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Brief discussion of Demand and Supply
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B.E MAZIBUKO201281434
PROFESSIONAL STUDIES 3A
DEMAND & SUPPLY
•Demand
•Supply
•Market Equilibrium
•Examples
•Price ceiling/floor
DEMAND
• behavior of buyers
• relationship between
• quantity demanded of a good
• price
• holding other factors constant
DEMAND• Behaviour of buyers
• Relationship between
• Quantity demanded of a good
• Price
• Holding other factors constant
Demand and its Determinants: • A General Definition:
Demand is the quantity of a good or resource that buyers (or demanders) are willing and able to buy under a given set of conditions over a given period of time.
• Conditions: price, income, taste, prices of related goods, expected prices, number of buyers, etc.
DEMAND
Quantity demanded is the amount
of a good that buyers are willing and able
to purchase.
DEMAND CURVE
• The demand curve is a graph illustrating how much of a given product a household would be willing to buy at different prices.
$3.002.50
2.001.501.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of Goods
Qd0
Price Quantity$0.00 120.50 101.00 81.50 62.00 42.50 23.00 0
QUANTITY DEMANDED (QD)
• amount of good or service
• unit of measure
• per unit of time
• “2 bottles of water per day”
LAW OF DEMANDIf the price of a good
then the Qd
holding other things constant!!!
WHY?
• higher price makes you feel poorer
• income effect
• higher price on one good,
substitute other goods.
• substitution effect
individual demand
demand curve for 1 buyer
market demand**
demand curve for all buyers
add up individual Qd for each price
CHANGE IN QUANTITY DEMANDED VERSUS CHANGE IN DEMAND
Change in Quantity DemandedMovement along the demand curve.
Caused by a change in the price of the product.
CHANGES IN QUANTITY DEMANDED
0
D1
Price of Cigarettes per Pack
Number of Cigarettes Smoked per Day
A tax that raises the price of cigarettes
results in a movement along the
demand curve.
A
C
20
2.00
Rs.4.00
12
CHANGE IN QUANTITY DEMANDED VERSUS CHANGE IN DEMAND
Change in DemandA shift in the demand curve, either to the left
or right.
Caused by a change in a determinant other than the price.
CHANGES IN DEMAND
0
D1
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
D3
D2
Increase in demand
Decrease in demand
CHANGE IN QUANTITY DEMANDED VERSUS CHANGE
IN DEMANDVariables that Affect Quantity
Demanded
A Change in This Variable . . .
Price Represents a movementalong the demand curve
Income Shifts the demand curve
Prices of relatedgoods
Shifts the demand curve
Tastes Shifts the demand curve
Expectations Shifts the demand curve
Number ofbuyers
Shifts the demand curve
TWO SIMPLE RULES FOR MOVEMENTS VS. SHIFTS
• Rule One• When an independent variable changes and that variable does not
appear on the graph, the curve on the graph will shift.
• Rule Two• When an independent variable does appear on the graph, the curve
on the graph will not shift, instead a movement along the existing curve will occur.
CONSUMER INCOMENORMAL GOOD
Rs.3.00
2.50
2.001.501.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
0
Increasein demand
An increase
in income...
D1
D2
CONSUMER INCOMEINFERIOR GOOD
Rs.3.00
2.50
2.001.501.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
0
Decreasein demand
An increase
in income...
D1D2
IMPORTANT!!
• Change in demand-- occurs when other factors change-- shift to a new demand curve
• change in demand• NOT caused by change in price of
the good
SUPPLY
• behavior of sellers
• relationship between
• quantity supplied of a good
• price
• holding other factors constant
SUPPLY
Quantity supplied is the amount of a good that sellers are willing and
able to sell.
SUPPLY CURVE
The supply curve is the upward-sloping line relating price to
quantity supplied.
SUPPLY CURVE
Rs.3.002.502.00
1.501.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
0
Price Quantity 0.00 0 0.50 0 1.00 1 1.50 2 2.00 3 2.50 4 3.00 5
LAW OF SUPPLYIf the price of a good
then the Qs
holding other things constant!!!
WHY?
• Holding costs constant
• higher price means higher profit margin
SUPPLY SCHEDULE
The supply schedule is a table that shows the relationship
between the price of the good and the quantity supplied.
SUPPLY SCHEDULE P Qs
Price = $/bottle
Qs = bottles/day
$2.00 3$1.50 2
$1.00 1$.50 0
CHANGES IN SUPPLY
• if other factors do change,
• change in supply
• shift to a new supply curve
CHANGE IN QUANTITY SUPPLIED VERSUS CHANGE IN SUPPLY
Change in Quantity SuppliedMovement along the supply curve.
