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# Lecture3

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• ### Lecture3

1. 1. Demand, Supply and Equilibrium INSPIRING CREATIVE AND INNOVATIVE MINDS
2. 2. Demand <ul><li>A market consists of: </li></ul><ul><ul><li>Buyers (demand) </li></ul></ul><ul><ul><li>Sellers (supply) </li></ul></ul><ul><ul><li>Exchange </li></ul></ul><ul><li>Effective demand = the quantity of a commodity which consumers will purchase at a given price per time period. </li></ul>
3. 3. <ul><li>A table showing the quantity demanded of a product at various prices </li></ul><ul><li>E.g. Demand Schedule for Big Macs </li></ul><ul><li>Price Qty demanded </li></ul><ul><li>\$1 500 </li></ul><ul><li>\$2 400 </li></ul><ul><li>\$3 300 </li></ul><ul><li>\$4 200 </li></ul><ul><li>\$5 100 </li></ul>The Demand Schedule
4. 4. <ul><li>Graphical representation of demand schedule </li></ul>The Demand Curve Price Quantity \$ 5 2 1 3 4 100 200 300 400 500 The Demand For Big Mac
5. 5. The Law of Demand <ul><li>As price increases the quantity demanded decreases, conversely , </li></ul><ul><li>as price decreases the quantity demanded increases. </li></ul>
6. 6. <ul><li>Reflects an inverse relationship ie </li></ul><ul><li>As Price , quantity demanded </li></ul><ul><li>As Price , quantity demanded </li></ul><ul><li>The law of demand is caused by: </li></ul><ul><ul><li>The Income Effect </li></ul></ul><ul><ul><li>The Substitution Effect </li></ul></ul>The Law of Demand
7. 7. <ul><li>As prices increase, consumers will purchase fewer goods and services. Their purchasing power (or real income) decreases </li></ul><ul><li>Quantity demanded decreases. </li></ul><ul><li>As prices decrease, the purchasing power of consumers increases </li></ul><ul><li>Quantity demanded increases. </li></ul>The Income Effect
8. 8. The Substitution Effect <ul><li>As prices increase, consumers generally purchase more of a substitute product whose price is lower. </li></ul><ul><li>A substitute product is a product that performs a similar function and satisfies the same consumer need/want e.g. Tea/ Coffee </li></ul><ul><li>Butter/Margarine </li></ul><ul><li>If the price of butter increases , the quantity demanded will fall as consumers will substitute butter with margarine. </li></ul>
9. 9. Supply <ul><li>Definition: the quantity of a product which producers offer to the market at a certain price per unit of time. </li></ul>
10. 10. The Law of Supply <ul><li>As price increases the quantity supplied increases, conversely </li></ul><ul><li>as price decreases the quantity supplied decreases. </li></ul>
11. 11. <ul><li>The law of supply is a direct relationship between price and quantity supplied. </li></ul><ul><li>As P Quantity supplied </li></ul><ul><li>As P Quantity supplied </li></ul>The Law of Supply
12. 12. The Logic of the law of supply <ul><li>Producers will seek to maximise their profits. </li></ul><ul><li>ie Supplying more at higher prices and less at lower prices. </li></ul>
13. 13. <ul><li>A table showing the quantity supplied at various prices. </li></ul><ul><li>Example: Supply Schedule for Big Macs </li></ul><ul><li>Price Qty Supplied </li></ul><ul><li>\$1 200 </li></ul><ul><li>\$2 300 </li></ul><ul><li>\$3 400 </li></ul><ul><li>\$4 500 </li></ul><ul><li>\$5 600 </li></ul>The Supply Schedule
14. 14. Price Quantity \$ Supply Curve 1 2 3 4 5 200 300 400 500 600 The Supply Curve
15. 15. <ul><li>Supply and Demand can now be brought together, to form the price mechanism . </li></ul>Price Quantity S D Equilibrium point (E) EP Market Equilibrium
16. 16. Market Equilibrium (E) is where: Qty demanded = Qty supplied (intersection of demand and supply curves) the market is cleared (no shortages or surpluses) Price (EP) is stable
17. 17. Market Disequilibrium = where Qty Demanded is NOT EQUAL to Qty Supplied. Types: 1. Market Shortage: where Qty demanded > Qty supplied 2. Market Surplus (oversupply): where Qty supplied > Qty demanded
18. 18. Price Qty S D P QS QD Shortage Market Shortage <ul><li>Caused by price being set BELOW the equilibrium. </li></ul>
19. 19. <ul><li>Caused by price being set ABOVE the equilibrium. </li></ul>P Q S D QD QS Surplus Market Surplus
20. 20. Changes in Demand Certain factors (other than price changes) affect the absolute level of demand. These factors are called Conditions of Demand. Changes to the Conditions of Demand cause changes in demand and this results in shifts of the Demand curve.
21. 21. <ul><li>The entire demand curve shifts to the Right . </li></ul>Qty Price D D1 S E E1 EP EP1 EQ EQ1 An Increase in Demand
22. 22. EQ1 EQ A Decrease in Demand The entire demand curve shifts to the Left Caused by a factor other than price Price Qty S D D1 E E1 EP EP1
23. 23. Conditions of Demand <ul><li>Change in tastes </li></ul><ul><li>Improvements in Technology </li></ul><ul><li>Real Income </li></ul><ul><li>Change in Population </li></ul><ul><li>Change in the price of Substitutes </li></ul><ul><li>A change in the price of other goods </li></ul><ul><li>Expectations of the future </li></ul><ul><li>Advertising </li></ul>
24. 24. Changes in Supply Certain factors (other than price changes) affect the absolute level of supply. These factors are called CONDITIONS OF SUPPLY and they result in shifts of the supply curve (not movements along it).
25. 25. Price Qty S D S1 E E1 EP EP1 EQ EQ1 An Increase in Supply Supply curve shifts to the right.
26. 26. Price Qty S D S1 E E1 EP1 EP EQ1 EQ A Decrease in Supply <ul><li>Supply curve shifts to the left </li></ul>
27. 27. Conditions of Supply <ul><li>Improvements in technology </li></ul><ul><li>A change in production costs </li></ul><ul><li>A change in the price of alternative products </li></ul><ul><li>Weather and seasons </li></ul>