Demand & Supply

Agenda for discussion

Demand, Demand function, Demand Schedule and Demand Curve Law of Demand Movement along the demand curve and Shift in the demand curve Supply and Law of Supply Supply Schedule and supply curve and Movement along the supply curve and shift in the supply curve Equilibrium: Demand and Supply Change in the Equilibrium

Demand

Demand
The

quantity consumers are willing and able to buy at each possible price during a given time period, other things constant Amounts purchased per period

at each possible price

Willing

and able Specific period Other things constant

The Demand Function

Includes all variables that influence the quantity demanded Q = f( P, Ps, Pc, Y, N, PE)
+ ? + +

P is price of the good PS is the price of substitute goods PC is the price of complementary goods Y is income, N is population, PE is the expected future price

Law of Demand

Law of demand
Quantity

demanded varies inversely with price, other things constant Higher price: lower quantity demanded

Demand Schedule and Demand Curve

Demand schedule : List or Tabular presentation of

Possible

prices Quantity demanded at each price

Demand curve Graphical presentation of demand schedule

Downward

slope

The demand schedule and demand curve

(a) Demand schedule
15 Price per unit

(b) Demand curve

a b c d e D 0 8 14 20 26 quantity 32

Price per Unit (Rs.)

Quantity Demanded Per week

12 9 6 3

a b c d e

15 12 9 6 3

8 14 20 26 32

The demand D shows the quantity demanded, at various prices, by all consumers. Price and quantity demanded are inversely related.

The demand curve- movement along demand curve

a) Price Move rightward along the demand curve P P b) Price Move leftward along the demand curve

A
P1 P2 B P2 P1

B A

D
Q1 Q2 Q Q2 Q1

D
Q

Shift of the Demand Curve

P
c) The Demand curve shifts rightward

D2 D1 Q

Income or wealth Price of substitute Price of complement Population Expected price Tastes shift toward good

Shift of the Demand Curve

P
d) The Demand curve shifts leftward

D1 D2 Q

Income or wealth Price of substitute Price of complement Population Expected price Tastes shift away from good

Some instances where the law of demand does not hold good
Giffen Goods: Example: when the price of bread increase consumer curtailed their consumption of meat.
Veblen effect: Example: when the rise in price take place , consumer may be misguided to think that quality improved. Expectation
Example:

of rise in price: Share Market:

Price of particular share rise its demand will also increased.

Supply Quantity Supplied

Quantity supplied
number of units of a good all sellers in the market would choose to sell over some time period given their constraints

Implies

a choice

the quantity that firms choose to sell maximizing profit given their constraints

The Law of Supply

When the price of a good rises, and everything else remains the same, the quantity of the good supplied will rise Assumptions

many variables change simultaneously we must understand each variable separately

we

assume everything remains the same excluding price

understand how supply reacts to price

The Supply Function

Includes all variables that influence the quantity supply Q = f( P, Pa, C, Nf, T, PE .)
P is price of the good Pa is the price of alternative goods C is the input price Nf is number of firms, Technological advancement PE is the expected future price

Supply Schedule and Supply Curve

Supply schedule

list of different quantities supplied at different prices, if other things are constant

Supply curve

relationship between the price of a good and the quantity supplied, with all other variables held constant Each point on the curve total quantity that sellers would choose to sell at a specific price Slopes upward - Law of Supply

The Supply Curve movement along the supply curve

Price
When the price is 2.00 , 40,000 units are supplied

4.00

G At 4.00, quantity supplied is 60,000 units

2.00

40,000

60,000

Quantity

Movements Along the Supply Curve

a change in the price of a good causes a movement along the supply curve, if other things are constant.

