variable A change in this variable

Price … causes a movement

along the D curve
Number of buyers … shifts the D curve
Income … shifts the D curve
Price of related goods … shifts the D curve
Tastes … shifts the D curve
Expectations … shifts the D curve
A C T I V E L E A R N I N G 2.1
Demand Curve
Draw a demand curve for roti prata. What happens to the
demand curve in each of the following scenarios?
A. The price of teh tarik falls.
B. The price of roti prata falls.
C. The price of naan falls.
Note: Teh tarik is “pulled” milk tea, roti prata is a South Indian flatbread consumed in
Southeast Asia, and naan is an Iranian/South Asian leavened, oven-baked flatbread.
A C T I V E L E A R N I N G 2.1
A. The price of teh tarik falls
A C T I V E L E A R N I N G 2.1
B. The price of roti prata falls
A C T I V E L E A R N I N G 2.1
C. The price of naan falls
Supply
Supply
§ The quantity supplied of any good
is the amount of the good
that sellers are willing and able to sell.

§ Law of supply:
As the price of a good é,
the quantity supplied é,
ceteris paribus.

People Respond to Changes in Costs and Benefits

The Supply Schedule
§ Supply schedule: Price Quantity
a table that shows of of lattes
the relationship between lattes supplied
the price of a good and $0.00 0
the quantity supplied 1.00 3
2.00 6
§ Example: 3.00 9
Starbucks’ supply of lattes 4.00 12
§ Notice that Starbucks’ 5.00 15
supply schedule obeys 6.00 18
the Law of Supply.
The Supply Schedule
P Price Quantity
of of lattes
$6.00
lattes supplied
$5.00 $0.00 0
$4.00 1.00 3
2.00 6
$3.00
3.00 9
$2.00 4.00 12
$1.00 5.00 15
6.00 18
$0.00 Q
0 5 10 15 20
Market Supply vs. Individual Supply
§ The quantity supplied in the market is the sum of the quantities
supplied by all sellers at each price.
§ Suppose Starbucks and Coffee Bean are the only two sellers
in this market.
Price Starbucks Coffee Bean Market Q S
$0.00 0 + 0 = 0
1.00 3 + 2 = 5
2.00 6 + 4 = 10
3.00 9 + 6 = 15
4.00 12 + 8 = 20
5.00 15 + 10 = 25
6.00 18 + 12 = 30
The Market Supply Curve
P
QS
P
$6.00 (Market)
$0.00 0
$5.00
1.00 5
$4.00 2.00 10
$3.00 3.00 15
$2.00 4.00 20
5.00 25
$1.00
6.00 30
$0.00 Q
0 5 10 15 20 25 30
Supply Curve Shifters
§ The supply curve shows
how price affects quantity supplied,
other things equal.

§ These “other things”

are the non-price determinants of supply
(i.e., things that affect sellers’ supply of a good
other than the good’s price).

§ Changes in them shift the S curve …

Supply Curve Shifters: Number of Sellers

§ An increase in the number of sellers

§ é quantity supplied at each price
§ shifts S curve to the right
Supply Curve Shifters: Input Prices

§ Examples of input prices:

prices of raw material, wages, prices of machinery,
rental prices of retail space.

§ A fall in input prices

makes production more profitable at each output price;
so firms supply a larger quantity at each price,
and the S curve shifts to the right.
Supply Curve Shifters: Input Prices

$6.00
$5.00
Suppose the price
$4.00 of milk falls.
$3.00 At each price,
the quantity of
$2.00 lattes supplied
will é.
$1.00
$0.00 Q
0 5 10 15 20 25 30
Supply Curve Shifters: Technology

§ Technology determines how many units of input

is required to produce a unit of output.

§ A cost-saving technological improvement

has the same effect as a fall in input prices,
and shifts the S curve to the right.
Supply Curve Shifters: Weather

§ Weather is an important factor in agricultural

commodities, e.g.,
§ Ideal weather conditions bring
a bumper harvest of sweet and rosy apples;
the S curve shifts right.
§ Freezing temperatures in California
damage the state’s citrus crops;
the S curve shifts left.
Supply Curve Shifters: Expectations

§ Expectations affect producers’ supply decisions, e.g.,

§ Events in the Middle East lead to
expectations of higher oil prices.
In response, oil fields in Brunei reduce supply now,
saving some inventory to sell later when prices are higher.
The S curve shifts left.

