Demand and Supply IB1.pptx

Demand
and
Price
ECONOMICS, IB1

Learning outcomes: At the lesson’s
end, you should be able to
DEFINE A MARKET
AND STATE ITS
FORMS.
DEFINE DEMAND
AND STATE ITS
LAW
EXPLAIN AND DRAW
UP A DEMAND
SCHEDULE AND
CURVE

Lesson starter
(Brain Teasers)

Instruction: Crack/interpret the following codes.
Example: 366 D in a L Y
Answer: 366 days in a leap year
Now do the following:
1) 7 D of the W
2) 26 L of the A
3) 90 D in a R A
4) 5 L of the V
5) 12 S of the Z
6) 7 C in the R
Starter

Solution to Lesson
starter
Next Slide…

Instruction: Crack/interpret the following codes.
1) 7 D of the W
Answer: 7 days of the week
2) 26 L of the A
Answer: 26 letters of the alphabet
3) 90 D in a R A
Answer: 90 degrees in a right angle
4) 5 L of the V
Answer: 5 letters of the vowel
5) 12 S of the Z
Answer: 12 signs of the zodiac
6) 7 C in the R
Answer: 7 colours in the rainbow
Solution to Starter

Meaning and Forms of a market
A market is a mechanism or
arrangement whereby buyers and
sellers are brought into contact for the
purpose of exchange of goods and
services.
A market can be a physical place or a
non-physical system or means for
bringing buyers and sellers together.
Forms of market:
1. Product market: For trading
goods and services.
2. Factor markets: For trading
factors of production e.g.
labour market
3. Stock markets: For trading
company shares e.g. NYSE
4. International financial markets:
For trading international
currencies e.g. forex market.

Meaning of demand
The quantity of a good or service that a
consumer is willing and able to buy at a
given price and period of time.
To be an effective demand a consumer
must have enough money to buy the
product. That is demand is not a mere
wish or desire to have a product. It must
be backed up by the ability to pay for the
product.

Law of Demand
The law of demand states that there is
an inverse relationship between the price
of a product and the demand for it. This
means:
As price rises, the quantity demanded
by consumers contracts, ceteris
paribus.
As price falls, the quantity demanded
by consumers extends, ceteris paribus.

Demand Schedule
A table showing all the various quantities of a product that a consumer
demands and their corresponding prices. An example is given below:
Price of shoes ($) Quantity demanded (in pairs)
250 12
300 9
314 8
378 7
400 5
425 2
Andrew’s Demand Schedule for shoes

Demand Curve
This is a graphical representation of the law of demand. A normal
demand curve slopes downwards to show the law of demand. This
means it has a negative slope.

Demand and Price
Learning outcomes: You should be able to-
a) Distinguish between individual demand
and market demand.
b) Discuss the determinants of demand.

Individual Demand and Market demand.
Individual demand is the demand for a product by a single consumer in the
market while market demand is the sum of all individual demands for a product
in a market. An example follows:
Individual demand and market demand schedules for books
Price
($)
Individual A’s
demand
Individual B’s
demand
Individual C’s
demand
Market demand
(A+B+C)
10 140 190 110 440
15 130 185 100 415
20 115 170 85 370
25 105 155 70 330
30 95 150 50 295
35 80 112 45 237

Demand and Price
Learning outcomes: You should be able to-
a) Discuss the determinants of demand.
b) Explain the difference between change in
demand and change in quantity demanded

1. What do you call a word, number, phrase, or
other sequence of characters which reads the
same backward as forward, such as madam or
racecar.

1. What do you call a word, number, phrase, or
other sequence of characters which reads the
same backward as forward, such as madam or
racecar.
Answer: Palindrome

2. What is the number 1 followed by 100 zeros
called (i.e 10100?)

2. What is the number 1 followed by 100 zeros
called (i.e 10100?)
Answer: Googol

3. Bored math students may know that typing
what number on a calculator spells out the name
of a tech giant when flipped upside down?
a) 5317
b) 0.7734
c) 376006
d) 378163771

3. Bored math students may know that typing
what number on a calculator spells out the name
of a tech giant when flipped upside down?
a) 5317
b) 0.7734
c) 376006 (Answer: it spells “google” when flipped upside down)
d) 378163771

Determinants of Demand
Price Determinant
The price of the product itself.
Non-price Determinants
1. Price of related goods e.g. the price of
complements and substitutes.
2. Consumer population.
3. Income: How income affects demand differs
for inferior and normal goods.
4. Tastes and preferences
5. Consumer population.
6. Other factors e.g. weather, government
policyhh
This causes a
movement along
the demand curve These cause a
shift of the
demand curve

Class Work
1. Using a demand and supply curve diagram, analyse the impact of
increased accidents in air travel on the market for air travel.
2. Using a demand and supply curve diagram, analyse the impact of a
decline in the use of robots on the market for software engineers.

CHANGE IN QUANTITY DEMANDED
A change in quantity demanded is just a
movement along the same demand curve. It is
when demand contracts when there is a rise in
price or extends when there is a fall in
price. The diagram below represents the two
cases of change in quantity demanded:
contraction of demand and extension of
demand. When price rises from P to P1, demand
contracts from Q to Q1 (A-B) and when price falls
from P to P2, demand extends from Q to Q2 (A-
C).
Note that a change in quantity demanded is
caused by a change ONLY in the price of the
product itself.

