Demand, Supply and Price

Market Buyers- households/demanders Suppliers- producers/firms Demand-The ability and willingness to buy specific quantities of good at alternate prices in a given time period Or the desire to buy a product, which is backed up by willingness and ability to pay for the it. Quantity demanded- the amount of a product that the consumers wish to purchase. Demand schedule- a table which shows the quantities of a good, a consumer is willing and able to buy at alternate prices, in a given time period.

 Individual demand schedulePrice 0.5 1 1.5 2 2.5 3 Quantity (consumer A) 6 5 4 3 2 1

 Market demand schedule- a table that shows the quantity of commodities that would be demanded by all consumers at given prices.
Price Quantity (consumer A)
6 5

Quantity (consumer B)
10 8

Market

0.5 1

16 13

1.5 2
2.5 3

4 3
2 1

6 4
2 0

10 7
4 1

 Demand curve- graphical representation of demand schedule. Each point on the demand curve represents a specific quantity that will be demanded at a given price.

 Market demand curve- is the horizontal sum of the demand curves of all consumers in the market.
Demand curve of Consumer A Demand curve of Consumer B Market Demand curve

 Law of demand- in a given time period, the quantity demanded of a good increases as its price falls, other things remaining the same(ceteris paribus). Qd=f(price) Negative relationship When price of product rises? When price of product falls? Change in quantity demanded- is a movement along the demand curve due to price changes, if other factors are held constant. Upward movement along the demand curve due to a price risea in quantity demanded. Downward movement along the demand curve due to a price fallan in quantity demanded.

Determinants of demand (Non-price determinants of demand) Qd=f(tastes and preferences, income of the consumer, prices of related goods, expectations, number of buyers) 1. tastes and preferences-likes and dislikes of consumers. It is also influenced by advertisement. 2. income-as income increases demand also increases 3. prices of related goods- a good is related to another by being a substitute or complement. substitute goods-goods that can be substituted for each other. When the price of good X increases, the demand for good Y increases.

complementary goods- goods that are consumed together or in combination. When price of good X rises, the demand for good Y falls. 4. expectations- expectation of a price rise in the future may cause current demand to increase. Eg. Financial instruments, agricultural commodities 5. number of buyers- if it increases demand also increases and vice versa. A demand curve is valid only so long as the underlying determinants of demand remain constant. But these determinants of demand can and do change. Thus, if ceteris paribus is violated, demand curve will shift to new position.

Change in demand- shift in demand curve due to changes in other factors, and price is held constant. increase in demand-represented by a rightward shift of the demand curve decrease in demand-represented by a leftward shift of the demand curve

 Shifts in the demand curve - Any change that raises the quantity that buyers wish to purchase at a given price shifts the demand curve to the right. Any change that lowers the quantity that buyers wish to purchase at a given price shifts the demand curve to the left. In short, the change in the determinants of quantity demanded is represented as follows:

Identify whether the following causes a movement or shift in the demand curve? An increase in income of the consumer A policy to discourage smoking A tax that raises the price of cigarettes

Supply
Suppliers/firms profit maximization Quantity supplied-amount of product the firms are able and willing to offer for sale. Qs=f (price) Supply schedule- a table that shows the relationship between the price of a good and the quantity supplied. Individual supply schedulePrice Quantity

0.5
1 1.5 2 2.5 3

0
1 2 3 4 5

 Market supply schedule- the quantity supplied in a market is the sum of the quantities supplied by all the sellers. Supply curve- a graph of the relationship between the price of a good and the quantity supplied.

 Law of supply-holding other things constant, the quantity supplied increases with increase in its own price in a given time period. positive relationship between price and quantity supplied. Change in quantity supplied- movements along the supply curve. An upward movement along the supply curve due to a price rise increases the quantity supplied. A downward movement along the supply curve due to a price fall decreases the quantity supplied.
Price S

S Quantity

Determinants of supply

Qs=f (price of inputs, technology, expectations, number of sellers) 1. Input prices-supply of a good is negatively related to prices of inputs. 2. Technology- advances in technology increases the supply 3. Expectations-expectation of a price rise in the future leads to less supply today. 4. Number of sellers- if it increases, supply increases and vice versa

 Shifts in the supply curve- Any change that raises the quantity that sellers wish to produce at a given price shifts the supply curve to the right(increase in supply). Any change that lowers the quantity that sellers wish to produce at a given price shifts the supply curve to the left(decrease in supply).
Price S2 S S1

S2 S S1 Quantity

Market Equilibrium Market Equilibrium- point where demand and supply intersect with each other. Equilibrium price- the price that balances supply and demand. Equilibrium quantity- the quantity supplied and the quantity demanded when the price has adjusted to balance supply and demand. At equilibrium price, the quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell. This equilibrium price is sometimes called the market-clearing price.

Market Equilibrium
Price Demand Supply

0.5
1 1.5 2 2.5 3

6
5 4 3 2 1

0
1 2 3 4 5

Price Eq. price 2

S
3 Eq. quantity

D
Quantity

 Surplus (excess supply)- a situation in which quantity supplied is greater than quantity demanded. Shortage (excess demand)-a situation in which quantity demanded is greater than quantity supplied. How does the market restore the equilibrium price (P0)and quantity(q0), if there is excess supply or excess demand?
Price D Excess supply S

P0

Excess demand

D
Q0 Quantity

 What is the effect on price and quantity if, 1. No change in supply and a) if demand rises dd curve shifts to right P? Q? b) if demand falls dd curve shifts to left P? Q? 2. No change in demand and a) if supply rises ss curve shifts to right P? Q? b) if supply falls ss curve shifts to left P? Q? 3. If both demand and supply shifts to the right by the same amount, what is its effect on new equilibrium price and quantity?

Fig.1.a. Price D p1 p S q E E1 p D1 S Price D D1

Fig.1.b. S E E1 S D1 q1 q Quantity D

D1
D q1 Quantity

p1

1. a. If there is no change in supply and if demand rises, at new equilibrium E1 price increases and quantity increases. 1. b. If there is no change in supply and if demand falls, at new equilibrium E1, price decreases and quantity decreases.

Fig.3.
Price D D1 S S1

P S

E1 D1

S1
q q1

D
Quantity

3. At the new equilibrium E1, price remains unchanged whereas quantity increases from q to q1.