Course 505: Demand & Supply

Course Teacher:
Dr. M. Abu Eusuf

BUP, July 2022

1
 Demand and Supply
v Demand
Ø Law of demand
Ø Demand schedule and demand curve
Ø Substitution and income effect
Ø Factors affecting the demand curve
Ø Movement along and shift in demand curve
v Supply
Ø Law of supply
Ø Supply schedule and supply curve
Ø Factors affecting the supply curve
v Equilibrium of demand and supply
 Demand
v Demand (D = f(P)
Ø Desires to buy something but depends on
ü Willing to buy
ü Ability to pay
ü Willing to pay
v Law of Demand
Ø A rise in the price of a commodity is followed by a
reduction in demand and a fall in price is followed
by a increase in demand, if other things being
constant
Ø Inverse relationship between price and quantity
demanded.
 Demand…
v Demand Schedule (numerical) and Demand
Curve (graphical)
Demand Schedule:

Price of the commodity (P), TK. Quantity Demanded (Q)

5 9
4 10
3 12
2 15
1 20
 Demand…
v Demand Curve: Graphical representation of
Demand Schedule
P

Q
 Demand…
v Why does quantity demanded tend to fall as
price increases?
v For two reasons:
ü  Substitution effect : When price of a commodity increases,
we substitute other similar commodities of it. For example,
as the price of beef increases, we look for more chicken.
ü  Income effect: When price increases, consumers find
themselves somewhat poorer than what they were before.
For example, if fuel price increases, we have in effect less
real income. Hence, we will naturally curb consumption of
fuel and other goods.
 Demand…
v M ovement along the demand (demand
changes due to the price changes of that
particular commodity)
v Shift in demand (demand changes due to the
factors other than price)
 Change in Demand…
D

Q
 Factors Affecting Demand…
v Average income
v Size of the market
v Availability of substitute goods
v Tastes/Preferences/Tradition/Religion
v Special influences
 Supply
v Amount offered for sale at a given price
v S = f(P)
v Law of supply:
ü As the price of a commodity increases its
supply is extended and vice versa, other
things being constant.
ü  Law of supply indicates positive relationship
between price and quantity supplied.
 Supply
Supply schedule (numerical) and supply curve (graphical)
P

Q
 Factors Affecting Supply
v Cost of production/prices of inputs
v Technological advances
v Prices of related goods
v Government policy
v Special influences
v Sellers price expectations
 Supply
v Movement along the supply (supply changes
due to the price changes of that particular
commodity)
v Shift in supply (supply changes due to the
factors other than price)
 Equilibrium of Demand & Supply
v Supply and demand interact to produce an
equilibrium price and quantity.
v Market equilibrium comes at that price and
quantity where the forces of supply and
demand are in balance.
v At the equilibrium price, the amount that
buyers want to buy is just equal to the
amount that sellers want to sell.
Equilibrium of Demand & Supply

P S
S>D

E (D = S)

D>S D

Q
 Problems and Solutions:
Equilibrium of Demand & Supply
Equilibrium in supply and demand analysis occurs when Qs = Qd
By equating supply and demand functions, the equilibrium price and quantity
can be determined

Given, Qs = - 5 + 3P
Qd = 10 – 2P
What would be the equilibrium price and quantity?
In equilibrium, Qs = Qd
Solving for P, -5 + 3P = 10 – 2P
or, 3P + 2P = 15
or, 5P = 15
∴P=3
 Problems and Solutions
Substituting P = 3 in either of the equations,
Qs = -5 + 3P
= -5 + 3 (3)
= -5 + 9
=4
= Qd
Thus, equilibrium price = 3
equilibrium quantity = 4
Find the equilibrium price and quantity for the following markets:

a) Qs = - 20 + 3P
Qd = 220 – 5P

b) Qs + 32 – 7P = 0
Qd – 128 + 9P = 0