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# Demand and supply

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### Demand and supply

1. 1. Demand and Supply 1
2. 2. Demand and Supply• By the end of the lecture, you are expected to be able to: – Explain and elaborate with example about law of demand and supply – Plot a demand and supply curves – Distinguish between individual demand/supply and market demand/suppy – Distinguish between change in Demand/ Supply and Change in Qd/Qs 2
3. 3. Demand• Demand can be defined as a desire to buy a good or a service accompanied by ability and willingness to pay.• Effective demand• Demand curve = A curve that shows the relationship between price (P) and quantity demanded (Qd)• Demand schedule = Shows the specific quantity of a good or service that people are willing and able to buy at different prices 3
4. 4. Law of Demand• The principle that there is an inverse relationship between the price of a good and the quantity buyers are willing to purchase in a defined time period, ceteris paribus• Shown by the downward sloping demand curve 4
5. 5. Individual’s Demand Curve for Compact Discs P A Individuals Buyer’s Demand Schedule for Compact Discs\$20 Point Price Quantity demanded per compact disk (per year) A \$20 4\$15 B B \$15 6 C \$10 8 C D \$5 16\$10 7 D\$5 Demand Curve 4 8 16 20 Q 5
6. 6. Individual Demand & Market Demand• Individual demand – demand by an individual consumer• Market demand- The summation of the individual demand schedules 6
7. 7. CHANGE IN Qd vs. CHANGE IND A change in quantity demanded is a movement • along a stationary demand curve caused by a change in price. Extension of demand (rise in Qd due to P↓) Contraction of demand (fall in Qd due to P↑) • When any of the nonprice determinants of demand changes, the demand curve responds by shifting. Increase in demand (demand curve shifts right) Decrease in demand (demand curve shifts left) 7
8. 8. P A fall in price causes an extension of demand (increase in quantity demanded)20 A15 B10 D 5 Q 10 20 30 40 50 8
9. 9. P An increase in price causes a contraction of demand (decrease in quantity demanded)20 A15 B10 D 5 Q 10 20 30 40 50 9
10. 10. P Demand curve shifts right (increase in quantity demanded not due to a price change)2015 A B10 D2 5 D1 Q 10 20 30 40 50 10
11. 11. P Demand curve shifts left (fall in quantity demanded not due to a price change)2015 B A10 D2 5 D1 Q 10 20 30 40 50 11
12. 12. What can cause a shift in a Demand Curve? 1. Number of buyers in the market2. Tastes and preferences3. Income4. Expectations of consumers5. Prices of related goods 12
13. 13. Normal Good & Inferior Good• Normal good - Any good for which there is a direct relationship between changes in income and its demand curve (Y↑D↑)• Inferior good - Any good for which there is an inverse relationship between changes in income and its demand curve (Y↑D↓) 13
14. 14. Substitute Goods & Complementary Goods• Substitute goods - Goods that compete with one another for consumer purchases (goods that perform the same functions)• Complementary goods - Goods that are jointly consumed with another good 14
15. 15. Supply• Supply refers to the quantity of a good that sellers are willing and able to offer for sale in a given time period.• Law of supply - The principle that there is a direct relationship between the price of a good and the quantity sellers are willing to offer for sale in a defined time period, ceteris paribus 15
16. 16. Supply schedule and supply curve• Supply schedule – shows specific quantity of a good or a service that suppliers are willing and able to offer for sale at different prices• Supply curve – a curve that shows the relationship between price and quantity supplied 16
17. 17. P A company’s Supply Curve for Compact Supply Curve Discs20 Point Price Quantity A15 A B 20 10 40 30 C 6 2010 B 5 C 10 20 30 40 Q 17
18. 18. Individual Supply and Market Supply• Individual supply – supply by an individual seller• Market supply - the horizontal summation of all the quantities supplied by all sellers at various prices that might prevail in the market 18
19. 19. CHANGE IN Qs vs. CHANGE IN S• A change in quantity supplied is a movementalong a stationary supply curve caused by achange in price. Extension of supply (rise in Qs due to P ↑) Contraction of supply (fall in Qs due to P ↓)• When any of the nonprice determinants ofsupply changes, the supply curve responds byshifting. Increase in supply (rightward shift) Decrease in supply (leftward shift) 19
20. 20. When price changes, what happens?• The curve does not shift - there is a change in the quantity supplied• Extension of supply (P increase)• Contraction of supply (P fall) When something changes other than price, what happens?• The whole curve shifts - there is a change in supply• Increase in supply (supply curve shifts right)• Decrease in supply (supply curve shifts left) 20
21. 21. P An extension of supply (increase in quantity supplied S20 due to a price rise) A15 B10 5 10 20 30 40 Q 21
22. 22. P A contraction of supply (decrease in quantity supplied S20 due to a price fall) A15 B10 5 10 20 30 40 Q 22
23. 23. P Increase in supply (supply curve shifts right)20 S1 S215105 10 20 30 40 Q 23
24. 24. P Decrease in supply (supply curve shifts left)20 S1 S215105 10 20 30 40 Q 24
25. 25. What can cause a shift in a Supply Curve? 1. Number of sellers in the market2. Technology3. Resource prices4. Taxes and subsidies5. Expectations of producers6. Prices of other goods the firm could produce 25