Change in Demand: Increase in demand
A rise/increase in demand
The demand curve shifts outwards
Possible causes are:
• an increase in consumer income (for normal
goods only)
• a rise in the price of substitutes
• a fall in the price of a complement
• tastes and fashion favour the product
• an increase in advertising
• a rise in the population
• other factors, e.g. hot weather increases
demand for cold drinks and sun creams

Change in Demand: Decrease in demand
A fall in demand
The demand curve shifts inwards
Possible causes are:
• a fall in consumer income (for normal
goods only)
• a fall in the price of substitutes
• a rise in the price of a complement
• tastes and fashion favour other products
• a reduction in advertising
• a fall in the population
• other factors, e.g. hot weather reduces the
demand for winder coats

Elasticity of Demand
Learning outcomes: You should be
able to define:
- Define the term, elasticity
- Define price elasticity of demand
(PED) and state the formula for its
calculation.
-Demonstrate calculations of PED.

Elasticity of Demand
Elasticity is a term that measures the
degree to which a variable changes
when one of its determinants changes.
We will look at two types:
1) Price Elasticity of demand (PED)
2) Income Elasticity of demand (YED).

Types of PED/Elasticity Coefficients: Graphs

Types of PED/Elasticity Coefficients: Graphs
1. Zero Elastic Demand (PED=0)

Illustration
1. The price of a product rose from $2 to $3 and the quantity demanded fell from 16 to
12 units.
a) Calculate the PED coefficient and interpret your answer.
b) What type/example of product would you say the product is?
2. The quantity demanded and price of a product changed as seen in the diagram
below.
Calculate PED if price
decreased from £20 to £10
and comment on its
coefficient.

Price Elasticity of Demand
Learning outcomes: At the end of
this lesson, you should be able to
-Explain the determinants of PED
-Explain the relationship between
PED and Total Revenue.

Relationship between PED and Revenue
1. Relatively elastic demand: If the
demand for a product is price elastic,
an increase in price will reduce total
revenue and vice versa.
2. Relatively inelastic demand: If the
demand for a product is price inelastic,
an increase in price will increase total
revenue and vice-versa.
3. Unitary elastic demand: If the
demand for a product is unitary elastic,
an increase or decrease in price will
leave total revenue unchanged.

Determinants of PED or Factors Affecting Price Elasticity of
Demand
1. Degree of necessity of a good/service.
2. Availability of substitutes.
3. Proportion of income taken up by a good/service.
4. Time period.

For each question, calculate PED, interpret your answer and calculate
Total Revenue before and after the price change.
1. The price of a product rose from $2 to $3 and the quantity demanded fell
from 16 to 12 units.
2. The product’s quantity demanded rose from 10 units to 17 units when its
price fell by 10% from $80.
3. The quantity demanded and price of a product changed as seen in the
diagram below.
Price decreased from £25
to £15.
15
25
160 200
Price ($)

1. Relatively elastic demand: If the
demand for a product is price elastic,
an increase in price will reduce total
revenue and vice versa.
2. Relatively inelastic demand: If the
demand for a product is price inelastic,
an increase in price will increase total
revenue and vice-versa.
3. Unitary elastic demand: If the
demand for a product is unitary elastic,
an increase or decrease in price will
leave total revenue unchanged.

Learning outcomes: At the end of this
lesson, you should be able to:
Explain why PED values on a
straight line demand curve are not
constant.
 Explain the difference between the
PED for primary products and
manufactured products.

1. The price of a product rose from $2 to $3 and the quantity demanded fell
from 16 to 12 units.
2. The product’s quantity demanded rose from 10 units to 17 units when its
price fell by 10% from $80.
3. The quantity demanded and price of a product changed as seen in the
diagram below.
Price decreased from £25
to £15.
15
25
160 200
Price ($)
Quantity
Starter questions: For each question, calculate PED, interpret your
answer and calculate Total Revenue before and after the price
change.

PEDs along a straight line demand curve
Along any downward-sloping, straight-
line demand curve, the PED varies (changes) as
we move along the curve. As the price of a
product falls, the PED along a straight-line,
downward sloping demand curve also falls.
A linear or straight line demand curve has a
unitary elasticity at the midpoint. The total
revenue is maximum at this point. Any point
above the midpoint has elasticity greater than 1,
(Ed > 1). Here, price reduction leads to an
increase in the total revenue.
The reason why PED falls when price falls on a
linear demand curve is that, consumers are more
price sensitive when product prices are higher

PED for Primary and Manufactured products
Primary products are goods that are available from cultivating raw
materials without a manufacturing process. Examples are wool, cotton,
wheat, fish, fruits etc.
Manufactured goods are tangible products created from the
conversion of raw materials into consumable or useful products e.g.
cars, airplanes, computers etc.
Generally primary products have relatively low PED values (inelastic),
while manufactured goods will tend to have higher values (more
elastic).
Reasons: Primary products tend to be more essential or necessary
goods that many people need and therefore have a small price

Learning outcomes: At the end
of this lesson, you should be
able to:
Explain the importance of PED
to firms and government.
 Define income elasticity of
demand (YED) and calculate it.

Importance of PED in decision making by Firms and
Government
1. Producers’ knowledge of the PED for the products they sell will help
them in setting prices. If a product’s PED is elastic a reduction in
price can raise revenue while an increase in price can raise revenue
if the price of the product’s PED is inelastic. Hence, they will raise
prices for products whose demand is inelastic and reduce prices for
products with elastic demand.
2. Government will impose higher taxes on goods that are inelastic in
demand like tobacco and alcohol since consumers consume them by
habit. Raising taxes on these products can help government
increase its tax revenues. A tax raise can also help to discourage
consumption of these types of goods, since they become more
expensive for consumers. Government, on the other hand, will
reduce taxes on products with an elastic demand in order to raise its
tax revenues. Also increasing taxes on tobacco and alcohol is a good

Income Elasticity of Demand (YED).
Not only price affects the demand for a product. Income is also an
important determinant.
Income elasticity of demand measures the degree of responsiveness of
quantity demanded to a change in consumer income. It is measured as:

Range of Values for Income Elasticity of Demand (YED).
1. If the income elasticity of demand coefficient is positive, it means
the product involved is a normal good. If negative, the good is an
inferior good.
2. If the absolute value of YED is less than 1, demand is income-
inelastic. The percentage change in income is greater than the
percentage change in quantity demanded. Necessity goods (e.g.
bread) generally have low income elasticities.
3. If the absolute value of YED greater than 1, demand is income-
elastic. The percentage change in quantity demanded is greater than
the percentage change in income. Superior/luxury goods have high
income elasticity.

