UNIT IV.

DEMAND AND SUPPLY

UNIT . SSE 201.MICROECONOMICS
MARKET

• any domain where there are exchanges of goods and services.

• Buyers and sellers make up a market.

• It can be any realm where there are buyers and sellers of goods and services
DEMAND AND QUANTITY DEMANDED

• Demand is the quantity of goods and services that consumers are willing and able to buy
at various prices in a particular time.

• Quantity demanded for a good or service is the amount that consumers are willing and
able to buy at a particular price in a particular time
LAW OF DEMAND

• The law states that holding other factors constant (ceteris

paribus), quantity demanded for a good decreases when the
price of that good increases. Likewise, quantity demanded for a
good increases when the price of that good decreases.

• In other words, price has an inverse relationship with quantity

demanded
NON-PRICE DETERMINANTS OF DEMAND

• 1. Consumer’s Income
• Change in demand brought by change in income varies depending on the type of
good or service.
• a. Normal Good - a good for which, other things equal, an increase in income leads
to an increase in demand. Examples of these goods are basic commodities like rice, utilities,
and medical services.
• b. Inferior Good - a good for which, other things equal, an increase in income leads
to a decrease in demand. Examples of these are fast food restaurants and public
transportation. When a person’s income increases for example, he/she will eat less at fast-
food restaurants and may opt to eat at fine-dining restaurants.
• 2. Prices of related goods
• a. Substitutes - two goods for which an increase in the price of one leads to an increase in
the demand for the other. Examples are private and public school education. A significant
increase in tuition and other fees in private educational institutions will lead to a decreased
demand for private school education. Students will opt to enroll in public schools, increasing
the demand for public school education.
• b. Complements -two goods for which an increase in the price of one leads to a
decrease in the demand for the other. These are goods that we consume together. Examples
are coffee and sugar, airfare and accommodation, etc.
•
• 3. Consumer’s Expectation of Future Prices

• 4. Consumer Tastes
• 5. Population
SHIFTS IN THE DEMAND CURVE
SUPPLY AND QUANTITY SUPPLIED

Supply is the amount of goods and services that producers or sellers are willing and able to
sell at given prices in a particular time. Supply does not only pertain to the total production,
but whether goods are made available to markets or not.

Quantity supplied is the amount of good or service that sellers are willing and able to sell at
particular prices in a particular time
LAW OF SUPPLY

• Ceteris paribus, the Law of Supply states that price and Figure 1. Supply for
quantity supplied has a direct relationship. This means Good X
35000
that when the price of the good increases, sellers also 30000

increase quantity supplied. In a similar fashion, when 25000

20000

Price (P)
the price of the good declines, sellers decrease the
15000
quantity they are willing to sell. 10000

5000

0
1000 2000 3000 4000 5000 6000
Quantity (Qd)
NON PRICE DETERMINANTS OF SUPPLY

• 1. Input prices
• Prices of inputs are negatively related to supply.

• 2.Technology
• Technological advancements in the form of efficient machineries raises supply

• 3. Expectations
• 4. Prices of related goods

• 5. Number of Sellers
SHIFTS IN THE SUPPLY CURVE
MARKET EQUILIBRIUM

• Graphically, market equilibrium is shown as

the intersection of Demand and Supply Figure 4. Market Equilibrium

curves. This means that sellers and buyers

agreed on the price and quantity of goods to
be bought and sold in the market.