Transcript Demand & Supply

Demand & Supply
What Is Demand?
Demand is a relationship between a
product’s price and quantity demanded.
Demand is shown using a schedule or
curve.
The law of demand states that price and
quantity demanded are inversely related.
Market demand is the sum of quantities
demanded by all consumers in a market.
Demand depends on 2 factors:
1. One is located in your head (heart)
2. The other is in your wallet
 Demand exists only for goods that you
both want and can afford to buy.
So why do we do this?
2 reasons:
1. Substitution effect – prices rise, we
substitute similar goods for it
2. Income – if prices fall, buyers able to buy
same amount for lower price; resulting in
extra income
Demand Schedule
A numerical tabulation of the quantities demanded at
selected prices
Individual Demand Schedule for
Strawberries
Price
($ per kg)
Quantity
Demanded
(mill of kg)
Point
on
graph
Individual Demand Curve for
Strawberries
4
Price
3
2
1
0
3.00
5
A
2.50
7
B
2.00
9
C
1.00
11
D
5
7
9
Quantity Demanded
11
Explanation of Demand Schedule:
Quantity demanded – refers to a
relationship that is determined by price
Ex. When strawberries are $2.50 quantity
demanded is 7 mill. Kg. but when they are
$3.00 Q.D. is 5 mill. Kg
Quantity demanded has fallen by 2
On the graph:
Price is measured on vertical axis (Y axis)
Quantity demanded on horizontal axis (X axis)
THIS HAS BECOME STANDARD PRACTICE
IN ECONOMICS
Points then plotted on graph & joined together
The line is called the Demand curve even
though it is a straight line
It runs downward from top left to bottom right
Inverse relation between $ & QD holds for
majority of goods we buy
Market Demand
Buying habits of thousands that decide
demand for most goods
Market Demand Schedule – sum total of
all the consumer demands for a product
Deriving Market Demand
Individual Demand Curve for
Strawberries
Friend's Demand Curve for
Strawberries
3
4
2
3
Price
Price
4
1
2
1
0
5
7
9
0
11
1
Quantity Demanded
2
3
4
Quantity Demanded
3.00
Friend’s
Quantity
Demanded
(kg)
6
Your Quantity
Demanded
(kg)
Market
Demand (kg)
Market Demand Curve for
Strawberries
4
5
11
2.50
8
7
15
2.00
10
9
19
1.00
12
11
23
Price ($)
Price
($ per kg)
3
2
1
0
1
2
3
Quantity Demanded (kg)
4
Changes in Demand
" are shown by shifts in the demand curve
" are caused by changes in demand
determinants
Demand Determinants
Include the following factors:
1. The number of buyers (an increase
causes a rightward demand shift)
2. Income
For normal products, an increase causes
a rightward demand shift.
For inferior products, an increase causes
a leftward demand shift.
Changes in Quantity Demanded
(cont’d):
Are shown by movements along demand
curve
Are caused by price changes
What Is Supply?
Supply: is a relationship between a
product’s price and quantity supplied
Is shown using a schedule or curve
The law of supply states there is a direct
relationship between price and quantity
supplied.
The Supply Curve
Market Supply Schedule for
Strawberries
Price
($ per kg)
Quantity
Supplied
(mill of kg)
Point
on
graph
Market Supply for Strawberries
20
Price
15
10
5
3.00
17
D
0
1
2.50
13
E
2.00
9
F
1.00
5
G
2
3
Quantity Supplied
4
Changes in Supply
are shown by shifts in the supply curve
are caused by changes in supply
determinants
Supply Determinants
•
•
•
•
Supply determinants include the following
factors:
Number of producers (an increase causes a
rightward supply shift)
Resource prices (an increase causes a leftward
supply shift)
State of technology (an improvement causes a
rightward supply shift)
Prices of related products (an increase causes a
leftward supply shift)
Determinants – (cont’d)
•changes in nature (an improvement causes a
rightward shift for some products)
• producer expectations (an expectation of lower
prices in the future causes an immediate rightward
supply shift)