Lecture 2&3: Demand

&Supply
Defining Demand

• Demand refers to the quantity of a good

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

• The law of demand states that consumers

will buy more of a good as price falls and
vice- versa
The Demand Curve
• Price • Demand curve slopes
downwards due to :
• Diminishing marginal
utility
• Law of demand

• quantity
Movements in Demand
• There is a movement
along the demand
curve only and only
contraction if the price of the
good concerned
changes
expansion
Shifts in Demand

Rightward shift Leftward Shift

Factors causing shifts in demand
Rightward Shift Leftward Shift
Rise in income Fall in income
Rise in population Fall in population
Rise in price of a substitute good Fall in price of a substitute good

Fall in price of a complementary Rise in price of a complementary

good good
Changes in taste in favour of the Changes in taste against the good
good

Advertising in favour of the good Advertising against the good or in

favour of rival goods
Climatic conditions* Climatic conditions*
Defining Supply

• Supply refers to the quantity of a good

which producers are willing and able to
offer for sale over a given period of time
at a particular price and place.

• The law of supply states that producers

will sell more as price rises and vice-versa.
The Supply Curve
Price
• The curve is upward
sloping, ie more is
supplied at a higher
price.

Quantity
Shifts in Supply Curve
Rightward shift Leftward shift

price
price

quantity quantity
Factors causing Shifts in Supply
Curve
Rightward Shift Leftward Shift
An improvement in A worsening in technology
technology
A subsidy granted by govt The removal of a subsidy by
govt
A fall in cost of production A rise in cost of production
 Equilibrium
Price DD SS
price
dd ss 0.00 200 0
0.10 160 0
Equil 0.20 120 40
price
0.30 80 80
0.40 40 120
Equil qty 0.50 0 160
qty
Regulatory Pricing
p • Minimum price or
dd ss price floor is set
Minimum
pricing above the equilibrium
price. This policy
Equil
price creates a surplus in
the market- ss
exceeds dd. Govt
intervenes and buys
q
the surplus and
warehouses it.
 • Maximum price or
p
dd ss
price ceiling is set
below equilibrium
price. This policy
Equil creates shortage in
price
the market. The govt
Maximum intervenes and
price
release past stocks or
use rationing to avoid
q
black mkting.
Exercise
• Plot dd and ss and find equil.
Price and qty.
Price DD SS • If dd increases by 120
throughout show the changes to
1 220 10 first part.
• Govt imposes a quota of 50 units
2 160 30 what will be the effect on equil.
3 120 50 Price.
• Show how the following affect
4 80 80 equil. Price and qty
– A tax imposed on the good
5 50 110
– A rise in price of a
6 30 150 complementary good
– A successful advertising
7 20 200 campaign
– A fall in cost of production
D =100-0.25 P
S= 40 +0.75 P

• Calculate:
• Equil P and Qty
• If govt imposes a max price of 48, calculate the resulting
shortage
• Calculate the amount govt receives by imposing such a
price
• Calculate equil P and Qty if SS changes to S=60 +0.75P