demand,supply & market

8/3/2019 Demand,Supply & Market

1/53

DEMAND, SUPPLY ANDMARKET EQUILIBRIUM


2/53

Contents of chapter

Introducing demand, supply andmarkets

Learning Outcome

At the end of the lesson, learnersshould be able to explain the meaning

of demand, supply and market

situations


3/53

Market Defined

An institution ormechanismthat brings togetherbuyers(demanders) and sellers(suppliers) of goods & services

markets Local, national & international Highly personal or face-to-face exchange Impersonal or remote

Product market - goods & services(Output)

Resource market - factors of production(Input)


4/53

Circular Flow

Resource

Market

Product

Market

Businesses Households

Both Flows Are Equal


5/53

Basic Assumptions in Demand and SupplyAnalysis

Ceteris paribus

The word ceteris paribusis Latin forother things being held constant. or.

all other things being held equal

Economists often use this ceterisparibusassumption to draw theirdiagrams as well as isolate the effects of

specific changes in a market.

RationalityThe assumption stated that individuals

do not intentionally make decisions

that would leave them worse off.


6/53

Demand And Supply Analysis

DemandThe demand schedule shows the

various amounts of a productconsumers are willing and able to

buy at each specific price in a seriesof possible prices during a specifictime period

Table 1 shows demand schedule forwheat


7/53

Demand Analysis

Price ($ per ton

of wheat in

2005)

Quantity Demanded (tonnes of

wheat)

$5 9

$4 10

$3 12

$2 15

$1 20

Table 1


8/53

Demand Analysis

The schedule shows how much buyersare willing and able to buy at five

possible prices

The market price depends on demandand supply


9/53

Demand Analysis

The Law ofDemandFundamental characteristic of demand

behavior

Otherthings being constant, as price of aproductincreases, the correspondingquantity demanded falls & vice versa

Inverse relationship between P & Qdemanded

Its called theIts called the Law ofDemand.Law ofDemand.


10/53

Quantity of wheat (tons of wheat in the year 2005)Quantity of wheat (tons of wheat in the year 2005)

Price

ofwheat(dollarsperton)

Price

ofwheat(dollarsperton)

DD

DD

AA

BB

CC

DD

EE

00 55 1010 1515 2020

11

22

33

44

55 Demand Curve


11/53

Demand Analysis

Downward sloping Demand curve The inverse relationship between the

price & quantity causes movement

along the demand curve

Q2Q1

Price

A

B

P1

P2

D0

Qty

0


12/53


13/53

Total and Marginal UtilityHamburgers

consumed

per meal

Total

Utility

Marginal

utility

(2)

0

1

2

3

4

56

7

0

10

0 1 2 3 4 5 6 7

Units consumed per meal


30

20

10TotalUtility(utils)

MarginalUtility(utils)

10

8

6

4

2

0

-2

TU

MU1 2 3 4 5 6 7Copyright McGraw-Hill, Inc. 1999


14/53

Hamburgers

consumed

per meal

Total

Utility

Marginal

utility

((2)

0

1

2

3

4

56

7

0

10 10

0 1 2 3 4 5 6 7



30

20


MarginalUtility(u

tils)

10

8

6

4

2

0

-2

TU



15/53

Hamburgers

consumed

per meal

Total

Utility

Marginal

utility

((2)

0

1

2

3

4

56

7

0

10

18

10

8

0 1 2 3 4 5 6 7



30

20


MarginalUtility(u

tils)

10

8

6

4

2

0

-2

TU



16/53

Hamburgers

consumed

per meal

Total

Utility

Marginal

utility

((2)

0

1

2

3

4

56

7

0

10

18

24

10

86

0 1 2 3 4 5 6 7



30

20


MarginalUtility(u

tils)

10

8

6

4

2

0

-2

TU

MU1 2 3 4 5 6 7


17/53

Hamburgers

consumed

per meal

Total

Utility

Marginal

utility

((2)

0

1

2

3

4

56

7

0

10

18

24

28

10

86

4 0 1 2 3 4 5 6 7Units consumed per meal


30

20


MarginalUtility(u

tils)

10

8

6

4

2

0

-2

TU

MU1 2 3 4 5 6 7


18/53

Hamburgers

consumed

per meal

Total

Utility

Marginal

utility

((2)

0

1

2

3

4

56

7

0

10

18

24

28

30

10

86

4

2

0 1 2 3 4 5 6 7



30

20


MarginalUtility(u

tils)

10

8

6

4

2

0

-2

TU

MU1 2 3 4 5 6 7


19/53

Hamburgers

consumed

per meal

Total

Utility

Marginal

utility

((2)

0

1

2

3

4

56

7

0

10

18

24

28

3030

10

86

4

20

0 1 2 3 4 5 6 7



30

20


MarginalUtility(u

tils)

10

8

6

4

2

0

-2

TU

MU1 2 3 4 5 6 7


20/53

Hamburgers

consumed

per meal

Total

Utility

Marginal

utility

((2)

0

1

2

3

4

56

7

0

10

18

24

28

3030

28

10

86

4

20

-2

0 1 2 3 4 5 6 7



30

20


MarginalUtility(u

tils)

10

8

6

4

2

0

-2

TU

MU1 2 3 4 5 6 7


21/53

Hamburgers

consumed

per meal

Total

Utility

Marginal

utility

((2)

0

1

2

3

4

56

7

0

10

18

24

28

3030

28

10

86

4

20

-2

0 1 2 3 4 5 6 7



30

20


MarginalUtility(u

tils)

10

8

6

4

2

0

-2

TU

MU

ObserveObserve

DiminishingDiminishing

MarginalMarginalUtilityUtility

1 2 3 4 5 6 7

Total and Marginal Utility


22/53

DemandAnalysis

Otherthings being constantOtherthings being constantrefers torefers to Consumers incomeConsumers income tastestastes

Number of buyersNumber of buyersPrices of related goods &Prices of related goods &Other things beside priceOther things beside price


23/53

Determinants of demand (Shift of thedemand curve)

To draw the demand curve in price andquantity space, we have to hold the other

things constant like income, taste and the

prices of other products.

