Demand and Supply Analysis Completed)

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2 References
dInternet
dWikipedia
Resource Person: 3

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Ô |emand indicates how much of a
product consumers are both willing
and able to buy at each possible price
during a given period,

u
d |emand= Will to purchase + Power to

Purchase
u Latin phrase, literally translated as "with other things

the same´. In order to formulate laws, it is usually
necessary to rule out factors which interfere with
examining a specific causal relationship.
{ {

{

Ô. The quantity demanded will
increase to 3 calls
B. Her demand for telephone
calls will increase
C. The quantity demanded will
decrease to 3 calls
|. Her demand for telephone
calls will decrease
Ñ |
Ô The law of demand says that quantity demanded varies
inversely with price, other things constant. Thus, the higher
the price, the smaller the quantity demanded and vise versa,

.
O

O 3 !
d ºo change in tastes and preference of the consumers.
d Consumer¶s income must remain the same.
d The price of the related commodities should not change.
d The commodity should be a normal commodity
|

w { "
|
½
Ñ |

Ô The demand schedule is
a table of numbers that
shows the relationship
between price and
quantity demanded by a
consumer, ceteris
paribus (everything else
held fixed).
ñ |
D arket demand is the sum of all individual

demands at each possible price.
Ô Araphically, individual demand curves are
summed horizontally to obtain the market
demand curve.
D Ôssume the ice cream market has two buyers
as follows«
ñ { " |

" #

$
m m m ! !
mm
m ! m
mm
m
mm m
| " #
Ô| " is the graph showing the relationship

between the price of a certain commodity and the
amount of it that consumers are willing and able to
purchase at that given price.
d The demand curve is drawn with price on the vertical axis

and quantity on the horizontal axis
d The demand curve usually slopes downwards from left to
right; that is, it has a negative association.
d The negative slope is often referred to as the "law of
demand", which means people will buy more of a service,
product, or resource as its price falls.
$

% w & #3

'
' $ ()|emand for
woolen clothes goes up in winter whereas their
demand is extremely less in summer .
ü w

w
"
& : The principal related goods are
M
. Ô M is a good that
is used with the primary good. Eg. automobiles and fuel. If
the price of the complement goes up the quantity demanded
of the other good goes down. The other main category of
related goods are substitutes. Substitutes are goods that can
be used in place of the primary good.. a fall in the price of
one good reduces the demand for another good, the two
goods.
* +

! If a consumer believes that the
price of the good will be higher in the future he is more
likely to purchase the good now and same situation will
prevail if income rises.
* ) any goods are bought on
credit using borrowed money and therefore the demand
for them may be sensitive to the rate of interest charged
by the lender. Therefore if the SBP decides to raise
interest rates - the demand for many goods and services
may fall. Examples of "interest sensitive" goods include
household appliances, electronic goods, new furniture
and motor vehicles. The demand for new homes is
affected by changes in mortgage interest rates.
9. | "
+ !
% + ! The level of demand for different
commodities also depends upon the business conditions
in the country. If the country is passing through boom
conditions, there will be a marked increase in demand
and vise versa.
%% , & : larger the
population larger will be the number of consumers. Ôlso
the composition of population has an effect on the
demand. eg : Ô higher number of females will have an
increased demand for cloths. These are the demographic
effects on demand for the commodities.
% | + : If the distribution of income in
the country is unequal the the demand for luxurious goods
will increase. On the other hand if the distribution of
income is equal the demand for basic goods of necessities
will increase whereas demand for luxurious goods will
decrease.
% -"
: If government imposes taxes on
commodities their price will increase and demand will
decrease while in case if granting subsidies the price will
decrease and hence the demand will increase.
*
Ô - -: These are low price goods that people on low
incomes spend a high proportion of their income on. When price
falls, they are able to discard the consumption of these goods and
move onto better goods. |emand may fall when the price falls.
These tend to be very basic foods such as rice and potatoes. 3

