Demand, supply and the market

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Demand, supply and the market
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Demand, supply and the Market

• The study of demand and supply of goods and
  services, and the way they interact, forms a
  fundamental part of economics.

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An illustrative example

• Consider the market for hay.
• At various times of the year, some livery yard
  owners are wanting to buy hay and farmers are
  willing to sell hay.
• The quantity bought and sold will be affected by
  the price of hay.

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Demand and supply for Hay
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The demand schedule

• As the price decreases, more yard owners are
  willing to buy more hay, e.g.
• At 48, only 20 tonnes of Hay will be bought.
• At 42, 50 tonnes will be bought.
• Further reductions in price will lead to more hay
  being bought.

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The supply schedule

• As the price increases, more farmers are willing
  to sell their hay, e.g.
• At 24, only 50 tonnes of hay will be sold.
• At 30, 72 tonnes of hay will be sold.
• Further increases in price will result in more
  hay being offered for sale.

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What would happen if price is set at 24 / ton?

• Buyers will want 300 tonnes
• Sellers will only be prepared to provide 50
  tonnes
• There would be a shortage of hay at 24 / ton!

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What would happen if price is set at 48 / ton?

• Buyers will want 20 tonnes
• Sellers will only be prepared to provide 120
  tonnes
• There would be an over supply of hay at 48 /
  ton!

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Market equilibrium

• At what price will the quantities of hay demanded
  and supplied balance?
• 36 / ton when 90 tonnes of hay will change
  hands.
• This is known as the equilibrium price.

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The equilibrium price

• of a commodity is that price at which the
  quantities demanded and supplied in a given time
  period are equal to each other.

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What factors might affect the price equilibrium
of hay?

• Severe winter weather
• Increase demand -gt increase price
• Good hay making weather
• Increase supply -gt reduce price
• Lower price of barley
• Livestock farmers may switch from hay to barley
  -gt lower demand for hay -gt lower price
• Quality of hay
• Low quality -gt lower price than good quality

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Demand and supply curves

• Using the data in the previous Table, illustrate
  the demand and supply curves for hay in a graph.

Price ()
Quantity (Tonnes)
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Supply and demand for Hay
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The Demand curve shows the relation between price
and quantity demanded holding other things
constant

• Other things include
• the price of related goods
• consumer incomes
• consumer preferences
• Changes in these other things affect the position
  of the demand curve

Price
D
Quantity
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The Supply curve shows the relation between price
and quantity supplied holding other things
constant

• Other things include
• technology
• input costs
• government regulations
• Changes in these other things affect the position
  of the demand curve

S
Price
Quantity
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Market equilibrium
S
D0
Price

• Market equilibrium is at E0 where quantity
  demanded equals quantity supplied
• with price P0 and quantity Q0

P0
E0
S
D0
Q0
Quantity
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Market equilibrium
S
D0
Price

• If price were above P0 there would be excess
  supply
• producers wish to supply more than consumers wish
  to demand

P1
P0
E0
S
D0
Q0
Quantity
Excess supply
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Market equilibrium
S
D0
Price

• If price were below P0 there would be excess
  demand
• consumers would wish to demand more than
  producers wish to supply

P0
E0
P1
S
D0
Q0
Quantity
Excess demand
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Exercise

• Plot out the supply and demand curves for the
  following data.
• What is the equilibrium price and quantity?
• What is the excess supply or demand when the
  price is
• (a) 12?
• (b) 20?

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Answer to exercise
Equilibrium price 17 Equilibrium quantity
6.5 Excess demand at 12 5 Excess supply at
20 3
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Further Reading

• Hill B, (1990). An introduction to Economics for
  students of Agriculture. Pergamon Press Oxford.
  Chapter 3.
• Begg D, Fischer S and Dornbusch R (2000).
  Economics. McGraw-Hill London. Chapter 3.