Illustration
1. Calculate the income elasticity and interpret the coefficient if incomes
increases from $10 to $15 and quantity demand falls from 20 units to
8 units as a result.

Income Elasticity of Demand
Learning outcomes: At the end
of this lesson, you should be
able to:
Explain what is meant by the
Engel curve.
 Explain the importance of a
knowledge of YED

Task on Income Elasticity:
Table 1 provides information about the quantities of good A
and good B purchased by a consumer between Year 1 and
Year 2.
Table 1
Using Table 1, calculate the income elasticity of demand for good A
and good B when income increases from Year 1 to Year 2. Interpret
your results and state what type of good each is.

The Engel curve is a curve that shows the relationship
between consumer income and the quantity demanded
of a product over a time period. The Engel curve is
named after the German 19th century economist, Ernst
Engel (1821-96)
Task: Draw and Engel Curve for
a) a normal good.
b) an inferior good.

Importance of the knowledge of Income Elasticity of Demand
1. YED knowledge helps businesses plan which market to sell
their goods in. Goods with high YED usually have large
increases in demand as income levels in a country rise and so
their markets will quickly grow. Hence, firms enter markets
with large YED and avoid those with low YED. Also, if a
country is expected to go into recession, producers will plan
to produce more inferior goods as demand for inferior goods
rise with a fall in income.
2. To explain sectoral changes in the structure of an economy.
The primary sector may grow slower than the secondary and
tertiary sectors when national income rises. YED explains the
reason for this. Primary sector products are less income-
elastic than secondary-sector and tertiary-sector ones.
Consumer spending on secondary and tertiary sector
products becomes proportionally greater than that of primary

Demand and Price
 Explain the importance of a
knowledge of YED to businesses.
Define cross elasticity of demand
and calculate it.

Importance of the knowledge of Income Elasticity of Demand
1. YED knowledge helps businesses plan which market to sell
their goods in. Goods with high YED usually have large
increases in demand as income levels in a country rise and so
their markets will quickly grow. Hence, firms enter markets
with large YED and avoid those with low YED. Also, if a
country is expected to go into recession, producers will plan
to produce more inferior goods as demand for inferior goods
rises with a fall in income.
2. To explain sectoral changes in the structure of an economy.
The primary sector may grow slower than the secondary and
tertiary sectors when national income rises. YED explains the
reason for this. Primary sector products are less income-
elastic than secondary-sector and tertiary-sector ones.
Consumer spending on secondary and tertiary sector
products becomes proportionally greater than that of primary

Demand and Price
Cross elasticity of demand is a measure of the degree of
responsiveness of the quantity demanded of a product X to a
change in price of a related product Y. It is computed as

Interpretation of Cross Elasticity Coefficient
1. Where cross elasticity of
demand is positive, the products
involved are substitutes.
demand negative, the products
involved are complements.
demand is zero, the products are
unrelated or independent.

Illustration
1. A consumer demands two products X and Y. The prices
and demands are shown below
Calculate the cross price elasticity of demand between X and Y and
comment on the coefficients when
a) the price of Y changes.
b) the price of X changes.
Price of X Price of Y Quantity of X
demanded
Quantity of Y
demanded
Previous $100 $300 1000 1500
Current $200 $250 700 1800

Demand and Price
 Perform more calculations and
interpretations of cross elasticity of
demand.
Discuss the exceptions to the law
of demand.

Class work
2021 Past paper
Table 1 provides information about Good X and Good Y, which are
related goods.
Table 1
Using Table 1, calculate the cross price elasticity of demand between
Good X and Good Y when the price of Good X increases. [2]

Exception to the law of demand/Abnormal Demand Curve
According to the law of demand, there is an inverse relationship between the
price and demand.
But there are situations where this normal relationship does not hold.
These are the cases of
a) Veblen goods or goods of ostentation or luxury goods
b) Giffen goods.
c) Expectation of future rise in price.
a) Veblen goods (named after the economist, Thorstein Veblen) are goods
that some consumers demand more of as their prices because their buyers
gain satisfaction from being seen to consume expensive goods.
b) Giffen goods (named after Robert Giffen) are necessary goods (e.g bread,
rice etc) whose demand increases as their prices increase. People may
consume less luxury items in order to purchase more Giffen goods.
c) Consumers buy more of some goods when their prices rise in order to
avoid further price rises in the future.

Demand and Price
EXPLAIN THE IMPACT OF LOW AND HIGH YED
ON COUNTRIES THAT HAVE THEM
Learning outcomes: At the lesson’s end, you
should be able to

1. What do you call a word, number,
phrase, or other sequence of characters
which reads the same backward as
forward, such as madam or racecar.

