Lecture Element of economics - Chapter 2: Demand and supply analysis

At the end of this lecture, students should be able to: Define demand and supply; know determinants of demand and supply; understand demand/supply schedule, individual demand/supply curve, market demand/supply curve; determine the market equilibrium price and its function.

Demand and Supply Analysis

Learning Objectives

At the end of this lecture, students should be able

to

• Define demand and supply

• Know determinants of demand and supply

• Understand Demand/supply Schedule,

individual demand/supply curve, market

demand/supply curve

• Determine the market equilibrium price and

its function

What is Demand?

buyers are willing and able to buy at a particular price  over a given period of time.

It is all these things backed by a willingness and ability to 

Individual and Market Demand

• Individual Demand; these are the various

quantities of goods and services individuals are willing and able to buy at various prices over a period of time.

• Market Demand; this is the sum or total of

various quantities of goods and services all consumers in the market willing and able to buy at various prices over a period of time.

Individual and Market demand schedule

Price $ Individual

consumer A

Individual consumer B

The demand curve

The demand curve:

The demand for potatoes (monthly)

A

Market demand for potatoes (monthly)

Demand

What is the nature of the

demand curve?

Negatively sloping from left to right

Factors that affect demand

• Price of Complements- milk/tea

• Substitutes: price of commodity with many substitutes is very sensitive to change- butter and margarine

Pr= Price of related product

T= Taste and preferences

N= Number of household/ consumers E= Expectation about future prices

Change in Quantity

Demanded and Change

in Demand

Change in Quantity Demanded

• A change in quantity demanded is

caused by the change in price of the product itself h olding other factors constant

• It is also known as movement along

the same demand curve

P1

Change in Demand/Shifts in the

demand curve

A change in quantity caused by a

change in other factors affecting dd apart from PRICE Such as income, price of related product, taste and

preference, etc.

Types of goods

• Normal or superior goods (income

increases, demand increases)

• Inferior goods (income increases,

demand decreases)

• Giffen Goods (prices increases dd

increases and vice versa)

The Supply

• Supply is the various quantities of goods

and services, producers are willing and able

to offer for sale at a particular price over a given period of time

• It states that, other things being equal, the

quantity of a commodity offered in a given market at a given time tends to vary directly with its price

• The higher the price, the greater will be the

quantity which sellers will be willing to supply and vice versa.

• Positive correlation between price and

quantity supplied

Individual and Industry supply

• Individual Supply; these are the various

quantities of goods and services that an individual producer is willing and able to supply at a particular price over a period of time.

• Industry Supply; this is the total goods and

services which producers within an industry are willing and able to supply at a particular price within a given period of time.

Individual and Industry Supply

The supply curve

The supply curve:The supply of potatoes (monthly)

Q

100 a

Determinant of Supply

• Price of the commodity

• Price of other commodities

• The cost of production

• The level of Technology

• Taxes and subsidies

• The cash position of producers

• Expectation of changes in price

Qs=g(P,Pr,Pi,G,T,E, ) Qs= Qty supply

P= Price

Pr= Price of the related good

Pi= Price of input

Change in Quantity Supplied and Change

in Supply

Change in Quantity Supplied

offered for sale caused by a change in the price of the product itself.

Change in Supply /Shifts in the

supply curve

A change in quantity offered

for sale caused by a change in all factors affecting supply

apart from price

Demand and supply analysis

Market equilibrium

Equilibrium price and output :

The Market Demand and Supply of Potatoes (Monthly)

Demand and supply analysis

Effect of shift in the

demand curve

Effect of a shift in the demand curve

Demand and supply analysis

Effect of shift in the

supply curve

Decrease in SS, dd constant

It will lead to increase

in price

SS increases, dd constant

It will lead to decrease

in price

Effect of a shift in the supply curve