§ In general, sellers may adjust the supply

(of non-perishable goods)
when their expectations of future prices change.
Summary: Variables that Influence Sellers

Variable A change in this variable

Price … causes a movement

along the S curve
Number of sellers … shifts the S curve
Input prices … shifts the S curve
Technology … shifts the S curve
Weather … shifts the S curve
Expectations … shifts the S curve
A C T I V E L E A R N I N G 2.2
Supply Curve
Draw a supply curve for burgers. What happens to the supply
curve in each of the following scenarios?
A. Burger sellers lower the price of burgers.
B. A technological advance allows burgers to be produced at
lower cost.
C. Hot dog sellers raise the price of hot dogs.
A C T I V E L E A R N I N G 2.2
A. The price of burgers falls
A C T I V E L E A R N I N G 2.2
B. The cost of producing burgers falls
A C T I V E L E A R N I N G 2.2
C. The price of hot dogs rises
Supply and Demand
Supply and Demand Together
Equilibrium: a state in which opposing forces are balanced
so that one is not greater than the other.
P
$6.00 D S
$5.00
Equilibrium:
$4.00 P has reached
$3.00 the level where
QS= QD
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25 30
Equilibrium price:
the price that equates Q S with Q D

P
$6.00 D S P QD QS

$5.00 $0 24 0
1 21 5
$4.00
2 18 10
$3.00 3 15 15
$2.00 4 12 20
5 9 25
$1.00
6 6 30
$0.00 Q
0 5 10 15 20 25 30
Equilibrium quantity:
Q S and Q D at the equilibrium price

P
$6.00 D S P QD QS

$5.00 $0 24 0
1 21 5
$4.00
2 18 10
$3.00 3 15 15
$2.00 4 12 20
5 9 25
$1.00
6 6 30
$0.00 Q
0 5 10 15 20 25 30
Surplus (excess supply):
when Q S > Q D

P Example:
$6.00 Surplus If P = $5,
D S
then
$5.00 Q D = 9 lattes,
$4.00 Q S = 25 lattes,
resulting in a
$3.00
surplus of
$2.00 16 lattes.
$1.00
$0.00 Q
0 5 10 15 20 25 30
Surplus (excess supply):
when Q S > Q D

P Facing a surplus,
$6.00 Surplus sellers lower the
D S
price,
$5.00 causing Q D to rise
$4.00 and Q S to fall,
which reduces the
$3.00
surplus.
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25 30
Surplus (excess supply):
when Q S > Q D

P Facing a surplus,
$6.00 Surplus sellers lower the
D S
price,
$5.00 causing Q D to rise
$4.00 and Q S to fall.
$3.00
Prices continue to
fall until the
$2.00 market reaches
$1.00 equilibrium.
$0.00 Q
0 5 10 15 20 25 30
Shortage (excess demand):
when Q D > Q S

P Example:
$6.00 If P = $1,
D S
then
$5.00 Q D = 21 lattes,
$4.00 Q S = 5 lattes,
resulting in a
$3.00
shortage of
$2.00 16 lattes.
$1.00
$0.00 Shortage Q
0 5 10 15 20 25 30
Shortage (excess demand):
when Q D > Q S

P Facing a shortage,
$6.00 sellers raise the
D S
price,
$5.00 causing Q D to fall
$4.00 and Q S to rise,
which reduces the
$3.00
shortage.
$2.00
$1.00
$0.00 Shortage Q
0 5 10 15 20 25 30
Shortage (excess demand):
when Q D > Q S

P Facing a shortage,
$6.00 sellers raise the
D S
price,
$5.00 causing Q D to fall
$4.00 and Q S to rise.
$3.00
Prices continue to
rise until the
$2.00 market reaches
$1.00 equilibrium.
$0.00 Shortage Q
0 5 10 15 20 25 30
Analyzing Changes in Equilibrium

To determine the effects of any event:

(i) Decide whether the event shifts the S curve, the D curve,
or both.
(ii) Decide in which direction the curve shifts.
(iii) Use the supply-demand diagram to see how the shift
changes equilibrium P and Q.
Shifts vs. Movements
§ Change in supply:
A shift in the S curve occurs
when a non-price determinant of supply changes.
§ Change in the quantity supplied:
A movement along a fixed S curve occurs when P changes.

§ Change in demand:
A shift in the D curve occurs
when a non-price determinant of demand changes.
§ Change in the quantity demanded:
A movement along a fixed D curve occurs when P changes.

