Transcript Demand and Supply Analysis

Demand and Supply Analysis
Trudie Murray ©
Demand

The amount consumers
desire to purchase at
various prices

Demand does not
necessarily mean a
consumer WILL buy,
but refers to a good or
service they WOULD
LIKE to buy
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Effective Demand

Consumers must be willing to buy AND be
capable of paying the price set by the
supplier
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Law of Demand
If Price rises – Quantity demanded falls
P
Q
If Price falls – Quantity demanded rises
P
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Q
Individual Demand

Individual Demand Schedule
Lists the different quantities of a good that an
individual consumer is prepared to buy at each
price
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Market Demand

Market Demand Schedule
Lists the different quantities of a good that all
consumers in the market are prepared to buy
at each price. It is derived by adding together
all the individual demand schedules for the
good
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Demand Schedule
(Demand for The Wii Games monthly)
(1)
Price
(per game)
(2)
Chris’s
demand
(3)
David’s
demand
(4)
Total market
demand
(# games)
(# games)
(# games)
A
20
28
16
700
B
40
15
11
500
C
60
5
9
350
D
80
1
7
200
E
100
0
6
100
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Demand Curve

At higher prices, consumers generally
willing to purchase less than at lower prices

Demand curve is said to have a negative
slope - downward sloping from left to right
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Point
100
Price per game
€ 20
A
Market Demand
700 games
Price (per game)
80
60
40
Demand
A
20
0
0
100
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200
300
400
500
Quantity (games)
600
700
800
Point
100
Price per game
Market Demand
A
€20
700 games
B
€40
500 games
Price ( per game)
80
60
B
40
A
20
0
0
100
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200
300
400
500
Quantity (games)
600
700
800
Point
100
Price ( per game)
80
Price per game
Market Demand
A
€20
700 games
B
€40
500 games
C
€60
350 games
C
60
B
40
20
A
0
0
100
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200
300
400
500
Quantity (games)
600
700
800
Point
100
D
Price ( per game)
80
60
Price per game
Market Demand
A
€20
700 games
B
€40
500 games
C
€60
350 games
D
€80
200 games
C
B
40
A
20
0
0
100
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200
300
400
500
Quantity (games)
600
700
800
E
100
D
80
Price ( per game)
Point
60
Price per game
Market Demand
A
€20
700 games
B
€40
500 games
C
€60
350 games
D
€80
200 games
E
€100
100 games
C
B
40
A
20
0
0
100
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200
300
400
500
Quantity (games)
600
700
800
An Increase in Demand
Price
P
Dx
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Qx
Q1
Quantity
D1
A Decrease in Demand
Price
P
D1
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Qx
Q1
Quantity
Dx
Factors affecting the demand
for a good
The Demand Function
Dx = f ( Px, Pc, Ps, Y, t, E)
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The Demand Function

Dx = f ( Px, Pc, Ps, Y, t, E)
Px = Goods which obey and do not obey the
Law of Demand
 Pc = Price of Complimentary Goods
 Ps = Cost of Substitute Goods
 Y = Income
 t = Tastes
 E = Consumers Expectation

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Demand for a good depends on its own price
If price rises quantity falls
If price falls quantity rises
P2
P1
Q2
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Q1
Quantity Demanded
Demand for a good depends on its own price
• Complimentary Goods
Goods which are used
jointly. The use of one
involves the use of the other
• Substitute Goods
Goods which satisfy the
same needs and thus can be
considered as alternatives to
each other
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Complimentary Goods
D1
D2
An increase in price of a
complementary good causes the
demand for good X to fall
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D2
D1
An fall in price of a complementary
good causes the demand for good X to
rise
Substitute Goods
(The Substitute Effect)
D2
D1
An increase in price of a substitute
good causes the demand for good X to
rise
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D1
D2
An fall in price of a substitute good
causes the demand for good X to fall
Demand for a good depends on level of income
(The Income Effect)
• Normal Goods
A normal good is a good with a positive income effect. A
rise in income causes more of it to be demanded, while a
fall in income causes less of it to be demanded
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Normal Goods
D2
D1
A rise in income causes the demand for
a normal good to increase from D1 to
D2
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D1
D2
An fall in income causes the demand
for a normal good to fall from D1 to
D2
Demand Depends on Taste

If the movement in taste is in favour of the
good, it causes an increase in demand,
which shifts the demand curve to the right

If the movement in taste is against the good,
it causes a fall in demand, which shifts the
demand curve to the left
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Movement in Taste
D2
D1
A movement in taste in favour of a good
causes demand to increase
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D1
D2
A movement in taste against a good
causes demand to fall
Demand for a good depends on the
expectations of consumers

Demand for a good will shift to the right if
consumers expect:
1.
2.
3.

The price of good X to be higher in the future
A scarcity of good X in the future
Their incomes to be higher in the future
Demand for a good will shift to the left if
consumers expect:
1.
2.
3.
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The price of good X to be lower in the future
A plentiful supply of good X in the future
Their incomes will be lower in the future
Consumer Expectations
D2
D1
Demand for Good X will rise if
consumers expect higher future price,
scarcity or higher future incomes
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D1
D2
Demand for Good X will fall if
consumers expect lower future price,
abundance or lower future incomes