lesson 2 lecture

Demand and SupplyOutline•Definition and examples of demand and supply

•Factors that affect demand and supply

•Graphical representation of Demand and supply

Introduction: MarketsExamples: Street markets, currency

markets, commodity markets, fish markets, clothes markets, the perfume market, the oil market, etc

In all markets there are those who want to buy (buyers) and those who want to sell (sellers).

Buyers represent the demand for a good or service.

Sellers represent the supply of a good or service.

Markets

Sellers have different aims than buyers

Buyers and sellers in a market transact in goods or services

All the transactions are based on one important factor – Price

But many other factors determine how much of each item is sold or purchased in a market

Definition of Demand

Demand is the amount or quantity of goods that consumers are willing and able to purchase at a given price and time.

Consumers would want more goods at a lower price, and less goods at a higher price.

SupplySupply is the quantity of goods that

a supplier has available to sell.

Goods supplied will vary depending on factors including price, availability, and time required for manufacture.

The higher the price, the greater the quantity of goods a supplier is willing to supply.

Demand and supply scenariosIf supply is greater than demand, then

the producer of those goods lose since they produced too many items which are not selling. This increases their costs.

If supply is less than demand, then the consumer may be unhappy since they can not get the product they want. The consumer will be unhappy with supplier.

The best scenario is when supply equals demand, also called equilibrium. This occurs at the price where supply and demand are equal.

The law of demand

The law of demand is the inverse relationship between demand price and the quantity demanded, ceteris paribus.

The law of demand

• This fundamental economic principle indicates that as the price of a commodity decrease, then the quantity of the commodity that buyers are able and willing to purchase in a given period of time, if other factors are held constant, increases.

• Ceteris paribus is Latin for ‘all other thing being equal’. For a demand curve to be accurate the ceteris paribus assumption must be in place. So when there is a change in price there is a movement along the demand curve. This is called a change in quantity demanded.

Factors that affect demand & supply

There is a whole range of factors that influence both demand and supply.

What are these factors?

How Factors Affect Demand and SupplyFactor Effect on demand and supplyIncomeClimate Age Technology Price of substitutes

Expectations of producers

Advertising Taste Cost of production Fashion Nature Quality Size of the population Price of complements

Example

Complimentary Demand

Types of goods or services

A substitute is a product that is similar to another product and can be used instead. Example, butter and margarine, a bus or a taxi, coffee and tea, gas and electricity.

A complement is a good that tends to be used together with another related good. Example, a DVD player and a DVD, toast and marmalade, coffee and milk, pen and paper

Demand CurveA demand curve represents a

relationship derived from how many items of a product or service a consumer would LIKE to purchase at different prices.

Demand curves are based on two major assumptions

1.Consumers are not only willing but also ABLE to buy the item - this is called 'effective demand.‘

2.It is an expression of preferences and includes a whole range of judgments about 'value'.

Definition of Equilibrium• What happens to prices and to the

amount that would be both bought and sold in a market when changes occur?

• When demand and/or supply in a market changes, we will get either 1. shortages occurring (where demand

is greater than supply) or 2. surpluses (where supply is greater

than demand).

Equilibrium condition

Changes to Demand & Supply• What happens to prices and to the

amount that would be both bought and sold in a market when changes are occur?

• When demand and/or supply in a market changes, we will get either 1. shortages occurring (where demand

is greater than supply) or 2. surpluses (where supply is greater

than demand).

PRICE AND OUTPUT DETERMINATION

• Equilibrium price and output

–response to shortages and surpluses

•shortage (D > S)

⇒ price rises

•surplus (S > D)

⇒ price falls

–significance of ‘equilibrium’

Goods Market

Dg ↑ shortage(Dg > Sg)

Pg ↑Sg ↑

Dg↓until Dg = Sg

Factor Market

Sg ↑Sf ↑

Df ↓until Df = Sf

↑Df shortage(Df > Sf)

Pf ↑

The price mechanism:the effect of a rise in demand

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

The determination of market equilibrium (potatoes: monthly)

Quantity (tonnes: 000s)

E

D

C

Aa

c

d

e

Supply

Demand

Pric

e (

sh p

er

kg)

Bb

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Quantity (tonnes: 000s)

E

D

C

B

Aa

b

c

d

e

Supply

Demand

Pric

e (

sh p

er

kg)

SHORTAGE

(300 000)

The determination of market equilibrium (potatoes: monthly)

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Quantity (tonnes: 000s)

E

C

B

Aa

b

c

e

Supply

Demand

Pric

e (

sh p

er

kg)

D dSURPLUS

(330 000)

The determination of market equilibrium (potatoes: monthly)

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

D d

Qe

Quantity (tonnes: 000s)

E

B

Aa

b

e

Supply

Demand

Pric

e (

sh p

er

kg)

The determination of market equilibrium (potatoes: monthly)

D1

Pric

e

P

O Q0 Q1

Quantity

An increase in demand

D0

P

QO

S2 S0 S1

IncreaseDecrease

Shifts in the supply curve

Think like an Economist

Resources are scarce

My wants are unlimited

I must make rational decisions in order to satisfy

my wants with limited resources