DEMAND

NON-PRICE DETERMINANTS OF SUPPLY (Shifts of supply curve)

Supply increase, curve right. Supply decrease, Curve left.
1) Cost of FOP Cost increase, Qty S shift to left.
2) Price of other products, which producer could produce instead of existing product
3) State of technology tech increase, Qty S right shift.
4) Expectations Expect P increase, Qty S right shift.
5) Govt interventions Tax increase, Qty S left shift. Subsidy increase, Qty S right shift.

DEFINITION : Quantity of a good and service that consumers are willing and able to purchase at a
given price in a given time period.

Price
of soft
drinks
($)
2.00
1.20

Quantity
demanded of
soft drinks
(cans)
100
150

(a) Demand schedule

Price of soft drinks ($)

LAW OF DEMAND : When price of product falls, quantity demanded of product usually increase,
ceteris paribus

LINEAR SUPPLY FUNCTIONS

QS = c + dP
2.00
1.20
0

CHAPTER
Quantity of soft drinks (cans)

3: MARKET EQUILIBRIUM, THE PRICE MECHANISM AND

MARKET EFFICIENCY

100 150
(b) Demand curve

DEMAND INCREASE BECAUSE :

1) Income effect
2) Substitution effect

Equilibrium = A state of rest, self-perpetuating in the absence of any

outside disturbance.

The market is in equilibrium

at Pe, since the amount of
coffee that people wish to
buy is at Qe, equal to the
amount that suppliers wish
to sell.

Price of coffee
e

($)

NON-PRICE DETERMINANTS OF DEMAND ( shifts of demand curve)

Demand increase, curve right. Demand decrease, curve left.
1) Income: Normal goods Income increase, quantity demanded increase
Inferior goods Income increase, quantity demanded decrease
2) Price of other products: Substitute Chicken and Beef
Complements Dvd Player and DVD
Unrelated Goods Toilet paper and Pencils
3) Tastes/Preferences change in taste for a product will increase the demand for it.
OTHER FACTORS
1) Size of the population population increase, qty dd increase
2) Changes in age structure of population
3) Changes in income distribution
4) Govt policy changes
5) Seasonal changes
LINEAR DEMAND FUNCTIONS
QD = a bP
a: Qty Dd if P=0
b: Slope
-

SUPPLY
Willingness and ability of producers to produce a quantity of a good or service at a given price
in a given time period

Qe

Quantity of coffee
(kg)
The equilibrium is
selfrighting.
Market is in equilibrium until there is an outside disturbance to change
it.
Surplus
= When producer try to raise/lower the equilibrium price
= Excess demand or supply
To eliminate surplus = Producer will raise/lower the price until D=S

The Effect of Changes in demand and supply upon the equilibrium

The equilibrium may be moved by any outside disturbance. For
example, changes in one of the determinants of demand or supply,
other than price.

When income , then the

demand for foreign holidays

Pe
1

LAW OF SUPPLY:
Price of holidays
e
As the price of a product rises, the quantity supplied of the product will usually increase, ceteris paribus
($)
Can be shown through supply schedule and supply curve.
Supply schedule same like demand schedule but replaced with Quantity supplied.
Supply curve is upwards instead downwards like demand curve.

also . People are willing and

able to pay, making the
D
demand curve shift to the right,
from D to D1. Excess demand
occurs.
To eliminate the excess
Quantity
of
demand,
holidays
(days) price will rise from Pe
to Pe1, where the quantity
demanded and supplied are
equal, that is at Qe1.

D1

Qe Qe
1