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1. Topic:
DEMAND AND SUPPLY THEORY AND MARKET
EQUILLIBRIUM
DATE:
20/6/19
Submitted to:
Ma'am Maryam

2. Group members:
1.Najam ul Hassan
2.Rana Husnain Raza
3.Mushtaq Ahmed
4.Usama sabri
5.Abdul Haseeb Mushtaq
6.Pervaiz Hayat

3. 1. The Demand
– The Demand Curve
– Shifts in the Demand Curve
2. The Supply
– The Supply Curve
– Shifts in the Supply Curve
3. Supply and Demand
―Equilibrium

4. This lesson will explain the emergence of market
demand and market supply, and show
these(market demand and supply)act together to
generate a market equilibrium which determines
the market price, the instrument of the “ invisible
hand”.
– The words “demand” and “supply” refer to the
behaviour of individuals while interacting in the
marketplace.

5. Market & Competition
 Market
– A market consists of groups of buyers and sellers of a good or a
service.
– The market is the place where demand and supply of a good or a
service meet.
– A market doesn’t have to be a physical place (i.e. have a concrete
location) like a bazaar.
– Buyers
• Determine the demand for the product
– Sellers
• Determine the supply of the product
 Competitive market
– Market in which there are many buyers and many sellers (A large
number of seller; A large number of buyers)
– Each has a negligible impact on market price (None of whom can
influence prices through his/her activities alone).
– Price and quantity are determined by all buyers and sellers
• As they interact in the marketplace

6. Demand
Quantity demanded
– The quantity demanded of any good is the amount
that buyers are willing and able to purchase.
– Although there are many factors that determine the
quantity demanded for any good, one chief
determinant is the price of the good.
Law of Demand
– The law of demand says that the quantity demanded
of a good falls, when the price of the good rises
• Quantity demanded declines, if the price rises
• Price Quantity demanded

8. Demand
 Price
– What a buyer pays for a unit of the specific good or
service is called price.
 Quantity Demanded
– The total number of units purchased at that price is
called the quantity demanded.
Demand schedule - a table
– Relationship between the price of a good and quantity
demanded
Demand curve - a graph
– Relationship between the price of a good and quantity
demanded
Individual demand
– Demand of one individual
8

9. 9
Diana’s Demand Schedule and Demand Curve
Demand curve
The demand schedule is a table that shows the quantity demanded at each price.
The demand curve, which graphs the demand schedule, illustrates how the quantity demanded
of the good changes as its price varies.
Because a lower price increases the quantity demanded, the demand curve slopes downward.
Price of
Ice-Cream
Cone
Quantity of
Cones
Demanded
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
12 cones
10
8
6
4
2
0
0 1210 1191 2 3 4 5 6 7 8
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice-Cream Cones
1. A decrease
in price . . .
2. . . . increases quantity
of cones demanded.

10. Demand
• Shifts in the demand curve
– The downward sloping demand curve summarizes how
the quantity demanded changes as the price rises or
falls , holding everything else constant (Ceteris Paribus)
– The demand curve shifts to the left or right, when some
event occurs to change the quantity demanded at any
given price.
– Increase in demand
• Any change that increases the quantity demanded at every
price
• Demand curve shifts right
– Decrease in demand
• Any change that decreases the quantity demanded at every
price
• Demand curve shifts left

11. 11
Shifts in the Demand Curve
Price of
Ice-Cream
Cones
Quantity of Ice-Cream Cones
0
Demand
curve, D1Demand
curve, D3
Demand
curve, D2
Increase in
Demand
Decrease in
Demand
Any change that raises the quantity that buyers wish to purchase at any given price
shifts the demand curve to the right. Any change that lowers the quantity that buyers
wish to purchase at any given price shifts the demand curve to the left.

13. Shift in the Demand Curve
• Determinants of shift in Demand Curve
– Income
• Normal goods
• Inferior goods
– Tastes and preferences
– The price of related goods
• Complements
• Substitutes
– Expectations
• Income
• Future prices
– Market size (number of buyers; Population
composition)

14. Income
i. Normal good:
– When income increases, people demand more of a
commodity.
– If the demand increases with the increase in income,
such goods are called normal goods.
• Other things constant
• An increase in income leads to an increase in demand
ii. Inferior good:
– If the demand decreases with the increase in income, such
goods are called inferior goods (or quantity demanded rises
when consumer income decreases).
– Inferior goods can be viewed as anything a consumer would
demand less of if they had a higher level of income.
• Other things constant
• An increase in income leads to a decrease in demand

15. Examples of Inferior Goods
There are many of examples of inferior goods.
a. An example would be that of Non-branded clothes.
When your income is low, you buy Non-branded clothes, but when
your income rises you buy branded clothes. If again your income lowers
you would again switch to inferior good i.e. non-branded clothes and
vice versa.
D. In the case of an inferior good, demand decreases as income grows.
That means, a higher income shifts the demand curve to the left. This
holds true for goods that are usually replaced as income grows.
A common example of an inferior good are bus rides. If people don’t
have enough money to buy a car or pay for a taxi, they have to travel by
bus. However, once their income allows them to buy a car, they don’t
need bus rides anymore. Therefore, demand for bus rides decreases as
income increases and vice versa.

