Supply & Demand

PR409

Namal Bandaranayake
Demand
 Law of Demand

• Price and Quantity Demanded are

negatively related.
• Consumers usually buy less of a good when
its price is higher and vice versa.

5
Demand Curve

Price of Quantity
Price
Oil per Demanded
Barrel $100 5
$100 $40 25
$15 50

$40

$15 Demand

5 25 50 Quantity of Oil
(MBD) 6
Demand

• Demand represents the behavior of

buyers.
• A Demand Curve is a function that shows
the quantity demanded at different
prices.
• The Quantity Demanded is the quantity that
buyers are willing (and able) to purchase at a
particular price.

8
Reading Demand Curves

Demand curves can be read in two ways:

• Horizontally: At a price of $20 per barrel buyer are willing to buy
25 million barrels per day
• Vertically: The maximum price that demanders are willing to pay
to purchase 25 million barrels of oil per day is $20 per barrel
9
Different Usages of Crude Oil
 The Intuition of the Demand Curve

When the price of oil is

Price of high, oil will only be used
Oil per Higher
in higher valued uses. As
Barrel Valued Uses the price falls, oil will also
$120 of Oil be used in lower valued
uses.

Lower
Valued Uses
of Oil
$20
Demand

Quantity of Oil
20 120 (MBD)
Consumer Surplus
• Consumer Surplus is
Maximum Price Consumer is

the consumer’s gain

Consumer
$40
from exchange

Surplus
$80
• The difference between
Willing to Pay

$40
Market the maximum price a
Price
consumer is willing to
pay for a given quantity
and the market price
Consumer surplus
• Total consumer surplus is the sum of
consumer surplus of all buyers.
• Graphically, total consumer surplus is
measured by the area below the demand
curve and above the price.

13
Total Consumer surplus (CS)
CONSUMER SURPLUS
PRICE OF OIL / (US$ PER BARREL)

Total Consumer Surplus at $30

US$30

QUANTITY OF OIL DEMANDED

Check Your Learning 1
The market price of the
product is $20 per unit.
Calculate the dollar
amount of consumer
surplus being earned in
this market.
a)$120,000
b)$60,000
c)$100,000
d)$80,000
Check Your Learning 1
The market price of the
product is $20 per unit.
Calculate the dollar
amount of consumer
surplus being earned in
this market.
a)$120,000
b)$60,000
c)$100,000
d)$80,000
 What Shifts the Demand Curve?
• An increase in demand means that quantity
demanded at a given price increases, or the
maximum willingness to pay for a given
quantity rises.
– On the graph: the demand curve shifts outwards, up,
and to the right.
– What happens to the demand for petrol when the
number of vehicles using petrol increase?

17
What Shifts the Demand Curve?
• A decrease in demand means that quantity
demanded at a given price decreases, or
the maximum willingness to pay for a given
quantity falls.
– On the graph: the demand curve shifts inwards,
down, and to the left.

18
A Decrease in Qty Demanded
Price per
Unit
Lower Willingness to Pay
$50 for the Same Quantity

Less Quantity Demanded at

the Same Price

$25

Old Demand
Curve

New Demand
Curve

Quantity
70 80
An Increase in Qty Demanded
Price per
Unit Greater Willingness to
$50 Pay for the Same
Quantity

Greater Quantity Demanded

at the Same Price

$25

New Demand
Curve
Old Demand
Curve

70 80
Quantity
Demand Shifters

1. Income
2. Population
3. Price of Substitutes
4. Price of Complements
5. Expectations
6. Tastes

21
Demand Shifters - Income
The effect of changes in income on demand
depends on the nature of the good in
question.
• A Normal Good: demand increases when
income increases (and vice versa).
• An Inferior Good: demand decreases when
income increases (and vice versa).

22
Demand Shifters - Population

As the population of an economy changes, the

number of buyers of a particular good also
changes, directly influencing its demand.
• More buyers of a good increases its
demand.
• Fewer buyers of a good decreases its
demand.
• What happens to the demand for roads when
vehicle population increases?

23
Demand Shifters –Price of Substitutes

Two goods are Substitutes if a decrease in the

price of one good leads to a decrease in
demand for the other good (or vice versa)

vs

vs
Demand Shifters -Price of Complements

Two goods are Complements if an increase in

the price of one good leads to a decrease in the
demand for the other (or vice versa).

vs

vs
Demand Shifters - Expectations
The expectation of a higher (lower) price for
a good in the future increases (decreases)
current demand for the good.
• Current spending will be adjusted in anticipation of the
direction of future prices
• If government is expected to provide a subsidy for
hybrid cars after the budget what will happen to demand
for hybrid cars before budget?

26
Important Demand Shifters - Tastes
Tastes and preferences are subjective and
will vary among consumers.
• Seasonal changes or fads will have predictable effects
on demand.
• What happens to demand for clothes in April?

27
What Shifts the Demand Curve?

 A “change in quantity demanded” is NOT

the same as a “change in demand.”
 “Quantity demanded” changes only when the price of
a good changes.
 A change in quantity demanded is a movement
along a fixed demand curve.
 “Demand” changes only when a non-price factor
(demand shifter) changes.
 A change in demand is a shift in the entire demand
curve.

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A Change in the Quantity Demanded
Versus a Change in Demand
Price

Decrease in
quantity
demanded

Increase in
quantity
demanded

D0

Quantity
A Change in the Quantity Demanded
Versus a Change in Demand
Price

P0

D0

Q0 Quantity
A Change in the Quantity Demanded
Versus a Change in Demand
Price

P1

P0

D0

Q1 Q0 Quantity
A Change in the Quantity Demanded
Versus a Change in Demand
Price

P1

P0

P2

D0

Q1 Q0 Q2 Quantity
A Change in the Quantity Demanded
Versus a Change in Demand
Price

D0

Quantity
A Change in the Quantity Demanded
Versus a Change in Demand
Price

Increase in

demand

D1
D0

Quantity
A Change in the Quantity Demanded
Versus a Change in Demand
Price

Decrease in Increase in

demand demand

D1
D0
D2

Quantity
A Change in the Quantity Demanded
Versus a Change in Demand
Decrease in
quantity
Price

demanded

Decrease in Increase in
demand
demand demand

D1
D0
D2 Increase in
quantity
Quantity demanded
Check Your Learning 2
Which one of the following will increase the demand
for ice cream?
a. A decrease in the price of the butterfat used to
make ice cream
b. A decrease in the price of ice cream
c. An increase in the price of milk used to make ice
cream
d. An increase in the price of yogurt a substitute for
ice cream
Check Your Learning 2
Which one of the following will increase the demand
for ice cream?
a. A decrease in the price of the butterfat used to
make ice cream
b. A decrease in the price of ice cream
c. An increase in the price of milk used to make ice
cream
d. An increase in the price of yogurt a substitute for
ice cream