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Market forces of Demand &

Supply
Theory of Supply and Demand
Supply and demand comprises the fundamental
concept on which our global economy stands.
Supply and demand are important in economics
for the following reasons:
They are the forces that make market economies
work
It shows how buyers and sellers behave and how they
interact with one another
They determine the quantity of each good produced
and the price at which it is sold

Principle of Supply and
Demand
The principle of supply and demand
states that when a particular good or
service has limited supply and
increased demand, the price of the
good or service increases.
Conversely, when a particular good
or service has an abundant supply
and little demand, the price of the
good or service decreases.

Economic Impact of Demand &
Supply
When central bank policy increases
the available money supply,
consumers react and spend more.
This creates increased demand for
goods and services. Companies
respond and increase production to
meet the increased demand.

that creates lower prices in the market because an adequate supply of products exists. . When this happens the supply shrinks compare to demand. companies reach their production capacity and can no longer meet the demand. causing prices to increase.Initially. But when this cycle continues too long.

.Demand Amount of a goods or services buyers are willing and able to purchase at a given price at a given time.

Relationship between price and quantity demanded Other things being same: When the price of the good rises Quantity demanded of a good falls and VISE VERSA .

.Demand schedule A table that shows the relationship between Price of a good and its corresponding demand Demand curve Graphical presentation of relation between the price and its corresponding demand.

Individual demand Demand of one individual for a particular goods in a given time Market Demand Demand of all individuals for a particular goods in a given time .

Price and demand of Icecream Pric Quantit Quantity e ($) y individu individu al-II al-I 5 10 15 4 15 20 3 20 22 2 22 25 1 25 27 Market Demand (Q) 25 35 42 47 52 .

Demand Curve a 5 4 3 2 1 25 35 42 47 52 .

Forces of Demand curve shifters Increase in demand Any change that increases the quantity demanded at every price Effect: Demand curve shifts right Decrease in demand Any change that decreases the quantity demanded at every price Effect: Demand curve shifts left .

demand for that goods is increased as a result of rise in income. luxurious goods .Variables that can shift the demand curve Income: Normal goods-Anything. Like. branded products. Example: goods that improves the standard of living.

demand for that goods is decreased as a result of rise in income. Economic VS Business class air travelling .Inferior goods-Anything. Example: Low price Rice VS high price Rice Bus VS Car.

demand for Pepsi will increase.Prices of related goods Substitutes -two goods An increase in the price of one Leads to an increase in the demand for the other Example: Price of Coke increases. . And the demand curve for Pepsi will shift right ward. but Pepsi price remain unchanged.

Advertisement and Consumer Taste Iodized VS Unionized Salt Preservative VS Without Preservative foods Smart phone VS Old fashioned phone set Smoking causes cancer due to ad changes peoples taste .

Consumers’ Expectations .Population Size and composition of population also influence the market demand for a product.

Graph D2 D 1 D3 .

Supply Basic Concept Amount of a good sellers are willing and able to sell at each level of price Law of supply Other things being equal When the price of the good rises Quantity supplied of a good rises and VISE VERSA .

Supply schedule A table showing the Relationship between Price of a good and its corresponding Quantity supplied .

Supply curve A graphical Relationship between Price of a good Quantity supplied Individual supply Supply of one seller at a given price Market supply Sum of the supplies of all sellers for a good or service at a given price .

Supply curve Y S Price 0 Quantity X .

.Equilibrium Price & quantity Buyers and sellers interact in markets. Market equilibrium occurs when the desires of buyers and sellers align exactly so that neither group has reason to change its behavior.

Graph . E .

is also the socially optimal output level. q*. meaning that people are willing to pay more to buy those units than they cost to produce. . the demand curve is above the supply curve.The market equilibrium quantity. There are gains from producing and then consuming those units. For each unit from 0 up to q*.

Forces of Supply Curve shifters Shifts in supply Increase in supply Any change that increases the quantity supplied at every price Effect-Supply curve shifts right Decrease in supply Any change that decreases the quantity supplied at every price Effect-Supply curve shifts left .

Pric e Quantit y S 1 S 2 .S 3 .

Variables that can shift the supply curve Input Prices Supply –negatively related to prices of inputs Technology Advance in technology –increase in supply Number of sellers/Firms Increase Market supply -increase and VISE VERSA .

in a restaurant Porota VS Luchi Producers’ expectations .Taxes Substitutions in productionTruck VS Car.

Equilibrium Price & quantity Buyers and sellers interact in markets. Market equilibrium occurs when the desires of buyers and sellers align exactly so that neither group has reason to change its behavior. .

S. are determined by where the demand curve of the buyers. and equilibrium quantity. p*. At that price. .The market equilibrium price. the amount that the buyers demand equals the amount that the sellers offer. crosses the supply curve of the sellers. q*. D.

. For each unit from 0 up to q*. the market equilibrium quantity.In the absence of externalities (costs or benefits that fall on persons not directly involved in an activity). meaning that people are willing to pay more to buy those units than they cost to produce. the demand curve is above the supply curve. q*. There are gains from producing and then consuming those units. is also the socially optimal output level.