Demand & Supply. What Is Demand? Demand is a relationship between a product’s price and quantity...
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Transcript of Demand & Supply. What Is Demand? Demand is a relationship between a product’s price and quantity...
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)