Caused by a change in the market price of the product.
CHANGE IN QUANTITY SUPPLIED
1 5
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
0
S
1.00A
CRs.3.00
A rise in the price of ice cream cones
results in a movement along the supply curve.
CHANGE IN QUANTITY SUPPLIED VERSUS CHANGE IN SUPPLY
Change in SupplyA shift in the supply curve, either to the left or
right.
Caused by a change in a determinant other than price.
CHANGE IN SUPPLY
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
0
S1 S2
S3
Increase in Supply
Decrease in Supply
CHANGE IN QUANTITY SUPPLIED VERSUS CHANGE IN SUPPLY
Variables that Affect Quantity Supplied
A Change in This Variable . . .
Price Represents a movement along the supply curve
Input prices Shifts the supply curve
Technology Shifts the supply curve
Expectations Shifts the supply curve
Number of sellers Shifts the supply curve
MARKETS
A market is a group of buyers and sellers of a particular good or service.
The terms supply and demand refer to the behavior of people . . . as they interact with one another in markets.
MARKETS
Buyers determine demand.
Sellers determine supply.
SUPPLY AND DEMAND TOGETHER
Equilibrium PriceThe price that balances supply and demand. On
a graph, it is the price at which the supply and demand curves intersect.
Equilibrium QuantityThe quantity that balances supply and demand.
On a graph it is the quantity at which the supply and demand curves intersect.
SUPPLY AND DEMAND TOGETHER
Price Quantity Rs 0 0 0.50 0 1.00 1 1.50 4 2.00 7 2.50 10 3.00 13
Price Quantity Rs 0 19 0.50 16 1.00 13 1.50 10 2.00 7 2.50 4 3.00 1
Demand Schedule
Supply Schedule
At Rs.2.00, the quantity demanded is equal to the quantity supplied!
Supply
Demand
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
EQUILIBRIUM OF SUPPLY AND DEMAND
21 3 4 5 6 7 8 9 10 12110
Rs.3.002.502.00
1.501.00
0.50
Equilibrium
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
21 3 4 5 6 7 8 9 10 12110
Rs.3.002.50
2.00
1.501.00
0.50
Supply
Demand
Surplus
EXCESS SUPPLY
SURPLUS
WHEN THE PRICE IS ABOVE THE EQUILIBRIUM PRICE, THE QUANTITY SUPPLIED EXCEEDS THE QUANTITY DEMANDED. THERE IS EXCESS SUPPLY OR A SURPLUS. SUPPLIERS WILL LOWER THE PRICE TO INCREASE SALES, THEREBY MOVING TOWARD EQUILIBRIUM.
EXCESS DEMAND
Quantity ofIce-Cream Cones
Price ofIce-Cream
Cone
Rs.2.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Supply
Demand
Rs.1.50
Shortage
SHORTAGE
WHEN THE PRICE IS BELOW THE EQUILIBRIUM PRICE, THE QUANTITY DEMANDED EXCEEDS THE QUANTITY SUPPLIED. THERE IS EXCESS DEMAND OR A SHORTAGE. SUPPLIERS WILL RAISE THE PRICE DUE TO TOO MANY BUYERS CHASING TOO FEW GOODS, THEREBY MOVING TOWARD EQUILIBRIUM.
THREE STEPS TO ANALYZING CHANGES IN EQUILIBRIUM
Decide whether the event shifts the supply or demand curve (or both).
Decide whether the curve(s) shift(s) to the left or to the right.
Examine how the shift affects equilibrium price and quantity.
HOW AN INCREASE IN DEMAND AFFECTS THE EQUILIBRIUM
Price ofIce-Cream
Cone
2.00
0 7 Quantity ofIce-Cream Cones
Supply
Initialequilibrium
D1
1. Hot weather increasesthe demand for ice cream...
D2
2. ...resultingin a higherprice...
Rs.2.50
103. ...and a higherquantity sold.
New equilibrium
S2
HOW A DECREASE IN SUPPLY AFFECTS THE EQUILIBRIUM
Price ofIce-Cream
Cone
2.00
0 1 2 3 4 7 8 9 11 12 Quantity ofIce-Cream Cones
13
Demand
Initial equilibrium
S1
10
1. Shortage of milk reducesthe supply of ice cream...
Newequilibrium
2. ...resultingin a higherprice...
Rs.2.50
3. ...and a lowerquantity sold.
REFERENCES
• Amin Hanif, Chief Executive Officer at The federation of lazy jobless people (FLJP) on Nov 03, 2011
• itutor on Aug 28, 2013
• MBA CORNER By Babasab Patil (Karrisatte) on Feb 24, 2012
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