Law of Demand

Definition: The law of demand states that other factors being constant (cetris
peribus), price and quantity demand of any good and service are inversely
related to each other. When the price of a product increases, the demand for
the same product will fall.
Description: Law of demand explains consumer choice behavior when the
price changes. In the market, assuming other factors affecting demand being
constant, when the price of a good rises, it leads to a fall in the demand of
that good. This is the natural consumer choice behavior. This happens
because a consumer hesitates to spend more for the good with the fear of
going out of cash.
Law of Supply
Definition: Law of supply states that other factors remaining constant, price
and quantity supplied of a good are directly related to each other. In other
words, when the price paid by buyers for a good rises, then suppliers increase
the supply of that good in the market.
Description: Law of supply depicts the producer behavior at the time of
changes in the prices of goods and services. When the price of a good rises,
the supplier increases the supply in order to earn a profit because of higher
prices.
Quantity demanded vs. Demand
Quantity Demanded
If the market price of a product decreases, then the quantity demanded
increases, and vice versa. For example, when the price of strawberries
decreases (when they are in season and the supply is higher - see graph
below), then more people will purchases strawberries (the quantity
demanded increases). A quantity demanded change is illustrated in a graph
by a movement along the demand curve.
refers to one particular point on the demand curve (not the entire curve).
refers to how much of the product is demanded at one particular price.
is the horizontal distance between the vertical axis and the demand curve.
Demand
When one or more of the six demand determinants listed in Section 6
changes, then demand changes. For example, when buyers' incomes
increase, the demand (not quantity demanded) for a normal product
increases. Or when the price of a substitute product decreases, then the
demand for the product in question decreases. Or when the number of buyers

increases, the demand increases, and the price of the product increases. An
increase in demand is illustrated in a graph by a rightward shift in the
demand curve.
refers to the entire relationship between prices and the quantity of this
product or service that people want at each of these prices.
should be thought of as "the demand curve."

Quantity supplied vs. Supply

Quantity supplied
If the market price of a product increases, then the quantity supplied
increases, and vice versa. For example, when housing prices increase (when
the demand for houses has been strong), then more people will want to sell
their house (quantity supplied increases). A quantity supplied change is
illustrated in a graph by a movement along the supply curve.
Quantity supplied refers to the amount of the good businesses provide at a
specific price. So, quantity supplied is an actual number.
refers to one particular point on the supply curve (not the entire curve).
refers to how much of the product is supplied at one particular price.
is the horizontal distance between the vertical axis and the supply curve.
Supply
When one or more of the four supply determinants listed in Section 8
changes, then supply changes. For example, when technology advances, or
the cost of production decreases, supply increases. An increase in supply is
illustrated in a graph by a rightward shift in the supply curve.
Supply describes the economic relationship between the goods price and
how much businesses are willing to provide. Supply is a schedule that shows
the relationship between the goods price and quantity supplied, holding
everything else constant.
refers to the entire relationship between prices and the quantity of this
product supplied at each of these prices.
should be thought of as "the supply curve."

Change in Demand

A change in demand of a good means a change of the whole purchase

plan. It is caused by factors other than the change in the price of the good.
Graphically, a change in demand involves a shift of the demand curve. This
means greater/smaller quantiies demanded than before at the original prices

With an increase in demand:

the demand curve shifts to the right.
at every possible price, a greater quantity is demanded.
An increase in demand might be caused by:
an increase in the number of consumers.
an increase in consumers' income (for a normal good) or a decrease in
consumers income (for an inferior good).
an increase in the price of a substitute good.
a decrease in the price of a complementary good.
an increase in preference for the product (i.e., the product becomes more
popular).
expectations (e.g., that the price will be higher in the future).

Change in quantity demanded

A change in quantity demanded of a good refers to a change of quantity
demanded as a result of price change of the good.
Graphically, the demand curve remains the same. The change is only shown
by a "movement along the demand curve" .

With an increase in quantity demanded:

the price of the product decreases.
there has been a movement from one point on the demand curve to
another point (further to the right) on the same demand curve.
An increase in quantity demanded is caused by:
a decrease in the price of the product.