1. What do you call a word, number,
phrase, or other sequence of characters
which reads the same backward as
forward, such as madam or racecar.
Answer: Palindrome

2. What is the number 1 followed by 100
zeros called (i.e 10100?)
Answer: Googol

3. Bored math students may know that
typing what number on a calculator spells
out the name of a tech giant when flipped
upside down?
a) 5317
b) 0.7734
c) 376006
d) 378163771

3. Bored math students may know that
typing what number on a calculator spells
out the name of a tech giant when flipped
upside down?
a) 5317
b) 0.7734
c) 376006 (Answer: it spells “google” when flipped upside
down)
d) 378163771

Learning Outcomes
At the end of this lesson, you should be able to:
1. Define a demand function.
2. Draw up a demand schedule from a demand function.
3. Draw a demand curve from a demand schedule
Topic: Demand and Price

Explain the implications for a country of a relatively low
income elasticity of demand for its primary products.
countries that specialize in primary products may need to diversify in
order to achieve economic growth
(relative) income for those working in the primary sector might decrease,
leading to greater inequality
as economic growth occurs, demand for primary products will increase
more slowly than the demand for secondary/tertiary products, causing the
prices of primary products to increase more slowly than the prices of
secondary/tertiary products
as economic growth occurs, there will be differences in the rate of
expansion of primary industries in relation to secondary/tertiary
industries/employment
because the prices of primary products fall relative to manufactures, the
terms of trade for countries specializing in the export of primary products
may deteriorate. This may threaten the process of economic development
as country specializes in the export of (income inelastic) goods, it will not
benefit from global economic growth (the income gap will widen), or the

Solution

Demand schedule for pencils

Question 2
Price
of
pencil
packs
($)
Quantity
Demand curve for pencil packs
0
2
4
6
8
10
12
0 5 10 15 20 25 30

Activity 1
Below is the demand schedule for a consumer for wine.
a) Draw a demand curve from the demand schedule above.
b) From your graph, find the:
i) quantity that would be demanded of wine if price were £17.5?
ii) price that the consumer would pay if he demanded 70 bottles of wine?
Price of wine (£) Quantity Demanded (bottles)
5 75
10 65
15 55
20 45
25 35
30 25

Supply and Price
- define supply and explain what is meant by effective
supply
- state the law of supply
- define and draw up a supply schedule.
- draw a supply curve and analyze its shape.
- distinguish between individual supply and market
supply.
Learning Outcomes

1. What comes once in a minute, twice in a
moment, but never in a thousand years?

1. What comes once in a minute, twice in a
moment, but never in a thousand years?
Answer: The letter "M"

2. I have keys, but no locks. I have space,
but no room. You can enter, but you can’t
go outside. What am I?

2. I have keys, but no locks. I have space,
but no room. You can enter, but you can’t
go outside. What am I?
Answer: A computer keyboard

3. What disappears as soon as you say its
name?

3. What disappears as soon as you say its
name?
Answer: Silence

3. What walks around all day and hides
under the bed at night?

3. What walks around all day and hides
under the bed at night?
Answer: Shoes

4. What belongs to you, but everyone else
uses it more.

4. What belongs to you, but everyone else
uses it more.
Answer: Your name

5. Before Mt. Everest was discovered,
what was the highest mountain in the
world?

5. Before Mt. Everest was discovered,
what was the highest mountain in the
world?
Answer: Mt. Everest

6. Why can’t you take a picture of man
with a wooden leg?

6. Why can’t you take a picture of man
with a wooden leg?
Answer: Because a wooden leg can't take pictures, only a camera can.

Supply, effective supply and law of supply
Supply is the quantity of a
good/service that a supplier/producer is
willing and able to offer for sale at a
given price and period of time.
As price rises, the quantity supplied
by producers extends because
production becomes more profitable
As price falls, the quantity supplied by
producers contracts because
production becomes less profitable
A supply curve slopes upwards
Supply is effective when supply is backed up by the
ability to offer a product for sale.
Law of supply: There is a positive relationship
between price and supply i.e. the higher the price, the
higher will be the supply and vice versa.

Supply schedule and Supply curve
A supply schedule is a table showing the relationship between price and quantity supplied of
a product. A supply curve is a graph that shows the relationship between price and quantity
supplied. A supply curve has a positive slope i.e. it is upward sloping. Find illustrations below.
Supply schedule for rice
Price
($)
Quantity Supplied
(kg)
20 50
40 100
60 150
80 200
100 250
120 300
0
20
40
60
80
100
120
140
0 50 100 150 200 250 300 350
S
Supply Curve for rice
Price
of
rice
Quantity
S

Individual Supply and Market supply.
Individual supply is the supply of a product by a single producer in the market
while market supply is the sum of all individual supplies for a product in a
market. An example follows:
Individual supply and market supply of books
Price ($) Individual A’s
supply
Individual B’s
supply
Individual C’s
supply
Market supply
(A+B+C)
10 100 112 45 257
15 120 150 50 320
20 130 155 70 355
25 150 170 85 405
30 180 185 100 465
35 220 190 110 520

Supply and Price
- discuss the exception to the law of supply.
- define a supply function, specify it and use it to
draw up a supply schedule and a supply curve.
- Analyze the concept of change in supply and
change in quantity supplied.
Learning Outcomes

1. Name three consecutive days without using the words:
Monday, Tuesday, Wednesday, Thursday, Friday, Saturday or Sunday?

1. Name three consecutive days without using the words:
Monday, Tuesday, Wednesday, Thursday, Friday, Saturday or Sunday?
Answer: Yesterday, Today and Tomorrow

2. There is a wordin the English language in which the first two letters
signify a male, the first three letters signify a female, the first four signify a
great man, andthe whole word, a great woman. What is the word?

2. There is a wordin the English language in which the first two letters
signify a male, the first three letters signify a female, the first four signify a
great man, andthe whole word, a great woman. What is the word?
Answer: Heroine

3. You’re escaping a labyrinth andthere are three exits. Exit A leads to an
inferno. Exit B leads to an assassin. Exit C leads to a lion that hasn’t eaten
in 3 years. Which exit do you pick?