M
M

M

M
M

M M

M
M
M

M

d Ô staple food is a food that can be stored for use for the longtime
and forms the basis of a traditional diet.
Ô + : Some goods are luxurious items where satisfaction
comes from knowing the price of the good. Ô higher price may be
a reflection of quality and people on high incomes are prepared to
pay this for the "snob value effect". Examples would include
perfumes, designer clothes, fast cars.
Ô *
Ô
!
Ô : a term used to
describe the lavish spending on goods and services
acquired mainly for the purpose of displaying
income or wealth. In the mind of a conspicuous
consumer, such display serves as a means of
attaining or maintaining social status.
|
Ô There are TWO types of change in demand;
% " Ñ '- " ) Ô
movement along the demand curve is caused by a
change in PRICE of the good or service. For instance,
a fall in the price of the good results in an
EXTEºSIOº of demand (quantity demanded will
increase), whilst an increase in price causes a
COºTRÔCTIOº of demand (quantity demanded will
decrease).
.{3w " ) Ô shift in the
demand curve is caused by a change in any non-price
determinant of demand. The curve can shift to the
right or left.
ñ" | "
î

î Ô tax that raises
the price of
mm cigarettes results
in a movements
along the
demand curve.
mm

m m

| "
î

î
Ô policy to discourage
smoking shifts the demand
curve to the left.

mm

m m m

ÔÔ rightward shift
represents an increase in
the quantity demanded
(at all prices), | to |,
where as a leftward shift
represents a decrease in
the quantity demanded
(at all prices). | to |3.
Ô . "

M
(a) Shift left
(b) Shift right
(c) ºo Shift
d The fall in the price of the complementary good will

cause an extension in the quantity demanded. This
will cause an increase in the demand for all
complementary goods. Therefore, the demand curve
will shift to the right. $+(
Ô . "
+
* " M
(a) Shift left
(b) Shift right
(c) ºo Shift
d If the good becomes more expensive then the price

will change. Ô change in the price causes a
movement along the curve (c)
w | /
|
0&&Ñ
2 åuantity Supplied refers to the amount (quantity) of
a good that sellers are willing to make available for
sale at alternative prices for a given period.
2 Ñ
!The law of supply states that the
quantity supplied will go up as the price goes up and
vice versa.. Higher prices means more profit so
firms will produce more of that product whose price
has increased. ºew producers will also emerge in
the market. Ônd total supply will also increase.
|irect relationship between Supply & Price
w

"
2 The
is a table that shows the
relationship between the price of the good
and the quantity supplied.
2 The
" is a graph of the
relationship between the price of a good and
the quantity supplied. The supply curve is

.
2 Ceteris Paribus: ³Other thing being equal´
{ "
Ñ
Ô Ô firm¶s
is a table of numbers that shows
the relationship between price and quantity supplied,
ceteris paribus (everything else held fixed).
ñM M

M

½

½
{ "
ñ
Ô { % ,,

1 %
1
+
"
3 2
"
Ô & ) Low the cost of the commodity as compare to its
market price, high the supply and vise versa. When cost are high as
compare to price, firms produce less, shift to other products or leave
the business.
Ô & ) Suppose a farmer grows rice and wheat on his
one farm. If the price of rice rises, he will grow more of it, and less of
wheat, so his supply of wheat falls.
Ô w
) Ô technological advance would cause the
average cost of production to fall which would be reflected
in an outward shift of the supply curve
Ô * ! Sellers expectations concerning future
market condition can directly affect supply. If the seller
believes that the demand for his product will sharply
increase in the foreseeable future the firm owner may
immediately increase production in anticipation of future
price increases.
Ô -" ) Aovernment
intervention can have a significant effect on supply. Aovernment
intervention can take many forms including environmental and
health regulations, hour and wage laws, taxes, electrical and
natural gas rates and zoning and land use regulations.
Ô w '+ & ñ ) Ôs more or fewer
producers enter the market this has a direct effect on the amount
of a product that producers (in general) are willing and able to
sell. ore competition usually means a reduction in supply,
while less competition gives the producer a opportunity to have a
bigger market share with a larger supply.
Ô & ! & !If the price of inputs increases
the supply curve will shift in as sellers are less willing or able to
sell goods at existing prices. For example, if the price of
electricity increased a seller may reduce his supply because of
the increased costs of production. The seller is likely to raise the
price the seller charges for each unit of output.