NOTE: A demand curve illustrates how much the quantity demanded changes
when the price changes.

A change in quantity demanded is represented as a movement along a

demand curve.
Factors that Cause a Change in Demand:
1. Income. A change in income will cause a change in demand. The direction
in which a demand curve shifts in response to a change in income depends
on the type of good represented by the demand curve. There are two types of
goods:
i) Normal Good. A normal good is one in which the quantity demanded at any
price increases with income. This means that an increase in income will shift
the demand curve for a normal good to the right.
ii) Inferior Good. An inferior good is one in which the quantity demanded at
any price decreases with income. This means that an increase in income will
shift the demand curve for an inferior good to the left.
2. Tastes and Preferences. An increase in the preference or taste for a good
will shift the demand curve for the good to the right. A decrease in the
preference or taste for a good will shift the demand curve for the good to the
left.
3. Prices of Substitutes and Complements.
i) Substitutes are goods that can replace each other in consumption. They are
related such that an increase in the price of one good will cause an increase
in the demand for the other good. Examples of substitutes include butter and
margarine and coffee and tea.
ii) Complements are goods that are jointly consumed. They are related such
that an increase in the price of one good will cause an decrease in the
demand for the other good. Examples of complements include lamps and
light bulbs and milk and cereal.
4. Expectations About the Future. Expectations about future income and
prices can shift the demand curve. For example, someone who expects
higher income or prices in the future will probably buy more goods today. In
this case, the demand curve will shift to the right.
5. Population. An increase in the population causes a greater quantity of
goods to be demanded at every price level. This causes the demand curve to
shift to the right.

Change in supply
A change in supply is caused by factors other than the price of the product.
Graphically, it involves a shift of the supply curve, which implies
greater/smaller quantities supplied than before at the original prices.

With an increase in supply:

 the supply curve shifts to the right.

at every possible price, a greater quantity is supplied.

An increase in supply might be caused by:

an increase in the number of sellers.
a reduction in the cost of inputs (such as labor or electricity).
a technological innovation that increases output (such as the development
of disease resistant crops).
unusually good weather (for an agricultural product).
expectations (e.g., that the price will be lower in the future).

Change in quantity supplied

A change in quantity supplied refers to a change in quantity offered for sale
as a result of a change in the price of the product.
Graphically, there is no shifting of supply curve, the change is represented by
"a movement along the supply curve"

But what factor(s) can cause a change in quantity supplied? Only one: price.
For example, the only thing that can cause sellers to change their quantity
supplied of computers is a change in the price of computers.
With an increase in quantity supplied:
the price of the product increases.
there has been a movement from one point on the supply curve to another
point (further to the right) on the same demand curve.

An increase in quantity supplied is caused by:

an increase in the price of the product

NOTE: A supply curve illustrates how much the quantity supplied changes
when the price changes.
A change in quantity supplied is represented as a movement along a supply
curve.

When price changes, quantity supplied will change. That is a movement

along the same supply curve. When factors other than price changes, supply
curve will shift. Here are some determinants of the supply curve.

1. Production cost:
Since most private companies goal is profit maximization. Higher production
cost will lower profit, thus hinder supply. Factors affecting production cost are:
input prices, wage rate, government regulation and taxes, etc.

2. Technology:
Technological improvements help reduce production cost and increase profit,
thus stimulate higher supply.

3. Number of sellers:
More sellers in the market increase the market supply.

4. Expectation for future prices:

If producers expect future price to be higher, they will try to hold on to their
inventories and offer the products to the buyers in the future, thus they can
capture the higher price.

Market Equilibrium
When the supply and demand curves intersect, the market is in equilibrium.
This is where the quantity demanded and quantity supplied are equal. The
corresponding price is the equilibrium price or market-clearing price, the
quantity is the equilibrium quantity.

Changes in Market Equilibrium: Impact of Increase and Decrease!

Changes in either demand or supply cause changes in market equilibrium.
Several forces bringing about changes in demand and supply are constantly
working which cause changes in market equilibrium, that is, equilibrium
prices and quantities.
The demand may increase or decrease, the supply curves remaining
unchanged. This would cause a change in equilibrium price and quantity.
Similarly, the increase or decrease in supply, the demand curve remaining
constant, would have an impact on equilibrium price and quantity. Both
supply and demand for goods may change simultaneously causing a change

in market equilibrium.
Supply-demand analysis is an important tool of economics with which we can
make forecasts about how prices and quantities will change in response to
changes in demand and supply. We explain below the impact of changes in
demand and supply on equilibrium price and quantity.

* Surplus and shortage:

If the market price is above the equilibrium price, quantity supplied is greater
than quantity demanded, creating a surplus. Market price will fall.
Example: if you are the producer, you have a lot of excess inventory that
cannot sell. Will you put them on sale? It is most likely yes. Once you lower
the price of your product, your products quantity demanded will rise until
equilibrium is reached. Therefore, surplus drives price down.
If the market price is below the equilibrium price, quantity supplied is less
than quantity demanded, creating a shortage. The market is not clear. It is in
shortage. Market price will rise because of this shortage.
Example: if you are the producer, your product is always out of stock. Will you
raise the price to make more profit? Most for-profit firms will say yes. Once
you raise the price of your product, your products quantity demanded will
drop until equilibrium is reached. Therefore, shortage drives price up.
If a surplus exist, price must fall in order to entice additional quantity
demanded and reduce quantity supplied until the surplus is eliminated. If a
shortage exists, price must rise in order to entice additional supply and
reduce quantity demanded until the shortage is eliminated.
Government regulations will create surpluses and shortages in the market.
When a price ceiling is set, there will be a shortage. When there is a price
floor, there will be a surplus.

Price Floor: is legally imposed minimum price on the market. Transactions

below this price is prohibited.
Policy makers set floor price above the market equilibrium price which they
believed is too low.
Price floors are most often placed on markets for goods that are an
important source of income for the sellers, such as labor market.
Price floor generate surpluses on the market.
Example: minimum wage.
A price floor is the lowest legal price a commodity can be sold at. Price floors
are used by the government to prevent prices from being too low. The most
common price floor is the minimum wage--the minimum price that can be
payed for labor. Price floors are also used often in agriculture to try to protect

farmers.
For a price floor to be effective, it must be set above the equilibrium price. If
it's not above equilibrium, then the market won't sell below equilibrium and
the price floor will be irrelevant.
A price floor, if set above the market equilibrium price, means consumers will
be forced to pay more for that good or service than they would if prices were
set on free market principles. Governments set price floors for a number of
reasons, but the typical result is an increase of supply and decreased
demand.
General Effects
Price floors affect small businesses in a number of ways. For example, the
minimum wage is a classic example of a price floor that prevents businesses
from paying workers what the government considers to be excessively low
amounts, regardless of what the market dictates. This may disincentivize a
business from hiring its desired amount of labor for low-skilled jobs. You might
have a need for five entry-level workers to help staff a retail store, for
example, and job applicants willing to work for less, but be limited to three
positions because the wage floor and its effect on your budget.

Price Ceiling: is legally imposed maximum price on the market. Transactions

above this price is prohibited.
Policy makers set ceiling price below the market equilibrium price which
they believed is too high.
Intention of price ceiling is keeping stuff affordable for poor people.
Price ceiling generates shortages on the market.
Example: Rent control.
Definition: Price ceiling is a situation when the price charged is more than or
less than the equilibrium price determined by market forces of demand and
supply. It has been found that higher price ceilings are ineffective. Price
ceiling has been found to be of great importance in the house rent market.
Description: Government imposes a price ceiling to control the maximum
prices that can be charged by suppliers for the commodity. This is done to
make commodities affordable to the general public. However, prolonged
application of a price ceiling can lead to black marketing and unrest in the
supply side.

Sources
https://www.cals.ncsu.edu/course/are012/readings/demand.html
http://econperspectives.blogspot.com/2008/05/demand-vs-quantitydemanded.html

http://www.inflateyourmind.com/index.php?
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