These other factors are called "shiftfactors" because if one of these factors

changes, the demand curve will shiftinwards or outwards.


24/53

Determinants of demand

Tastes favourable change shifts thedemand curve up

Number of buyers more buyers lead to

shift the demand curve upward Income I D for normal goods but forinferior goods (used furniture) I D

Prices of related goods -

Substitute goods PEPSI & COCA-COLAare substitute goods.

Ifprice of PEPSI Demand forCOCA-

COLA (+)


25/53


Complementary goods -Film and Camera are complementarygoods.If the price of camera , the demand

for camera and thus the demandfor film also (-)Expectations about the future prices, product availability &

income shift the demand curve.


26/53

Figure 6: Shifts of theDemand Curve

Qty

D1

Price

D0D2



27/53

Supply Analysis

Supply

Shows the amount of a product aproducer is willing & able to produce &

sell at each specific price in a series of

possible prices during a specified time

period

The schedule shows quantities that willbe offered at various prices


28/53

Price

($ per tonne in 2005)

Quantity Supplied

(tonnes of wheat)

1 52 20

3 35

4 50

5 60

Supply Analysis

Table 2


29/53

Supply Analysis

Law of supply

It shows direct or positive relationshipbetween price and quantity supplied

Higher price increases production & sale

direct relationship between price andquantity supplied Given production costs, a higher price

means greater profit, thus an incentive to

increase the quantity supplied. As shown in Figure 6


30/53

Qty

P

P1

P2

S0

Figure 6: The Supply Curve, and

MovementsAlong it

Qty

P

Figure 7: Shifts of the Supply

Curve

S0

S1

S2

Supply Analysis

C

D

Q1 Q2


31/53

Supply Analysis

The supply curve

The supply curve is an upward slopingcurve implyingthatthe lowerthe price,

other things constant, the less units firms

will produce and vice versa.


32/53


33/53

Determinants of supply

Taxes and subsidies business tax is treated as a cost, so decreases

supply

A subsidy lowers cost of production, so increasessupply

Prices of related goods - price of substitutegoods , production of higher priced goodsrises & supply of the original good decreases

Expectations - future price of a product currentsupply to increase or decrease

Number of sellers large number of sellergreater supply


34/53

Q

P S0

D0

PE

QE

Figure 8: Demand andSu l E uilibrium

Equilibrium Analysis

0


35/53

Price ($ per

tonne)

Quantity

Demanded

Quantity

Supplied

1 2000 120002 4000 10000

3 7000 7000

4 11000 4000

5 16000 1000

Table 3: The Demand and Supply Schedule

Combined



36/53


37/53


38/53


When both supply and demand curvesshift

If S

D P , but new equilibrium qtydepends on relative sizes of shifts in

demand and supply

If S D P , but new equilibrium qtydepends again on relative sizes of shifts

in demand and supply


39/53

Disequilibrium

The Dynamic Laws of Supply andDemand

If quantity demanded is greater than

quantity supplied (excess demand),

prices tend to rise. If quantity supplied is greater than

quantity demanded (excess supply),

prices tend to fall.


40/53


41/53

SS

SS

CC

SurplusSurplusBBAA

DD

QQ

PP

55

44

33

22

11

00

55 99 1010 1515 1818 2020

A Surplus

1313

Supply more

than Demand


42/53

SS

SSDD

DD

CC

ShortageShortage

PP

QQ

55

44

33

22

11

0055 77 1010 1515 2020

A Shortage

Demand isgreater

thansupply


43/53


44/53


45/53

Simultaneous Changes in

Both Demand and Supply

1. Increase in Demand and Supply

2. Increase in Demand and Decreased in

Supply

3. Decreased in Demand and Increased in

Supply

4. Decreased in Demand and Supply


46/53


47/53

P

Q0

D

D1

D1

D

S

S1

S1

S

P1

Q2Q1

P2

Situation 1 : Increase in demand is

less than increase in supply

Price

decreases

Quantity

Increases


48/53

P

Q0

D

D1

D1

D

S

S1

S1

S

P1

Q2Q1

Situation 2 :

Increase in demand = increase in supply

Quantity

Increases

Price

Unchanged


49/53

P

Q0

D

D1

D1

D

S

S1

S1

S

P1

Q2Q1

P2

Situation 3 :

Increase in demand is greater

than increase in supply

Quantity

Increases

Price

Increases


50/53

2. Increase in Demand and Decrease2. Increase in Demand and Decrease

in Supplyin Supply

Atthe new equilibrium point, price alwaysincrease, lets look atthe 3 different

conditions

Quantity decreased ifincrease in demand< decrease insupply

Quantity remainthe same ifincrease indemand = decrease insupply

Quantityincreased ifincrease in demand> decrease insupply


51/53


52/53

4. Decrease in Demand and Supply

Atthe new equilibrium point, quantityalways decreased, lets look atthe 3

different conditions

Price decreased if decreased in demand> decreased insupply

Price remainthe same if decreased indemand = decreased insupply Price increased if decreased in demand

demand,supply & market

Documents