54
EXAMPLE: The Market for Hybrid Cars
price of P
hybrid cars S1

P1

D1
Q
Q1
quantity of
hybrid cars
EXAMPLE 1: A Shift in Demand
The price of petrol rises.
P
S1
Step 1: P2
The D curve shifts.
Step 2: P1
D shifts right.
Step 3:
The shift causes D1 D2
P to é and Q to é. Q
Q1 Q2
EXAMPLE 1: A Shift in Demand

P
S1
Notice that P2
when P rises,
producers supply P1
a larger quantity
of hybrids,
even though the S curve
D1 D2
has not shifted.
Q
Q1 Q2
EXAMPLE 2: A Shift in Supply
A new technology reduces the
cost of producing hybrid cars. P
S1 S2
Step 1:
The S curve shifts.
Step 2: P1
S shifts right. P2
Step 3:
The shift causes D1
P to ê and Q to é. Q
Q1 Q2
EXAMPLE 3: A Shift in Supply and Demand
The price of petrol rises
AND new technology reduces P
production costs. S1 S2
Step 1:
Both curves shift. P2
Step 2: P1
Both D and S shift right.
Step 3:
Q é but the effect on P D1 D2
is ambiguous. Q
Q1 Q2
If demand increases
more than supply,
P é.
EXAMPLE 3: A Shift in Supply and Demand
The price of petrol rises AND
new technology reduces P
production costs. S1 S2
Step 1:
Both curves shift.
Step 2: P1
Both D and S shift right. P2
Step 3:
Q é but the effect on P D1 D2
is ambiguous. Q
Q1 Q2
If supply increases
more than demand,
P ê.
A C T I V E L E A R N I N G 2.3
The Market for Cellphones
Use the three-step method to analyze the effects of each event
on the equilibrium price and quantity of cellphones.
A. The recession compels consumers to delay new purchases
of cellphones.
B. The number of cellphone manufacturers increases.
C. Events A and B both occur.
A C T I V E L E A R N I N G 2.3
A. Delay new purchases of cellphones
A C T I V E L E A R N I N G 2.3
B. Number of cellphone manufacturers increases
A C T I V E L E A R N I N G 2.3
C. Events A and B both occur
A C T I V E L E A R N I N G 2.4
The Market for Coffee
“In the last few years, coffee yields have plummeted here [Colombia] and
in many of Latin America’s other premier coffee regions as a result of
rising temperatures and more intense and unpredictable rains, phenomena
that many scientists link partly to global warming . . . [while] global
demand is soaring as the rising middle classes of emerging economies like
Brazil, India and China develop the coffee habit.”
The New York Times, March 9, 2011

Illustrate the impact of these events in a supply-and-demand graph

of the global market for coffee.
A C T I V E L E A R N I N G 2.4
The Market for Coffee
A C T I V E L E A R N I N G 2.5
Supply and Demand
Draw supply-and-demand graphs to explain each of the following.

A. Why are housing prices so much higher in Singapore

compared to Norway, which is just as rich?

B. For a few weeks in June and July of 2022, durians were much
cheaper relative to other summers. Why?
https://www.channelnewsasia.com/asia/durian-season-supply-malaysia-singapore-
cna-explains-2765621

C. Why does the price of seafood go up just before Chinese New

Year?
A C T I V E L E A R N I N G 2.5
A. Housing prices in Singapore vs. Norway
A C T I V E L E A R N I N G 2.5
B. Durian prices in the summer of 2022
A C T I V E L E A R N I N G 2.5
C. Seafood prices before Chinese New Year
A C T I V E L E A R N I N G 2.6
The Market for Cotton Shirts
Which of the following events would unambiguously cause
a decrease in the equilibrium price of cotton shirts?
A. An increase in the price of wool shirts and a decrease in the
price of raw cotton.
B. A decrease in the price of wool shirts and a decrease in the
price of raw cotton.
C. An increase in the price of wool shirts and an increase in the
price of raw cotton.
D. A decrease in the price of wool shirts and an increase in the
price of raw cotton.
A C T I V E L E A R N I N G 2.6
The Market for Cotton Shirts
Test Yourself
§ In market economies, the _________ of a good adjusts
to bring the quantity supplied and the quantity
demanded into balance.

§ These __________________ are the signals that guide

economic decisions and thereby allocate ____________
resources.
Test Yourself
§ The law of demand:

§ The law of supply:

Test Yourself
§ Things that shift the demand curve:

§ Things that shift the supply curve: