Chapter 3 Demand - Supply

Chapter 3
Market demand and supply
Economics for Today. & Douglas McTaggart, C Findlay and M Parkin Modified by Girish Buskalowa
Key concepts
Defining demand Changes to demand if price or other factors change Defining supply Changes to supply if prices or other factors change. Defining market equilibrium Understanding and explaining the causes and changes in market equilibrium
2
What is Demand & Supply?
What is Demand?
Wants are the unlimited desires or wishes people

have for goods and services.
Demand reflects a decision about which wants to

satisfy.
The quantity demanded of a good or service is the
amount that consumers plan to buy during a particular time period, and at a particular price.
THE LAW OF DEMAND

The law of demand states: Other things remaining the same, (ceteris Paribus) the higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good, the larger is the quantity demanded. There is an inverse relationship between the price of a good and the quantity buyers are willing to purchase in a defined time period, ceteris paribus.
The law of demand
A demand schedule (table) shows the specific quantity of a good or service that people are willing and able to buy at different prices. The demand curve shows the relationship between price and quantity demanded (on a graph).
Demand Schedule
An inverse relationship
At the higher price consumers will buy fewer units, and at a lower price they will buy more units. When these points are plot on a graph, we have a demand curve.
AN INDIVIDUAL DEMAND CURVE
Market demand
Individual demand curves
Does price changes
When price changes, Consumers react to the price change, hence quantity demanded changes. There is a movement along the demand curve.
If non-price factors change

This is known as a change in demand. That is, the demand curve shifts. Rightward shift indicates demand increasing. (Be careful of the assumption about price here)
Non-price determinants of demand / Factors affecting demand

Changes in demand are brought about when the following non-price determinants of demand change:
1. 2. 3. 4. 5.
number of buyers in the market / Population tastes and preferences income expectations of buyers prices of related goods.
Impact of changes in non-price determinants
SUMMARY: DEMAND
14
Supply
Supply is a relation showing how much of a good sellers are willing and able to sell at each possible price during a given period of time, other things held constant.
The law of supply states that the quantity of a good supplied is directly related to its price, other things held constant the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller the quantity supplied.
Supply
The supply schedule (table) shows the quantity of a good or service that firms are willing and able to offer for sale at different prices. The supply curve depicts the relationship between price and quantity supplied (on a graph).
16
A positive relationship Supply Schedule
Note that the supply curve has a positive slope.

17
Market supply
18
When price changes

When price changes, quantity supplied changes. This is a movement along the supply curve.
When non price factors change

When any factor that influences selling plans other than the price of the good changes, there is a change in supply and the supply curve shifts. An increase in supply shifts the supply curve rightward and a decrease in supply shifts the supply curve leftward
A change in non-price factors is known as a change in supply; i.e., the supply curve shifts. Rightward shift indicates supply increasing.
20
Non-price determinants of supply

Changes in supply are brought about when the following non-price determinants of supply change:
number of sellers in the market technology available input prices taxes and subsidies expectations of producers prices of other goods the firm could produce.
21
Impacts of changes in non-price determinants
22
SUMMARY: SUPPLY
23
SUMMARY: SUPPLY
24
Market supply and demand

A market exists where interaction amongst buyers and sellers determines the price and quantity of goods and services exchanged. This is often called the price system the forces of supply and demand create market equilibrium. This is also referred to as the invisible hand.
Equilibrium
Equilibrium is a market condition that occurs at any price for which the quantity demanded and the quantity supplied are equal. Equilibrium is the point of balance between demand and supply in the market. The equilibrium price is the price at which the quantity demanded equals the quantity supplied. The equilibrium quantity is the quantity bought and sold at the equilibrium price.
Supply and demand for jeans
Market forces bring change

At any price other than the equilibrium price, market forces act to bring the market into balance. In a surplus there is excess supply: sellers compete for buyers by cutting their selling price. In a shortage there is excess demand: potential customers try to attain the available goods by paying a higher price.
28
Summary: equilibrium
At equilibrium there is an efficient outcome. This is also referred to as market clearing as society maximises the benefits it receives from scarce resources.
29
Equilibrium in the dairy milk market

Millions of litres per month
Price per litre ($) Quantity demanded Quantity supplied Surplus or shortage Price change
1.25 1.00 0.75 0.50 0.25
8 14 20 26 32
28 24 20 16 12
Equilibrium in the dairy milk market
S Price per litre

$1.25 1.00 0.75 0.50 Shortage 0.25 0
14 16 20 24 26
Surplus
In equilibrium, the plans of buyers match the plans of sellers
Millions of litres per month

Which of the graphs depicts the effect of a decrease in the price of ipods on the demand for stereos?
At a price of $5, Sam buys 10 units of a product. When the price increases to $6, Sam buys 8 units. Martha says Sams demand has decreased. Is Martha correct? A. Yes, Martha is correct. Sams demand has decreased. B. No, Martha is incorrect. Sams demand has increased. C. No, Martha is incorrect. Sams quantity demanded has decreased, and his demand has not changed. D. No, Martha is incorrect. Sams quantity demanded has increased, and his demand has increased. E. No, Martha is incorrect. Sams demand has increased, and his quantity demanded has decreased.

Chapter 3 Demand - Supply

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 3 Demand - Supply

Uploaded by

Copyright:

Available Formats

Chapter 3

Market demand and supply

What is Demand & Supply?

Wants are the unlimited desires or wishes people

Demand reflects a decision about which wants to

The quantity demanded of a good or service is the

THE LAW OF DEMAND

The law of demand

AN INDIVIDUAL DEMAND CURVE

Individual demand curves

Does price changes

If non-price factors change

Non-price determinants of demand / Factors affecting demand

Impact of changes in non-price determinants

A positive relationship Supply Schedule

Note that the supply curve has a positive slope.

When price changes

When non price factors change

Non-price determinants of supply

Impacts of changes in non-price determinants

Market supply and demand

Supply and demand for jeans

Market forces bring change

Equilibrium in the dairy milk market

1.25 1.00 0.75 0.50 0.25

Equilibrium in the dairy milk market

S Price per litre

In equilibrium, the plans of buyers match the plans of sellers

Millions of litres per month

You might also like