3. You’re escaping a labyrinth andthere are three exits. Exit A leads to an
inferno. Exit B leads to an assassin. Exit C leads to a lion that hasn’t eaten
in 3 years. Which exit do you pick?
Answer: Exit C. If a lion hasn’t eaten in 3 years, it has definitely starved to
death

Topic: Supply and Price
Exception to the law of Supply: Backward Bending Supply curve

Topic: Supply and Price
- discuss the exception to the law of supply.
- define a supply function, specify it and use it to draw up a
supply schedule and a supply curve.
- Analyze the concept of change in supply and change in
quantity supplied.
Learning Outcomes

Topic: Supply and Price.
Exception to the law of Supply: Backward Bending
Supply curve

Solution Question (a)

Price
($)
Quantity Supplied
(Kg)
5 20
10 30
15 40
20 50
25 60
Supply schedule

Solution Question (b) & (c)
Price
($)
Quantity Supplied
(Kg)
5 20
10 30
15 40
20 50
25 60
Supply schedule
0
5
10
15
20
25
30
0 10 20 30 40 50 60 70
Price
($)
Quantity (kg)
Supply Curve
S
S
From the graph, $22.50 is the unit
price for 55kg of the product supplied.

Supply and Price
Learning outcomes: At the end of this lesson, you should
be able to:
-Define Price Elasticity of Supply (PES).
-Calculate and interpret PES values.
-Explain the determinants of PES.

Price Elasticity of Supply
This is defined as the degree of responsiveness of quantity supplied of a
product to a change in its price. It is calculated as follows:

Range of values for PES and their meanings

Quick Note on Perfectly Elastic Supply
Perfectly inelastic supply (vertical supply curve)
Producers are completely price insensitive. A change in price leads to no change in supply. The idea
of a perfectly elastic supply is often seen a sporting or entertainment venue with a maximum
capacity. For example, the maximum capacity of Real Madrid Stadium is 81,044 which means the
supply of tickets is perfectly elastic at 81,044.
Quantity
Price
81044

Illustration
A publishing firm realises that they can now sell their monthly magazine
for $5.50 instead of $5.00. In light of this, they increase their supply
from 240,000 to 270,000 magazines per month. Calculate the price
elasticity of the magazine and comment on your answer.

Determinants of PES
The determinants of PES include:
1. Unused or Spare capacity/Availability
of factors of production.
2. The mobility of factors of production.
3. Time.
4. The ability to store stock.

Determinants of PES
1. Unused capacity/Availability of factors of production: Where a firm has a lot of unused
capacity (significant amount of resources not fully used), it will be able to increase output
easily. PES for the product will be relatively high. However, where a firm is producing at full
capacity, it will be difficult to raise supply significantly and the product’s supply will
therefore be relatively inelastic.
2. The mobility of factors of production: Where factors of production can be easily
switched from one productive use to another, supply will tend to relatively elastic, but
supply will be relatively inelastic if it is difficult to move factors of production from one
productive use to another. For example, it may be easy to convert resources from the
production of metal cups to production of metal spoons. Thus when the price of metal
spoon rises, a firm may find it easier to increase the supply of metal spoons, which makes
the supply of metal spoons relatively elastic.

Determinants of PES
3. The ability to store stock: The more a firm is able to store products, the easier it is to
respond to a change in price and the more elastic the supply of the products will be if their
prices change. A low ability to store stocks will mean the supply of the stocks will be
relatively inelastic when their prices change.
4. Time: Most products have inelastic supply in the short run because most firms may not be
able to increase the quantity of all factors of production so as to increase supply
significantly when product prices rise. On the other hand, most products have elastic
supply in the long run because firms may have enough time to increase all factors of
production to raise supply significantly.

Market Equilibrium
Learning outcomes: You should be
able to
- Explain the reasons for the differences
in the PES for manufactured goods and
primary goods.
-Explain the concept of market
equilibrium
-Explain the concepts of excess demand
and excess supply.

Lesson starter
1. 84% of people reading this will not find the the mistake in this
A,B,C,D,E,F,G,H,I,J,K,L,M,N,O,P,Q,R,S,T,U,V,W,X,Y,Z.
2. How can you throw a ball as hard as you can and have it come back to you, even if
it doesn’t bounce off anything? There is nothing attached to it, and no one else
catches or throws it back to you.
3. How can you spell the word “cow” with 13 letters?
4. Interpret the code with a full sentence: IC UR YY 4 me.
130

SOLUTION TO Lesson starter
1. 84% of people reading this will not find the the mistake in this
A,B,C,D,E,F,G,H,I,J,K,L,M,N,O,P,Q,R,S,T,U,V,W,X,Y,Z.
2. How can you throw a ball as hard as you can and have it come back to you, even if
it doesn’t bounce off anything? There is nothing attached to it, and no one else
catches or throws it back to you.
3. How can you spell the word “cow” with 13 letters?
4. Interpret the code with a full sentence: IC UR YY 4 me.
 Answer 1 – “The” is repeated.
 Answer 2 – Throw the ball up in the air.
 Answer 3 – See o double you.
 Answer 4 – I see you are two wise for me.
131

Differences in PES for manufactured and primary goods
1. Primary goods (e.g. cocoa) tend to have inelastic supply as a
change in price may not cause a proportionately large change in
supply. For example, a rise in the price of cocoa may not be met by
a significant proportional rise in supply because it takes a long time
to grow cocoa. Also, moving productive resources from the
production of rice, for example, to the production of cocoa may be
impossible or difficult, hence its supply ay be relatively inelastic.
2. Manufactured products, e.g. soda, on the other hand, tend to have
elastic supply as it is easier to increase or decrease quantity
supplied in response to a change in price. With manufactured
goods it is likely there will be unused capacity in the industry and
factors of production may be more mobile and it is relatively easy

Market equilibrium
Price
Quantity
D
D
S
S
Equilibrium
quantity
Equilibrium
price
0
A market is in
equilibrium where
market demand equals
market supply
At the equilibrium price
the quantity consumers
wish to buy is exactly
equal to the quantity
producers wish to sell
If a market is in
equilibrium there are no
pressures to change the
market price.

