Law of Demand

Law of Demand
Globalisation and Business Enterprise
• Theory and empirical evidence suggest that the

relationship between Price and Quantity is an inverse
or negative relationship.
• At higher prices, quantity purchased is smaller, or at
lower prices the quantity purchased is greater.
• Is the functional relationship between the price of the
good and the quantity of that good purchased in a
given time period, income, other prices and
preferences being held constant (ceteris paribus).
1 © AUT Faculty of Business 2008

Changes in Demand and
Quantity Demanded
• Change in Quantity Demanded - movement along the
same demand curve in response to a price change.
• Results from a price change.
• Change in Demand - shift in entire demand curve.
• Results from a change in a determinant of demand (a
ceteris paribus variable such as substitutes and
complements).

Change in Demand vs.
Change in the Quantity Demanded

Law of supply
• Supply is defined as a schedule of quantities of a good

that will be produced and offered for sale at a
schedule of prices during a given time [UT], ceteris
paribus.
• Generally, producers are willing to offer greater
quantities of a good for sale at higher prices; a
positive relationship between price and quantity
supplied.

Change in Quantity Supplied
Supply Schedule
Observation Price Quantity
Supplied
•
A $1 6
B $2 10
C $3 14
D $4 18
E $5 22
F
P
$5
$4
$3
$2
$1
2 4 6 8 10 12 14 Q
What influences Supply and how
might this change the supply graph?
• Changes in resources.
• Developments in technology.
• Price changes of inputs in production.
• Expectations of producers of their own
productivity.
• Changes in the number of producers.

Equilibrium (Table)
Price Quantity Quantity Status Price Change

Demanded Supplied
Per Video
$5 30 102 Surplus Price Falls
$4 48 84 Surplus Price Falls

$3 66 66 EQUILIBRIUM No Change
$2 84 48 Shortage Price Rises
$1 102 30 Shortage Price Rises

What does Equilibrium mean?
• Equilibrium is the price and quantity at which the quantity

supplied and the quantity demanded are equal.
• A market is said to be in disequilibrium at all points at
which the quantities demanded and supplied are not equal.
• A surplus occurs whenever S > D.
• A shortage occurs whenever D > S.
Surpluses and shortages can be resolved with price

changes.

The Effects of a Shift of the
Demand Curve

This model relies on
assumptions…
That all parties:

• are trying to maximise their own position;
• have perfect information about the choices available to
them and their outcomes;
• can easily move resources to where they are most highly
valued;
• operate in a market that is perfectly competitive (more on
this in week 3).
In reality, many of these conditions are seldom met,

leading to market failure.

Consumer and producer surplus
• Consumer surplus is the difference between what

consumers are willing to pay rather than go without a
commodity and what they actually have to pay in the
market.
• Producer surplus is the sum of all short-run profits of

firms in an industry; the difference between total
revenue from supplying a good and the costs
represented by the area under the supply curve.

Consumer and producer surplus
cont…
Price
C S
CS
P E
PS
F D
Quantity
Q
CS: Consumer surplus

PS: Producer surplus

Maximum price controls
• Maximum price controls, sometimes called a price

ceiling, may be set by the government, in the interest
of those in lower income groups, on items of mass
consumption such as bread, milk or rental
accommodation.
• To have any effect , the controlled price must be
below the market equilibrium.

Maximum price controls cont…
Black market price P1

P S
P1
Pmax Maximum price
Excess demand
D
Qs Qd Q
Shortage

Minimum price controls
• In some cases, prices are set above the market

equilibrium and some regulations prevents the
automatic return to that equilibrium. If set below the
equilibrium they would be ineffective.
• A minimum price may be referred to as a price floor;
minimum wage legislation is an example of this.
• Although minimum wage rates are generally below
market equilibrium levels, they do serve as a ‘safety
net’, reducing the possibility of workers being
exploited.

Minimum price controls cont…
P
S
Pmin
Minimum price
Qd Qs Q

Market Failure and Public Goods
2 important characteristics:
• They are non-rival in consumption
The good cannot be ‘used up’ and therefore not
accessible to others (e.g. immunisations).
• They are non-excludable

Once a good or service is provided for one member
of society, others cannot be excluded from access to
it (e.g. spending on national defence).

Market Failure and
Externalities
An externality is a spill-over cost or benefit that affects parties
external to an economic activity.
Examples: The impact of a producer polluting the

environment (negative externality).
Walking past a concert hall and hearing music even though
you haven’t bought a ticket (positive externality).
Free markets often fail to take account of externalities.

Law of Demand

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Law of Demand

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Law of Demand

Globalisation and Business Enterprise

• Theory and empirical evidence suggest that the

1 © AUT Faculty of Business 2008

2 © AUT Faculty of Business 2008

Change in the Quantity Demanded

3 © AUT Faculty of Business 2008

• Supply is defined as a schedule of quantities of a good

4 © AUT Faculty of Business 2008

6 © AUT Faculty of Business 2008

Price Quantity Quantity Status Price Change

$5 30 102 Surplus Price Falls

$4 48 84 Surplus Price Falls

7 © AUT Faculty of Business 2008

• Equilibrium is the price and quantity at which the quantity

Surpluses and shortages can be resolved with price

8 © AUT Faculty of Business 2008

9 © AUT Faculty of Business 2008

That all parties:

In reality, many of these conditions are seldom met,

10 © AUT Faculty of Business 2008

• Consumer surplus is the difference between what

• Producer surplus is the sum of all short-run profits of

11 © AUT Faculty of Business 2008

CS: Consumer surplus

12 © AUT Faculty of Business 2008

• Maximum price controls, sometimes called a price

13 © AUT Faculty of Business 2008

Black market price P1

Pmax Maximum price

14 © AUT Faculty of Business 2008

• In some cases, prices are set above the market

15 © AUT Faculty of Business 2008

16 © AUT Faculty of Business 2008

• They are non-excludable

17 © AUT Faculty of Business 2008

Examples: The impact of a producer polluting the

Free markets often fail to take account of externalities.

18 © AUT Faculty of Business 2008

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