FUNDEMENTALS OF ECONOMICS

FUNDEMENTALS OF

ECONOMICS

BY

A A D THILINI SAPARAMADU

A A D Thilini Saparamadu 2

IS 1007: Fundamentals of EconomicsBachelor of in Information and Communication

Technology BICT Degree Programme

Year 1University of Colombo School of Computing - UCSC

Lecturer :Mrs. Saparamadu A A D TDepartment of Business Economics

Faculty of Management Studies and CommerceUniversity of Sri Jayewardenepura

SESSION 02

DEMAND, SUPPLY & EQUILIBRIUM

DEMAND

Demand is a relationship indicating the quantity of a well-defined commodity that consumers are both willing and able to buy at each possible price during a given period of time, while other things remain constant (ceteris paribus)


THEORY OF DEMAND

THE DETERMINANTS OF QUANTITY DEMANDED

• The price of the product

• The price of other products

• The consumer's income and wealth

• Various “sociological” factors

DEMAND FUNCTIONThe list of determinants of demand can be

summarized in functional notation as;

Qdx = f (Px, P1…….Pn-1, Y, S…..)A A D Thilini Saparamadu 5

THE INDIVIDUAL’S DEMAND FOR A COMMODITY

The relationship between the quantity of a commodity, that a consumer wishes to purchase

per period of time and the price of that commodity, when other

things being equal, is called individual demand.


THE DEMAND SCHEDULE

Demand schedule is one way of showing the relationship between quantity demanded and the price.


Price Quantity Demanded

18 20

19 19

20 18

21 17

22 16

DEMAND CURVE

A graphical representation of the relationship between the product price and the quantity demanded is called the demand curve.


DEMAND AND PRICE

• There is a negative relationship between the quantity demanded and the price of the commodity

• Rationale :

‐ Income effect

‐ Substitute effect


THE MARKET DEMAND FOR A COMMODITY

The market demand for a given commodity is the horizontal summation of the demands of

the individual consumers in the market.


Price Demand A Demand B Market Demand

A B

18 20 22 42

19 19 21 40

20 18 20 38

21 17 19 36

22 16 18 34

23 15 17 32

MARKET DEMAND CURVE

A graphical representation of the relationship between the price and the

market demand is called Market Demand Curve.


MARKET DEMAND FUNCTION

Market Demand can be written in mathematical form:

Qdx = f (Px, Py, N, Y, T,…..)

Qdx = Quantity demanded

Px = Price of X

Py = Prices of other goods

Y = Consumer income

T = Consumer preference or taste

N = Number of consumers in the marketA A D Thilini Saparamadu 12

MOVEMENTS ALONG DEMAND CURVE• A movement downwards along a demand curve -

Increase in the quantity demanded

• A movement upwards along a demand curve - Decrease in the quantity demanded


20

18

0 18 20 Quantity Demanded

SHIFTS IN THE DEMAND CURVE

A Demand curve shifts , in response to a change in any of the determinants of demand.

A rightward shift - Increase in demand A leftward shift -Decrease in demand


THEORY OF SUPPLY

Supply indicates how much of the goods producers are, both willing

and able to offer, for sale in a given time period at each possible price, while other

conditions of supply are held constant.


THE DETERMINANTS OF SUPPLY

The Price of the product and factors of production

The goals of producing firms

The state of technology

Price expectations

Changes resulting from nature

Government policy

SUPPLY FUNCTION

The Supply function is a short-hand way of saying that quantity supplied depends on the variables listed on the right – hand side , while the form of the function determines the sign and magnitude of that dependence.

Qsx = F (Px, Py,F1…..Fm..)


There is a positive relationship between the price of a commodity and its supply.

Reasons :

- willingness - Ability


SUPPLY SCHEDULE

Supply can be expressed as a supply schedule. It shows the relationship between quantity supplied and the price .


Price Quantity Supplied

19 18

20 19

21 20

22 21

23 22

24 23

SUPPLY CURVE

Each market has a supply side as well as a demand

side .

The supply can be represented by a supply

curve, which is the plot of the supply schedule on a

graph.


MARKET SUPPLY Market supply is the sum of the amount supplied at each

price by all the individual suppliers.


Price Supply – A Supply –B Market Supply

18 13 11

19 15 13

20 17 15

21 19 17

22 21 19

23 23 21

MOVEMENTS ALONG SUPPLY CURVE

The result of a change in the price of the commodity .

A movement down a supply curve - Decrease in the quantity supplied

A movement up the supply curve - Increase in the quantity supplied


SHIFTS IN THE SUPPLY CURVE

A Supply curve shifts to a new position in response to a change in any of the variables , that were held constant when original curve was drawn.

These variables (factors) are called Shift Factors.(Price of production factors, level of technology …) .

A rightward shift - Increase in SupplyA leftward shift - Decrease in Supply


EQUILIBRIUM PRICE AND OUTPUT

The quantity that consumers and producers are willing and able to sell is called equilibrium.


Price Demand Supply

18 42 24

19 40 28

20 38 32

21 36 36

22 34 40

23 32 44

Equilibrium : Graphical Analysis


EQUILIBRIUM: Using Equations

CHANGES IN THE EQUILIBRIUM

Changes in the conditions of Demand and Supply

Demand Shifts

If the conditions of demand change, the demand curve shift either to the right or left side.


SUPPLY SHIFTS

The equilibrium price and quantity may be altered by a change in supply .

If the price of relevant resources (cost of production), technology and the number of producers or the price of related products change , supply changes.


END OF SESSION 02


Documents

FUNDEMENTALS OF ECONOMICS