Algebraic determination of equilibrium

Sketch
Price

Market disequilibrium
Price per unit
Quantity traded per period
D
D
S
S
Pe
0
A market is in disequilibrium if the quantity
consumers wish to buy is not matched by the
quantity producers wish to sell
P1
P2
At price P1 there is an excess supply or
surplus. Price will need to fall to persuade
consumers to buy more and for producers to
contract their supply.
At price P2 there is an excess demand or
shortage. Price will need to rise to reduce
consumer demand and to encourage
producers to supply more.
SURPLUS
or
or SHORTAGE

Class work 2
You are given the schedules below:
a) Fill in the empty cells in the table
b) From the table determine the equilibrium price and quantity
Price ($) Quantity
Demanded
Quantity
Supplied
Excess
demand
Excess supply
5 180 80
10 150 100
15 120 120
20 90 140
25 60 160
30 30 180
Equilibrium price:
Equilibrium quantity:

Market EQUILIBRIUM
At the end of this lesson,
you should be able to:
 Solve further problems on
equilibrium
 Analyse the impact of
changes in demand and
supply on market for
LEARNING OUTCOME:
139

Class Task
1. Using well-labelled diagrams, illustrate what will happen to the market for
each product in each of the cases below:
a. The media has published an article saying that eating microwave popcorn
results in a higher risk of dementia.
b. An early drought has severely harmed the olive harvests in Italy.
c. There has been an improvement in the production technology in the textile
industry.
2. Analyse with the aid of an appropriate diagram the impact of an increase in
the price of Coca-Cola on the market for Pepsi.

Market Efficiency
At the end of this lesson,
you should be able to
explain the meanings of and
calculate:
 Consumer surplus
 Producers surplus
 Community (social) surplus
LEARNING OUTCOME:

Meaning of Consumer Surplus and Producer Surplus
Consumer Surplus (CS)
This is the extra satisfaction (or utility) gained by consumers from paying a price that is
lower than that which they are willing to pay for. It is shown by the area under the
demand curve and above the equilibrium price. Formula:
Note: bCS and hCS stand for base and height of the consumer surplus triangles
respectively.
Producer Surplus (PS)
This is the amount of income gained by producers from receiving a price that is higher
than that which they are willing to receive. It is shown by the area under the demand
curve and above the equilibrium price. Formula:
Note: bPS and hPS stand for base and height of the producer surplus triangles
respectively.

Meaning of Social Surplus
Community (Social) Surplus (SS)
This is the total benefit to society of operating where market demand equals market
supply. It is the addition of consumer surplus and producer surplus.
Formula:

Diagrams of Consumer and Producer Surplus

Illustration
a) State the equilibrium price and
quantity.
b) Calculate the consumer
surplus and producer surplus.
c) Calculate the social surplus.
d) If the price fell to $3 per kg,
i) calculate the resulting change
in the producers surplus.
ii) calculate the resulting change
in the consumer expenditure.

Government Intervention in Markets
Learning outcomes:
 Identify reasons why
government intervenes in
markets
 Identify different methods
of government
intervention.
 Explain maximum and
LEARNING OUTCOME:

Reasons for Government intervention in
Markets
 To support households and firms
through favourable pricing.
 To influence consumption and
or/production
 To protect consumers from the
misuse of monopoly power.
 To promote well-being and equity in
society.
 To raise government revenue for

Methods of Government intervention in
Markets
 The use of subsidies.
 The use of indirect taxes
 The use of maximum price.
 The use of minimum price.

Maximum Price
A maximum price (or price
floor) is a price set by
government below the
equilibrium price to encourage
the consumption of a product
and to make the product more
affordable for consumers.
Producers are not allowed by
law to sell above the maximum
price.

Analysis of a Maximum Price
The equilibrium price Pe may be
too high for consumers to afford
the product (bread). Government
then intervenes by setting a
maximum price Pmax below the
equilibrium price Pe. But at the
maximum price, quantity
demanded Q2 exceeds quantity
supplied Q1, thereby creating an
excess demand of Q1Q2.

Illustration
Given the demand-supply diagram for
rice in Islandia below, the government of
Islandia wants to reduce the price of rice
by in order to enable low-income
households to buy enough rice to meet
their needs. The government decides to
achieve this by imposing a maximum
price.
(a) Calculate the shortage resulting from
the imposition of the maximum price.
(b) Calculate the change in consumer

Problems/effects of a Maximum Price
1. Shortages (excess demand)
2. Emergence of black
market/parallel market, which is
an illegal market where the
product is sold for a higher price,
somewhere between the
maximum price and the
equilibrium price.
3. Emergence of queues.
4. Preferential treatment from
sellers, which involves sellers

Revolutionary Tribal
Wars:
Government
Intervention
in
Markets
Economics, IB1

learning outcomes: At the end of this lesson, you
should be able to
DEFINE
RATIONING AND
IDENTIFY ITS
TYPES
EXPLAIN
MINIMUM PRICE
AND IDENTIFY
ITS PROBLEMS
EXPLAIN HOW
GOVERNMENT RESOLVES
PROBLEMS OF MAXIMUM
PRICES

 Lesson Starter
next slide…

A man was murdered in his office.
The suspects are Ericson, Maggi, Jason, Benny,
Sona, Patrick.
A calendar found near the man has the following
numbers written on it with blood: 6, 4, 9, 10, 11.
Who is the killer?
Starter: Question 1

SOLUTION TO QUESTION 1
 NEXT SLIDE…

A man was murdered in his office.
The suspects are Ericson, Maggi, Jason, Benny,
Sona, Patrick.
A calendar found near the man has the following
numbers written on it with blood: 6, 4, 9, 10, 11.
Who is the killer?
Answer: Jason
The numbers 6, 4, 9, 10, 11 (written on the calendar)
represent the 6th, 4th, 9th, 10th and 11th months of
the year respectively: June, April, September,
October and November. They spell the name Jason.
Solution to Starter: Question 1

RATIONING
Rationing is the controlled
distribution of goods and
services among competing
users, or an artificial restriction
of demand.
Rationing controls the size of
the ration, which is the
quantity of the limited product
that the buyer is allowed to
buy at a particular time.