17. Tastes & Preferences
– Change in tastes – changes the demand
– The tastes and fashion(trends) of consumers change from
time to time.
– If the consumer taste for a particular commodity
increases, the demand for the commodity increases. On
the other hand, if the taste decreases for the commodity,
the demand for that commodity decreases.
– In this sense, if consumers' tastes for a good or service
increase, then their quantity demanded increases, and vice
versa

18. 18
Shifts in Demand
The Determinants of Demand
Income: Tastes and Preferences
D1
Q/Units
Price
Sport Utility Vehicle
• Increase in demand
D2
Smoking
• Decrease in demand
D3

19. Price of Related Goods
• Substitutes: Substitute goods (those that can be used to
replace each other): price of substitute and demand for
the other good are directly related.
• Tea and coffee
• Coke and Pepsi
• iPods, for example, are likely to be substitutes for CD players.
• Breakfast cereal is a substitute for eggs.
• Complements: Complement goods (those that can be
used together): price of complement and demand for
the other good are inversely related.
• DVD players and DVDs
• computers and high-speed
internet access.
• Tennis rackets and tennis balls

23.  Expectations
• Income:
– Expect an increase in income
• Increase in current demand
consumers’ current demand will increase if they expect higher
future income; their demand will decrease if they expect lower
future income
• Future prices
– Expect higher prices
• Increase in current demand
• consumers’ current demand will increase if they expect
higher future prices; their demand will decrease if they
expect lower future prices
• For example, consumers demand more of an item today if they
expect the price to ​increase in the future.
• Similarly, people who expect their incomes to increase in the
future will often increase their consumption today

24. If people expect gasoline prices to rise tomorrow, they will fill up their tanks today to try to
beat the price increase.
The same will be true for goods such as automobiles and washing machines: an expectation
of higher prices in the future will lead to more purchases today.
If the price of a good is expected to fall, however, people are likely to reduce their purchases
today and await tomorrow’s lower prices. The expectation that computer prices will fall, for
example, can reduce current demand

25. Number of Buyers/Market Size/Population Composition
• Number of buyers – increase
– Market demand – increases
– In general, the greater the population, the greater
the demand.
– the more buyers lead to an increase in demand;
fewer buyers lead to decrease
market demand increases when the number of buyers increases, and market demand
decreases when the number of buyers decreases.

28. Supply
Quantity Supplied
– The quantity supplied of any good is the amount that sellers are willing
and able to produce.
• Quantity supplied
– Amount of a good
– Sellers are willing and able to sell
Law of Supply
– The law of supply, in short, states that ceteris paribus sellers supply
more goods at a higher price than they are willing at a lower price.
– "Other things remaining the same, if the price of a commodity
increases its quantity supplied increases and if the price of a
commodity decreases, quantity supplied also decreases".
– There exists a direct and positive relationship between price and
quantity supplied of a commodity
• Law of supply
– Other things equal
– When the price of the good rises
• Quantity supplied of a good rises

29. Supply
• Supply schedule - a table
– Relationship between the price of a good and the
quantity supplied.
– a table that shows the quantity supplied at each
price.
• Supply curve - a graph
– Relationship between the price of a good and the
quantity supplied (shown graphically).
– a graph that shows the quantity supplied at each
price.
• Individual supply
– Supply of one seller
29

31. 31
Ben’s Supply Schedule and Supply Curve
Price of
Ice-cream
Cone
Quantity
Of Cones
Supplied
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
0 cones
0
1
2
3
4
5
Supply curve
The supply schedule is a table that shows the quantity supplied at each price. This supply curve,
which graphs the supply schedule, illustrates how the quantity supplied of the good changes as
its price varies. Because a higher price increases the quantity supplied, the supply curve slopes
upward.
0 1210 1191 2 3 4 5 6 7 8
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice-Cream Cones
1. An increase
in price . . .
2. . . . increases
quantity of cones
supplied.

