Demand & SupplyDemand & Supply

What Is Demand?What Is Demand?

Demand is a relationship between a Demand is a relationship between a product’s price and quantity demanded.product’s price and quantity demanded.

Demand is shown using a schedule or Demand is shown using a schedule or curve.curve.

The law of demand states that price and The law of demand states that price and quantity demanded are inversely related.quantity demanded are inversely related.

Market demand is the sum of quantities Market demand is the sum of quantities demanded by all consumers in a market.demanded by all consumers in a market.

Demand depends on 2 factors:Demand depends on 2 factors:

1.1. One is located in your head (heart)One is located in your head (heart)

2.2. The other is in your walletThe other is in your wallet

Demand exists only for goods that you Demand exists only for goods that you both want and can afford to buy.both want and can afford to buy.

So why do we do this?So why do we do this?

2 reasons:2 reasons:

1.1. Substitution effect – prices rise, we Substitution effect – prices rise, we substitute similar goods for itsubstitute similar goods for it

2.2. Income – if prices fall, buyers able to buy Income – if prices fall, buyers able to buy same amount for lower price; resulting in same amount for lower price; resulting in extra incomeextra income

Demand ScheduleDemand ScheduleA numerical tabulation of the quantities demanded at A numerical tabulation of the quantities demanded at

selected pricesselected prices

PricePrice

($ per kg)($ per kg)

QuantityQuantity

DemandedDemanded

(mill of kg)(mill of kg)

PointPoint

onon

graphgraph

3.003.00 55 AA

2.502.50 77 BB

2.002.00 99 CC

1.001.00 1111 DD

Individual Demand Curve for Strawberries

0

1

2

3

4

5 7 9 11

Quantity Demanded

Pri

ce

Individual Demand Schedule for Strawberries

Explanation of Demand Schedule:Explanation of Demand Schedule:

Quantity demanded – refers to a Quantity demanded – refers to a relationship that is determined by pricerelationship that is determined by price

Ex. When strawberries are $2.50 quantity Ex. When strawberries are $2.50 quantity demanded is 7 mill. Kg. but when they are demanded is 7 mill. Kg. but when they are $3.00 Q.D. is 5 mill. Kg$3.00 Q.D. is 5 mill. Kg

Quantity demanded has fallen by 2Quantity demanded has fallen by 2

On the graph:On the graph:

Price is measured on vertical axis (Y axis)Price is measured on vertical axis (Y axis)

Quantity demanded on horizontal axis (X axis)Quantity demanded on horizontal axis (X axis)

THIS HAS BECOME STANDARD PRACTICE THIS HAS BECOME STANDARD PRACTICE IN ECONOMICSIN ECONOMICS

Points then plotted on graph & joined togetherPoints then plotted on graph & joined together

The line is called the Demand curve even The line is called the Demand curve even though it is a straight linethough it is a straight line

It runs downward from top left to bottom rightIt runs downward from top left to bottom right

Inverse relation between $ & QD holds for Inverse relation between $ & QD holds for majority of goods we buymajority of goods we buy

Market DemandMarket Demand

Buying habits of thousands that decide Buying habits of thousands that decide demand for most goodsdemand for most goods

Market Demand ScheduleMarket Demand Schedule – sum total of – sum total of all the consumer demands for a productall the consumer demands for a product

Deriving Market DemandDeriving Market DemandIndividual Demand Curve for

Strawberries

0

1

2

3

4

5 7 9 11

Quantity Demanded

Pri

ce

Friend's Demand Curve for Strawberries

0

1

2

3

4

1 2 3 4

Quantity Demanded

Pri

ce

Price

($ per kg)

Friend’s Quantity

Demanded (kg))

Your Quantity

Demanded

(kg)

Market Demand (kg)

3.003.00 66 55 1111

2.502.50 88 77 1515

2.002.00 1010 99 1919

1.001.00 1212 1111 2323

Market Demand Curve for Strawberries

0

1

2

3

4

1 2 3 4

Quantity Demanded (kg)

Pri

ce

($

)

Changes in Demand

" are shown by shifts in the demand curve

" are caused by changes in demand determinants

Demand Determinants

Include the following factors:

1. The number of buyers (an increase causes a rightward demand shift)

2. Income

For normal products, an increase causes a rightward demand shift.

For inferior products, an increase causes a leftward demand shift.

Changes in Quantity Demanded (cont’d):

Are shown by movements along demand curve

Are caused by price changes

What Is Supply?

Supply: is a relationship between a product’s price and quantity supplied

Is shown using a schedule or curve

The law of supply states there is a direct relationship between price and quantity supplied.

The Supply CurveThe Supply Curve

PricePrice

($ per kg)($ per kg)

QuantityQuantity

SuppliedSupplied

(mill of kg)(mill of kg)

PointPoint

onon

graphgraph

3.003.00 1717 DD

2.502.50 1313 EE

2.002.00 99 FF

1.001.00 55 GG

Market Supply Schedule for Strawberries

Market Supply for Strawberries

0

5

10

15

20

1 2 3 4

Quantity SuppliedP

ric

e

Changes in Supply

are shown by shifts in the supply curve

are caused by changes in supply determinants

Supply Determinants

Supply determinants include the following factors:

• Number of producers (an increase causes a rightward supply shift)

• Resource prices (an increase causes a leftward supply shift)

• State of technology (an improvement causes a rightward supply shift)

• Prices of related products (an increase causes a leftward supply shift)

Determinants – (cont’d)Determinants – (cont’d)•changes in nature (an improvement causes a rightward shift for some products)

• producer expectations (an expectation of lower prices in the future causes an immediate rightward supply shift)