TYPES OF RATIONING
TYPES OF RATIONING
1. Price rationing: Price rationing is a method of rationing that
allocates the limited quantities of goods and services using
markets and prices. For example, if the quantity of a given
commodity becomes increasingly limited, then the price rises.
Only the buyers most willing and able to buy the commodity, and
pay the higher price, obtain the good. The limited quantity is
automatically rationed to the highest bidder.
2. Non-price rationing: This involves rationing limited goods and
services by ways other than by price. Methods artificially designed
by humans/government are employed to ration the limited goods
and services to consumers.

Non-price Rationing methods
Non-price
rationing
methods
Preferential treatment
i.e. allocation according
to sellers’ preferences
Random allocation by
ballot
Queueing or first-come,
first served
The use of
coupons/vouchers or quota
per customer/household

GOVERNMENT SOLUTIONS TO EXCESS DEMAND
CREATED BY PRICE CEILINGS
In order to eliminate the excess
demand created by a maximum
price, government can increase
supply through
1. Subsidies: Government can
grant subsidies to enable firms
increase the supply of the
product.
2. Direct provision: Government
can produce and provide the
goods/services directly to
eliminate excess demand.
3. Release from storage:
Government can draw on
previously stored products to

Controlling the
macroeconomy
Economics, IB1
Government
intervention in
Markets

Learning outcomes:
1
Define minimum price and
explain why government sets
minimum prices.
2
Analyse the impact of
minimum prices on markets
3
Discuss the interventions
used in minimum price
legislation

Minimum Price
(Price Floor)
A minimum price is a price
set by the government
above the equilibrium price
to increase the supply of a
product and ensure that the
producers make a decent
profit from its sale.

Reasons for setting minimum prices (price floors)
Government can set minimum prices to:
1. Raise the incomes for producers of goods and services that government
thinks are important e.g. agricultural products which are subject to large
price fluctuations.
2. Protect workers by setting a minimum wage so they can earn enough to
meet their needs and wants reasonably well.
3. Discourage the consumption of harmful products (e.g. alcohol and
tobacco) by pricing them above what many can afford.

Effects of a price floor
1. A surplus (excess supply)
of Q1Q2 is created.
2. Producers may try to get
around the price floor by
selling at a lower price: a
price between the price
floor (PMin) and the
equilibrium price (Pe)

Government intervention to control excess
demand supply at the price floor
1. Government can buy up the surplus at the minimum price
so that the demand curve shifts to the right to
D+government buying. This eliminates the surplus. The
government then stores the surplus, destroys it or sells it
abroad. But buying and storing the surplus is expensive and
has opportunity costs, destroying it is wasteful and selling it
abroad may amount to dumping.
2. Producers may be limited by quotas so they do not supply
beyond Q1. But this means only a limited number of
producers will benefit from the minimum price.
3. Government can attempt to increase the demand for the
product by advertising it or by restricting imports (through
protectionism) of the same products so that domestic
demand for it will increase.

(Subsidies)
Learning outcomes
You should be able to:
- Define a subsidy and explain why government grants
it.
- Demonstrate subsidy grants graphically and calculate
it.

Meaning and reasons for subsidies
A subsidy is an amount paid by government to a firm, per unit
of output, to encourage the production of a product.
The reasons why government grants subsidies include:
1. To reduce the price of essential goods (e.g. rice) so as to encourage its
consumption.
2. To guarantee the supply of products of strategic importance to the economy e.g.
basic food supply and power source like coal.
3. To enable producers to compete with overseas trade, thereby protecting the home
industry.

Subsidy and the Supply Curve
If a subsidy is granted to a firm on a
certain product, the supply curve for
the product will shift vertically
downwards by the amount of the
subsidy, because it reduces the cost
of production. If a subsidy of $2 per
unit is granted, the supply curve will
shift to the right as seen below.

Government
Intervention in
Markets
Economics, IB1

DEFINE AN INDIRECT TAX
AND IDENTIFY TYPES
STATE THE REASONS FOR IMPOSING
INDIRECT TAX HOW
INDIRECT TAX WORKS
Learning outcomes: At the end of this lesson,
you should be able to

An indirect tax is a tax imposed
on expenditure on goods and
services. Examples include:
 Goods and Services Tax (GST)
 Value Added Tax
 Consumption tax
 Excise tax
Indirect Tax

REASONS FOR IMPOSING INDIRECT TAXES
1. To raise revenue needed to carry out state
responsibilities.
2. To discourage the consumption of
dangerous/demerit goods.
3. To redistribute income in order to reduce income
inequality.
4. To preserve and protect the environment e.g.
pollution tax.
5. To reduce balance of payments deficits.

How Indirect Taxes Work
An indirect tax is imposed on the selling price of a
product, thereby raising the firm’s costs and shifting the
supply curve for the products vertically upwards by the
amount of the tax. Because of this shift, less of the
product is supplied at every price.