32. Supply
Shift in Supply Curve
― The position of a supply curve will change following a change in one or more of
the underlying determinants of supply. For example, a change in costs, such as a
change in labour or raw material costs, will shift the position of the supply
curve.
• When price changes, quantity supplied will change. That is a movement along
the same supply curve (i.e. supply curve only).
• When factors other than price changes, supply curve will shift.
there are some determinants of the supply curve.
― Increase in supply
• Any change (factor other than price i.e. non-price determinant) that increases the
quantity supplied at every price
• Supply curve shifts right
• If the supply curve shifts to the right, this is an increase in supply; more is provided for
sale at each price
― Decrease in supply
• Any change (factor other than price i.e. non-price determinant) that decreases the
quantity supplied at every price
• Supply curve shifts left
• If the supply curve moves inwards, there is a decrease in supply meaning that less will
be supplied at each price

34. CHANGE IN SUPPLY
Change in factors other
than price
Occurs due to
Leads to
Shift in Supply Curve
Rightward shift Leftward shift
either or
Known as Known as
Increase in supply
(Due to favourable change in
other factors at the same
price)
Decrease in Supply
(due to unfavourable
change in other factors at
the same price)

35. Supply
• Determinants of shift in Supply Curve
Input Prices/Production Cost/Resource Prices
Technology
Expectations about future
Number of sellers

36. Input Prices (Production costs)/Resource Prices
– Supply – negatively related to prices of inputs
– Higher input prices – decrease in supply
– The prices paid for the use of labor, capital, land,
and entrepreneurship affect production cost and the
ability to supply a good.
― If resource prices increase, then production cost is higher
and the sellers are inclined to offer less of the good for
sale.
― If resource prices decrease, then production cost is lower
and the sellers are inclined to offer more of the good for
sale.
― Higher production cost will lower profit, thus hinder
supply. Factors affecting production cost are: input prices,
wage rate, government regulation and taxes, etc.

37. If resource cost
Decreases
Supply Increases
• [making more $]
If resource cost
increases
Supply Decreases
• [making less $]

38. Technology
– Advancement in technology – increase in supply
• Technology is what producers know about the ways to combine
inputs into the production of outputs(i.e. Production
Technology)
• Technological improvements help reduce production cost and
increase profit, thus stimulate higher supply.
• If there is a technological advancement related to the
production of the good, the supply increases and vice versa.

39. • Improvement in technology enables more efficient production of goods and services.
• Thus reducing the production costs and increasing the profits.
• As a result supply is increased and supply curve is shifted rightwards.
• When Technology becomes obsolete , supply reduces and curve shifts towards left.

40. Expectations about Future
– Affect current supply
– Expected higher prices
• Decrease in current supply
― If producers expect future price to be higher, they will try to hold on
to their inventories (hoarding behavior.)and offer the products to the
buyers in the future, thus they can capture the higher price.
― The decision to sell a good today depends on expectations of future
prices. Sellers seek to sell the good at the highest possible price.
― If sellers expect the price to decline in the future, they are inclined to
sell more now.
― If they expect the price to rise in the future, they are inclined to sell
less now.
For example
― When farmers suspect the future price of a crop to increase, they will withhold their agricultural
produce to benefit from higher price thus reducing the supply. In case of manufacturers, when
they expect the future price to increase, they will employ more resources to increase their
output and this may increase current supply as well.
― If everyone expects the price of gold to be higher in the future, they will sell less of it now to
take advantage of higher future prices. This causes a decrease in supply. However, if people
expect the price of houses to drop in the future, then everyone will want to sell today, which
will result in an increase in supply.

41. • If sellers expect the price to decline in the future, they are inclined to sell more
now.
• If they expect the price to rise in the future, they are inclined to sell less now.

42. Number of Sellers
―Number of sellers – increase
– Market supply – increase
– Greater the number of sellers, greater will be the quantity of
a product or service supplied in a market and vice versa.
Thus increase in number of sellers will increase supply and
shift the supply curve rightwards
– Whereas decrease in number of sellers will decrease the
supply and shift the supply curve leftwards.
For example,
when more firms enter an industry, the number of sellers
increases thus increasing the supply

43. The number of sellers willing and able to sell a good affects the overall supply.
With more sellers, there is more supply.
With fewer sellers, there is less supply.

45. Supply and Demand
• Equilibrium - a situation
– Supply and demand forces are in balance
– A situation in which market price has reached the level where
• Quantity supplied = quantity demanded
• The situation when quantity supplied equals quantity demanded at a
particular price
– Supply and demand curves intersect
• Equilibrium price
– Balances quantity supplied and quantity demanded
– Market-clearing price
• Equilibrium quantity
– Quantity supplied and quantity demanded at the equilibrium price
When the supply and demand curves intersect, the market is in equilibrium.
This is where the quantity demanded and quantity supplied are equal.
The corresponding price is the equilibrium price or market-clearing price, the
quantity is the equilibrium quantity.

47. • When you combine the supply and demand
curves, there is a point where they intersect; this
point is called
“market equilibrium”.
• The price at this intersection is the “equilibrium
price”, and the quantity is the “equilibrium
quantity”.
• At the equilibrium price, there is
no shortage or surplus.
Quantity of good that buyers are willing and able to
buy
Quantity of good that seller are willing and able to
sell

48. A good way to visualize the relationship between supply and demand is to place the
supply and demand schedule data into a graph. Below is a graph of the supply and
demand schedule.
Price per
Chocolate
Bar
Quantity
Demande
d
Quantity
Supplied
$2.00 100 500
$1.60 200 400
$1.20 300 300
$0.80 400 200
$0.40 500 100

49. Thank you