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    Demand and Supply

    Uploaded by

    Maham Umair
    Demand is defined as the willingness and ability to buy a product. The law of demand states that price and quantity demanded are inversely related - if price increases, quantity demanded decreases, and vice versa. The demand curve slopes downward to show this. Non-price factors like income, tastes, and prices of substitutes and complements can cause the demand curve to shift. Supply is defined as the willingness and ability to sell a product. The law of supply states that price and quantity supplied are directly related - if price increases, quantity supplied increases as well. The supply curve slopes upward. Non-price factors like input costs, weather, taxes, and subsidies can cause the supply curve to shift.

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    Demand and Supply

    Uploaded by

    Maham Umair
    58 views41 pages
    Demand is defined as the willingness and ability to buy a product. The law of demand states that price and quantity demanded are inversely related - if price increases, quantity demanded decreases, and vice versa. The demand curve slopes downward to show this. Non-price factors like income, tastes, and prices of substitutes and complements can cause the demand curve to shift. Supply is defined as the willingness and ability to sell a product. The law of supply states that price and quantity supplied are directly related - if price increases, quantity supplied increases as well. The supply curve slopes upward. Non-price factors like input costs, weather, taxes, and subsidies can cause the supply curve to shift.

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    Demand is defined as the willingness and ability to buy a product. The law of demand states that price and quantity demanded are inversely related - if price increases, quantity demanded decreases, and vice versa. The demand curve slopes downward to show this. Non-price factors like income, tastes, and prices of substitutes and complements can cause the demand curve to shift. Supply is defined as the willingness and ability to sell a product. The law of supply states that price and quantity supplied are directly related - if price increases, quantity supplied increases as well. The supply curve slopes upward. Non-price factors like input costs, weather, taxes, and subsidies can cause the supply curve to shift.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    58 views41 pages

    Demand and Supply

    Uploaded by

    Maham Umair
    Demand is defined as the willingness and ability to buy a product. The law of demand states that price and quantity demanded are inversely related - if price increases, quantity demanded decreases, and vice versa. The demand curve slopes downward to show this. Non-price factors like income, tastes, and prices of substitutes and complements can cause the demand curve to shift. Supply is defined as the willingness and ability to sell a product. The law of supply states that price and quantity supplied are directly related - if price increases, quantity supplied increases as well. The supply curve slopes upward. Non-price factors like input costs, weather, taxes, and subsidies can cause the supply curve to shift.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 41

    What is demand?

    Demand is defined as the willingness and ability to by a product.

    In economics, when we discuss demand for a product, we are


    discussing effective demand which has two essential components:
    • Willingness to buy
    • Ability to buy
    An individual may want to buy a product but if they cannot afford to
    buy it, their demand is not effective as a firm will not be prepared to
    sell it to them.
    The law of demand:
    The price of a product and its quantity demanded are inversely related,
    ceteris paribus. This means that if the price of a product increases, the
    quantity demanded decreases; on the other hand, when the price of a
    product falls, the quantity demanded increases.

    Ceteris paribus: holding all other factors constant


    A change in
    price leads to
    a change in
    quantity
    demanded
    and is shown
    my a
    movement
    along the
    demand
    curve.
    The demand curve is downward sloping
    because price and quantity demanded are
    inversely related.
    The demand schedule is used to draw a demand curve:
    Lets practice drawing a demand curve!
    Individual Vs. Market demand:

    Individual demand is the amount of a product an individual would be


    able and willing to buy at different prices.

    Market demand refers to the total demand for a product at different


    prices. It is found by adding up, or aggregating, each individual's
    demand at different prices.
    Individual Demand Market Demand
    Effect of a change in price on demand

    • Extension in demand (expansion of demand): a rise in quantity


    demanded as a result of a fall in price.

    • Contraction of demand: a fall in quantity demanded as a result of a


    rise in price.
    Exercise:
    A shop changes the price of a can of soft drink from $3 to $2 and, as a
    result, demand changes from 40 cans a day to 50 cans.

    a) Illustrate this change on a demand curve.


    b) Identify whether demand has extended or contracted.
    Non-price factors that change demand (Conditions or
    Determinants of demand):

    There are a variety of non- price factors that may cause a change in
    demand – either more or less of a product being demanded – even if
    price is unchanged. These are sometimes known as ‘conditions of
    demand’. E.g. weather or season has an effect on demand for ice cream
    so in hot weather there is an increase in demand for ice cream at each
    and every price.

    Changes in these non-price factors will result in a shift in the demand


    curve.
    Shift due to changes in demand:
    Some non-price factors that cause changes in
    demand are:
    • Changes in income: An increase in a person’s income will increase D for
    normal goods and decrease D for inferior goods.

    • Changes in the price of substitutes: A substitute is a good that may be used in


    place of another. E.g. tea & coffee. An increase in price of a substitute e.g. tea
    will increase demand for coffee, while a decrease in the price of tea will
    increase D for coffee.

    • Changes in the price of compliments: A complimentary good is one that is


    used together with another product. E.g. printer and ink cartridges, tea and
    tea whitener. An increase in the price of ink cartridges will decrease the D for
    printers while a decrease in price of cartridges will increase D for printers.
    • Advertising campaigns: effective advertising campaigns will increase the
    demand for the product advertised.

    • Changes in age structure of population: for a product such as toys, demand will
    fall is the population is aging (% of elderly increases)

    • Changes in tastes and fashion: a product’s demand will increase if it is in fashion


    or becomes more popular while if a product goes out of fashion, its demand
    falls.

    • Expectation of future prices: if price of a product is expected to rise in the


    future, people will demand more of it today
    Effect of a increase in income:
    Normal good Inferior good
    Effect of a change in the price of a substitute:
    Increase in price Decrease in price
    Effect of change in the price of a complimentary
    good:
    Increase in price Decrease in price
    Effect of an Advertising Campaign:
    Effect of a change in age structure of
    population:
    • E.g. when the population is aging (percentage of elderly increases)
    Effect of a change in tastes/fashion:
    • E.g.
    Practice questions:
    Draw demand diagrams for the following and write a brief explanation
    as well:
    a) Effect on demand for cell phone if consumer income increases.
    b) Effect on demand for butter if margarine becomes cheaper.
    c) Effect on demand for playstation if price of game CDs decreases.
    d) Effect on demand for sugar if its price if expected to rise in the
    future.
    e) Effect on demand for apples if their price increases.
    Supply:
    • Supply is the willingness and ability to sell a product.

    • Relationship between supply and price:


    There is a direct relationship between price and quantity supplied, ceteris paribus.
    The higher the price, the greater quantity supplied and vice versa.

    Explanation: when the price of a commodity increases, there is an opportunity to


    make more profit so producers are willing to sell more so quantity supplied
    increases.
    Supply curve:
    Effect of change in price:
    • Extension of supply: an increase in quantity supplied a result of an
    increase in price

    • Contraction of supply: a decrease in quantity supplied as a result of a


    decrease in price
    Non-price factors that change supply:
    • Factors other than price that may change quantity supplied at each
    given price
    • Also called ‘determinants of supply’
    • A change in any of the determinants may result in a shift in the supply
    curve
    Shifts in supply curve due to change in supply:
    Non-price factors/determinants of supply:
    Availability of factors of production:
    The availability of factors of production, such as labour or raw
    materials, can affect the amount that can be produced and supplied.
    For example, if a firm producing motor vehicles experiences a shortage
    of steel for its body panels, then its ability to produce vehicles will be
    reduced.
    Cost of inputs/resources
    Changes in input costs will alter a firm’s calculation of how much to
    supply at a given price. For example, if the same motor manufacturer
    experiences an increase in labour costs due to an increase in the wage
    rate, the cost of producing each vehicle will rise. This means that the
    price the manufacturer expects to receive will increase. If the price
    does not increase, less will be produced, ceteris paribus
    New firms entering the market
    In terms of total supply to a market, the number of firms in the market
    will affect the total supply. New firms in a market will increase market
    supply and firms leaving will reduce supply. New firms may be attracted
    into a market because of the expectation of profits and existing firms
    may leave because they cannot cover their costs, and make losses.
    Weather and other natural factors:
    Changes in the weather can have a considerable impact on the ability
    to produce certain products, like farm produce and commodities. This
    tends to affect the primary sector more than manufacturing
    Taxes on manufacturing:
    An increase in the tax rate means businesses have to pay a larger % of
    their profits as taxes to the government. This raises their cost of
    production and is passed on by firms to customers in the form of
    higher prices resulting in a leftward shift of the supply curve.
    Subsidies:
    Subsidies are funds given to firms to enable them to increase their
    supply or to reduce the price of their product to the consumer.
    Subsidies can increase the firm’s willingness and ability to produce and
    supply.

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