Specific Tax and Percentage Tax

Government Intervention in
Markets:
Indirect Taxes
Economics, Year IB1

Government Intervention in markets: Indirect
Tax
Learning outcomes: At the end of this lesson, you should be able to:
1. EXPLAIN THE IMPACT OF INDIRECT
TAXES ON STAKEHOLDERS
3. PERFORM CALCULATIONS ON
THE IMPACT OF INDIRECT
TAXES
3. EXPLAIN HOW THE TAX
BURDEN IS SHARED BETWEEN
CONSUMERS AND
PRODUCERS

Graphical Analysis of Indirect Tax
Notes:
1. The price Pe is received by producers and also paid by consumers before the tax.
2. A specific tax of $XY per unit is charged. Hence the supply curve shifts vertically upwards by the
amount $XY. The quantity demanded and supplied falls from Qe to Q1
3. Following the tax, the amount received by producers then falls from Pe to C and the amount paid by
consumers rises from Pe to P1.
4. Producers receive the price $C per unit and consumers pay the price P1 after the tax is imposed.
Producers pay CPe to government and consumers pay to PeP1 to government as tax.

What determines the burden of Tax

Computation on Impact of Indirect taxes

Demand and Supply: a revisit
Learning outcomes: You should be able to:
- To explain the reasons for a downward sloping demand curve.
- Define the price mechanism and explain its functions.

Reasons for downward sloping demand curve
There is an inverse relationship between the demand for a product and its price for
the following reasons:
1. Income effect.
2. Substitution effect

Reasons for downward sloping demand curve
Income effect: There will be an increase in the real income of consumers when
the price of a good/service falls and vice-versa. That is consumers will be able to
buy a higher quantity of a product when the price falls. For example, a consumer
with an income of $30 can buy 15 apples priced at $2 each. If the price of each
apple falls to $1.50, the consumer’s real income will increase as they will be able to
now buy 20 apples.
Substitution Effect: When the price of a product rises, it is likely that consumers
will substitute it for a relatively cheaper alternative product whose price has
remained the same. Also when price falls, consumers tend to substitute other
relatively more expensive products for the product whose price falls. Moreover, if
we link utility (satisfaction derived from consuming products) with product
consumption and a product’s price increases, this means the utils (measurement of
utility in units) from the product is the same but the product is more expensive.
Consumers will therefore tend to switch their purchases to a relatively cheaper
substitute that gives them utils that correspond to the price they pay for it.

The price mechanism is the means by which decisions of consumers
and businesses interact to determine the allocation of resources.
The free-market price mechanism clearly does not ensure an
equitable distribution of resources and can lead to market failure.
The price mechanism performs (3) three functions (SIR):
1) Signalling function
2) Incentive function
3) Rationing function
Price Mechanism

Functions of the Price Mechanism
1. Signalling function
Prices perform a signalling function – i.e. they adjust to demonstrate where
resources are required.
Prices rise and fall to reflect scarcities and surpluses.
If prices are rising because of high demand from consumers, this is a signal to
suppliers to expand production to meet the higher demand.
If there is excess supply in a market, the price mechanism will help to eliminate a
surplus of a good by allowing the market price to fall.
2. Incentive function
Through choices consumers send information to producers about their changing
nature of needs and wants.
One important feature of a free-market system is that decision-making
is decentralised, i.e. there is no single body responsible for deciding what to
produce and in what quantities.
This is in contrast to a planned (state-controlled) economic system where there is

Functions of the Price Mechanism
3. Rationing function
Prices ration scarce resources when demand outstrips supply.
When there is a shortage, price is bid up – leaving only those
with willingness and ability to pay to buy.
.

Demand and Supply: a revisit
Learning outcomes: You should be able to :
- explain why the supply curve is upward sloping.

Reasons for the downward sloping nature of the Supply
Curve
Three factors responsible for the shape of the supply curve or the law of supply:
1. The short run.
2. The law of diminishing marginal utility.
3. Increasing marginal costs.

Reasons for the upward sloping nature of the Supply Curve
1. The short run.
The short run is a production period too short to vary all factors of production. At least one
factor of production is fixed in the short run. In the short run, firms are not able to change
all their factors of production to increase or decrease supply when product prices change.
Capital and land may be fixed while labour may be variable.
2. The law of diminishing returns.
This law states that as more variable factors of production continue to be added to a fixed
factor of production, additional units of output (called marginal product) increases at first but
eventually declines.
3. Increasing marginal costs.
Marginal cost is the additional cost associated with producing an extra unit of output. This
cost starts to increase when diminishing returns set in due to inefficiency in production.
Therefore, to encourage firms to produce more, price must rise high enough to cover the
additional cost of production.

How the Law of Diminishing returns works
1. Total Product (TP)
This is the total output produced by a firm using its fixed and variable inputs in a time period.
2. Average Product (AP)
This is the output product by each unit of variable input employed. It is calculated as
3. Marginal Product (MP)
This is the additional output produced by a firm by using an extra unit of a variable input.
This is calculated as

How the Law of Diminishing returns works - Class work
The table below shows tubers of yam produced on a farmland in different periods. You are
required to fill in the blank spaces and sketch the general graphs of TP, MP and AP to show
their relationships.
Quantity
of Land
(plots)
Quantity
of
labour
Total
Product
(units)
Average
Product
(units)
Marginal
Product
(units)
2 0 0 -
2 1 10
2 2 26
2 3 45
2 4 67
2 5 85
2 6 90
2 7 84
2 8 76

Demand and Supply IB1.pptx

Recommended

Recommended

More Related Content

Similar to Demand and Supply IB1.pptx

Similar to Demand and Supply IB1.pptx (20)

Recently uploaded

Recently uploaded (20)

Demand and Supply IB1.pptx