% " Ñ '-

" ) Ô movement
along the supply curve is caused by a change in PRICE
of the good or service. For instance, an increase in the
price of the good results in an EXTEºSIOº of supply
(quantity supplied will increase), whilst a decrease in
price causes a COºTRÔCTIOº of supply (quantity
supplied will decrease).
.{3w
" ) Ô shift in the supply
curve is caused by a change in any non-price
determinant of supply. The curve can shift to the right or
left.

"

î

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d The supply curve shows the quantity supplied at a
given price by the seller.
d The demand curve shows the quantity demanded
at a given price by consumers.
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When quantity demanded exceeds quantity supplied, Suppliers

will raise the price due to too many buyers chasing too few
goods, thereby moving toward equilibrium.
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Ô When the price is above the equilibrium point

there is a surplus of supply; where the price is
below the equilibrium point there is a shortage
in supply.
w w
,
1 +
. |ecide whether the event shifts the supply
or demand curve (or both).
. |ecide whether the curve(s) shift(s) to the
left or to the right.
3. Use the supply-and-demand diagram to see
how the shift affects equilibrium price and
quantity.
Ô Example: Ô Heat Wave

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$ (
Ô In economics,
is the ratio of the percent
change in one variable to the percent change in
another variable. ³responsiveness of one variable to
changes in another.´
Ô In proper words, it is the relative response of one

variable to changes in another variable. The phrase
"relative response" is best interpreted as the
percentage change.
w& 3Ñw{{w
d w "

M
#
. Price Elasticity of |emand
. Price Elasticity of Supply
3. Income Elasticity of |emand
4. Cross-Price Elasticity of |emand
w
$
w %&'3ñ( )
Consumers will buy more when prices go
down and less when prices go up
Õ MUCÕ M LSS?

M
M

% &
|
Ô Percentage change in quantity demanded with
respect to the percentage change in price, ceteris
paribus.
d if we raise a price, the Qd will decline, but how much?
Elasticity answers the ³how much´ question.
In Business, we want to know the relationship between Qd
and Price
O &647 /
|
7 &
64 8 "

ñ | " &

|
Ô Ô rise in the price
of milk (from $ to
$.) decreases the
quantity demanded by
(from to 8),
so the price elasticity of
demand is . =
.
&
î
î

î

! " #

w
3
(
|

Total Revenue is the amount of money that is brought into a company by its business activities
&
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3

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| ! The price elasticity is greater than
one.
{ | ! The price elasticity of demand is

less than one.
0

! The price elasticity of demand
equals one.

%

%

d When the price elasticity of demand for a good is M

M
(Ed = ), changes in the price do not affect the quantity demanded for
the good; raising prices will cause total revenue to increase.
d When the price elasticity of demand for a good is

M
(- < Ed < ), the percentage change in quantity demanded is smaller
than that in price. Hence, when the price is raised, the total revenue
rises, and vice versa.

M (Ed = -), the percentage change in quantity is equal to that in
price, so a change in price will not affect total revenue.

M (-
ö < Ed < - ), the percentage change in quantity demanded is greater
than that in price. Hence, when the price is raised, the total revenue
falls, and vice versa.
d When the price elasticity of demand for a good is M
M (Ed
is - infinite), any increase in the price, no matter how small, will cause
demand for the good to drop to zero. Hence, when the price is raised,
the total revenue falls to zero.

