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Lifetime Learning… Building Success… Towards Globalization

Economics -Chapter 2Demand, Supply and Market Equilibrium

Lifetime Learning… Building Success… Towards Globalization

• The Market:• The market for a product is a situation in which the buyer and

seller communicate with each other for the purpose ofexchange.

• The market may be local, regional, national or international.• The market may have no exact location, as with exchange via

the internet.

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• What is Demand?

• Demand for a product is the amount of the productthat consumers are willing and able to purchase at aparticular price over a given period of time.

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• Factors influencing/ affecting the demand

– Price of the product

– Price of other products

– Household income

– Tastes

– Advertising.

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The Demand Curve

• The demand curveshows the relationshipbetween the quantitydemanded of a good orservice over a particularperiod of time and itsprice, assuming ceterisparibus.

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Demand Curve Explained

• Price on vertical axis and quantity demanded on horizontal axis.

• Demand is a flow concept - measured over a period of time.

• Curve slopes downward from left to right, a negativerelationship.

• A change in price of the product shall lead to a movement alongthe demand curve.

• Assumption of ceteris paribus meaning ‘ all other factorsremaining unchanged.

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Movement along the Demand Curve

• Movement along the demand curve is the result of a rise orfall in the price of the product itself.

• A change in price of a product leads to a Movement Alongthe Demand Curve.

– Quantity demanded decrease— contraction of demand

– Quantity demanded increase— expansion of demand

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Shift in Demand Curve

• Factors other than the price of the product shall shift theposition of the demand curve.

– Increase in demand — shift to the right

– Decrease in demand — shift to the left

• Shift factors’ (known as conditions of demand) include:

– Price of other related products

– Level of household income.

– Tastes of consumers

– Number of consumers

– Advertising

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Shift factors Explained

A change in the prices of related product affects thedemand in two ways:

• An increase in the price of a substitute for a good, increases thedemand for the good. (right shift)

• A fall in the price of a substitute for a good, decreases the demandfor the good. (left shift)

• Substitute goods can be used in place of one another (Pepsi cola-Coca cola)

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• Complementary goods are used jointly or purchasedtogether. (car and petrol)

• A fall in the price of a complement to a good increases thedemand for the good. (right shift)

• An increase in the price of a complement to a good decreasesthe demand for the good. (shift to left)

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Change in household income:

Normal goods-With an increase in income demand for thenormal commodity increases. (right shift)

Inferior goods-With an increase in income demand for theinferior goods decreases. (left shift)

• Changes in taste:

– in favour of a product can increase demand, (right shift)

– against a product can decrease demand. (left shift)

• Advertising:

– Successful advertising can increase demand, (right shift)

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Shift in Demand Curve

• The quantity demanded of a product decreases (shift to the left) if there is:

– Fall in price of substitute

– Rise in price of complement

– Fall in real income (normal product)

– Rise in real income (inferior product)

– Change of tastes against product

– Fall in advertising expenditure.

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• The quantity demanded of a product increases (shift to the right) if there is

– Rise in price of substitute

– Rise in number of consumers

– Rise in income

– Rise in advertising cost

– Tastes in favour of product

• The quantity demanded of a product decreases (shift to the left) if there is

– Fall in price of substitute

– Fall in number of consumers

– Fall in income

– Fall in advertising Cost

– Tastes against product

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Shift in Demand Curve

• The quantity demanded of a product increases (shift to the right) if there is:

– Rise in price of substitute

– Fall in price of complement

– Rise in real income (normal product)

– Fall in real income (inferior product)

– Change of tastes in favour of product

– Rise in advertising expenditure.

•

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Market Demand Curve

• Market demand curve is the total amount thatconsumers demand at a particular price over a givenperiod of time.

• The market demand curve is derived from summingthe individual demand curves horizontally.

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Supply

• What is Supply?

• Supply of a product is the quantity of the productthat firms are willing and able to offer for sale at aparticular price over a particular period of time.

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• Factors influencing supply are:– Price of the product

– Price of all the other products

– Price of the factors of production

– Technology

– All other factors (taxes, weather)

– Note: Assumption of ceteris paribus

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• A change in the price of the product:

– An increase in the price of a product will increase thequantity supplied in market (more profitable for theproducers) assuming ceteris paribus.

– The relation ship between price and quantity supplied canbe presented in the form of supply schedule ( in table) or inthe form of supply curve (graph)

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Supply Curve

• The supply curve slopeupwards (positiverelationship) since as theprice rises, the quantitysupplied expands(increases), assumingceteris paribus.

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Movement along the Supply Curve

• A change in the price of the product will lead to amovement along the supply curve (same line).

• Movement along the supply curve is the result of a rise or fall in the price of the product itself.

• The Quantity supplied of a products contracts (falls) if:

– the price falls

• The Quantity supplied of a products expands(increases) if:

– The prices rises

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Shift in Supply Curve

• The other factors which influence the supply willshift the position of the supply curve (new line).

• Shift factors are:

– A change in the price of other products.

– A change in the price of the factors of production.

– A change in technology

– Other factors (weather, taxes, subsidy)

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Shift in Supply Curve

• The quantity supplied of a product decreases (shift to the left) if there is:

– Rise in price of substitute product

– Fall in price of complement product

– Rise in costs of production

– Decline in the level of technology

– A new tax on the product

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Shift in Supply Curve

• The quantity supplied of a product increases (shift to the right) if there is:

– Fall in price of substitute product

– Rise in price of complement product

– Fall in costs of production

– Improvement in the level of technology

– Introduction of subsidy on the product

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• The quantity supplied of a product increases (shift to the right) if there is:

– Fall in costs of production

– Increase in the number of producers

– Good technology

– subsidy on the product

• The quantity supplied of a product decreases (shift to the left) if there is:

– Rise in costs of production

– Decline in the number of producers

– Decline in the level of technology

– Tax on the product

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• Market Supply is the total amount of the productthat all the firms are willing and able to supply at aparticular price over a given period of time.

• The market supply curve is derived from summingthe individual firm supply curves horizontally.

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Market equilibrium

• Equilibrium price relates to the price at which thequantity demanded equals the quantity supplied.

• Disequilibrium refers to a situation in which demanddoes not equal supply.

• This can lead to a situation of either excess demandor excess supply.

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Market equilibrium (Continued)

•At price 35 pence, → equilibrium

price and quantity. (quantity

demanded 5 million bars =

quantity supplied 5 million bars.

•At price 20 pence →

disequilibrium situation; excess

demand of 6 million bars; cause

the price to rise.

• At price 50 pence →

disequilibrium excess supply of 6

million bars; cause the price tofall

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Changes in equilibrium

• The equilibrium price and output may change as aresult of any one (or more) of the following:

• Increase in demand (Figure 2.9a)

• Decrease in demand

• Increase in supply (Figure 2.9b)

• Decrease in supply.

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• What is demand curve?

• A. The demand curve shows the relationship between the quantity demanded of a product and its price, over a period of time.

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