Shifts of the Supply Curve

a change in any variable that affects supplyexcept for the goods price causes the supply curve to shift.
Sell

a greater quantity at any price

The supply curve shifts rightward (increase in supply)

Sell

a smaller quantity at any price

The supply curve shifts leftward (decrease in supply)

Shifts of the Supply Curve

Price A decrease in transportation costs shifts the supply curve for goods from S1 to S2. At each price, more Quantity are S1 supplied after the shift. J S2

4.00

60,000

80,000

Quantity

Factors that Shift the Supply Curve

1. Input Prices
A fall in the price of an input
lower cost of production increase in supply (rightward shift)

2. Price of Alternatives
Other goods that a firm could produce A rise in the price for an alternative
decrease in supply (leftward shift)

Factors that Shift the Supply Curve

3.

Technology

technological advances
increase the supply of a good

4.

Number of Firms

An increase in the number of sellers

increase supply

5.

Expected price

An expected rise in price

decrease the current supply (leftward shift)

Factors that Shift the Supply Curve

6.

Changes in Weather/Other Natural Events

Favorable weather
increases crop yields increases the supply (rightward shift)

Unfavorable weather
destroys crops, shrinks yields, decreases the supply (leftward shift)

The Supply Curve

a) Price Move leftward along the supply curve

b) Price Move rightward along the supply curve

P1 P2 B

P2 P1 A

Q2 Q1

Q1

Q2

The Supply Curve

P S1 S2 Price of input Price of alternatives Number of firms Expected price Technological advance Favorable weather Q

c) The Supply curve shifts rightward

The Supply Curve

P
S2 S1 Price of input Price of alternatives Number of firms Expected price Unfavorable weather Q

d) The Supply curve shifts leftward

Supply and Demand

Equilibrium
both

P and Q have settled into a state of rest

Equilibrium price and quantity

once

achieved - remain constant until either the demand curve or supply curve shifts

Equilibrium
Price S E

3.00

1.00

D
25,000 50,000 75,000 Quantity

Excess Demand

the amount by which quantity demanded exceeds quantity supplied - at a given price
Buyers

compete with each other to get more of the good than is available The price will rise Equilibrium is reached

Excess Demand
Price

2. causes the price to rise . . .

S E 3. shrinking the excess demand until price reaches its equilibrium value of 3.00

3.00

1.00

Excess Demand 25,000 50,000 75,000

J D

1. At a price of 1.00 per Bottle, an excess demand of 50,000 bottles . . .

Quantity

Excess Supply

the amount by which quantity supplied exceeds quantity demanded - at a given price
Sellers

compete with each other to sell more than buyers want The price will fall Equilibrium is reached

Excess Supply
Price 1. At a price of 5.00 per bottle an excess supply of 30,000 bottles . . . Excess Supply 5.00 3. shrinking the excess supply . . . S

K
E

L 4. until price reaches its equilibrium value of 3.00

3.00

D
2. causes the price to drop 35,000 50,000 65,000 Quantity

What Happens When Things Change

Income rises normal good the demand increases (rightward shift of the demand curve)

Rightward

movement along the supply curve Equilibrium price rises Equilibrium quantity rises

Income rises, causing an increase in D

Price
4. equilibrium price increases 3. to a new equilibrium S 4.00 3.00 E E' 1. An increase in demand . . . 2. moves us along the supply curve

D2 D1
5. equilibrium quantity increases too 50,000 60,000 Quantity

What Happens When Things Change

Example - Weather changes will shift the supply curve

Decrease in supply (the supply curve shifts leftward)

Equilibrium

price rises Equilibrium quantity falls

Bad weather hits, decreasing the S

Price S2 5.00 E'

S1

3.00

D 35,000 50,000 Quantity

Both Curves Shift

Just one curve shifts (D or S)

we

can determine the direction that BOTH equilibrium price AND quantity will move

Both curves shift (D and S)

we

can determine the direction that EITHER equilibrium price OR equilibrium quantity will move direction of the other which curve shifts by more

Income rises and Bad weather hits

Price 6.00 S2 E'

S1

3.00

E D2 D1 Quantity