Ô Ô

d & d &

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& 2
Ô Suppose a retail coffee outlet is selling its
premium ³Black Coffee´ for $3cup. The store
generally is selling cups of ³BC´ per hour,
and the store manager is thinking seriously of
raising the price to $cup. He knows he will
lose some sales but thinks that most of his
customers are willing to pay more. Help him
quantify his decision by determining how
many fewer cups he can sell and still generate
more revenue per hour.
&

Ô &

1

d Price elasticity of supply can be illustrated by the

following formula:
Pȯs = Percentage change in Quantity Supplied
Percentage change in Price
O If a rise in the price of a product causes a rise
in the quantity supplied, the price elasticity of supply will
be:
&64%7 4%
%7
{
| !
Ô {

1

d Income elasticity of demand can be illustrated by the

following formula:
64& /
|
& {
O If a rise in the consumer¶s incomes causes an 8 rise
in product¶s demand, then the income elasticity of demand
for the product will be:
64*7 4ü
7

Ô " income elasticity of demand is associated with
inferior goods; an increase in income will lead to a fall in
the demand and may lead to changes to more luxurious
substitutes.
Ô " income elasticity of demand is associated with
normal goods; an increase in income will lead to a rise in
demand. If income elasticity of demand of a commodity is
less than , it is a necessity good. If the elasticity of demand
is greater than , it is a luxury good or a superior good.
Ô , income elasticity (or inelastic) demand occurs when
an increase in income is not associated with a change in the
demand of a good. These would be sticky goods.
ü )&
| !
Ô

1

d &+64& |

& & +
If, for example, the demand for butter rose by when the price of
margarine rose by 8, then the cross price elasticity of demand of
butter with respect to the price of margarine will be.
&+647 4
*7
If, on the other hand, the price of bread (a compliment) rose, the
demand for butter would fall. If a 4 rise in the price of bread led to a
3 fall in the demand for butter, the cross-price elasticity of demand
for butter with respect to bread would be:
&+64) 7 4)
ü7
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w'&

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%

% 9 <

%
9

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&:(
(
&:(

&; &; &;

%

+ -
Ô Consider Coke and Pepsi. If the price of
Coke goes up, what would you expect to
happen to the quantity demanded of Pepsi?
O It will rise, since people will buy less
Coke and more Pepsi. Thus the |emand
for Pepsi will rise.
Ô So the bottom of the elasticity fraction is
positive and top of the elasticity fraction is
positive.

Ô Consider Washing achines and |ryers. If the
price of Washing achines goes up, what
would you expect to happen to the quantity
demanded of |ryers?
O It will fall, since people will buy less
washers at the new price, they will need less
dryers.
Ô So the bottom of the elasticity fraction is
positive and top of the elasticity fraction is
negative.

Demand and Supply Analysis Completed)

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  

Resource Person: 3  

d |emand= Will to purchase + Power to

u Latin phrase, literally translated as "with other things

O    

D arket demand is the sum of all individual

Ô| " is the graph showing the relationship

d The demand curve is drawn with price on the vertical axis

m  m   

d The fall in the price of the complementary good will

d If the good becomes more expensive then the price

Ô {    %    ,,    

% "  Ñ '-  

 1 +       *   

*     *   

When quantity demanded exceeds quantity supplied, Suppliers

Ô When the price is above the equilibrium point

Ô Example: Ô Heat Wave

Ô In proper words, it is the relative response of one

d w   "  

  64 8 "       

 î  $

{  | ! The price elasticity of demand is

Ô   Ô  

d   &  d   & 

d Price elasticity of supply can be illustrated by the

d Income elasticity of demand can be illustrated by the

d &+64&      |  

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Resource Person: 3

O

Ô| " is the graph showing the relationship

m m

Ô { % ,,

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1 + *

d w "

64 8 "

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{ | ! The price elasticity of demand is

Ô Ô

d & d &

d &+64& |