Demand and supply

Demand, Supply and Price

• Market
• Buyers- households/consumers
• Suppliers- producers/firms
• Demand-The ability and willingness to buy specific
quantities of good at alternate prices in a given time period
Or the desire to buy a product, which is backed up by
willingness and ability to pay for the it.
• Quantity demanded- the amount of a product that the
consumers wish to purchase.
• Demand schedule- a table which shows the quantities of a
good, a consumer is willing and able to buy at alternate
prices, in a given time period.
• Individual demand schedule-
Price Quantity (consumer A)
0.5 6
1 5
1.5 4
2 3
2.5 2
3 1
• Market demand schedule- a table that shows the
quantity of commodities that would be demanded
by all consumers at given prices.
Price Quantity Quantity Market
(consumer A) (consumer B)

0.5 6 10 16
1 5 8 13
1.5 4 6 10
2 3 4 7
2.5 2 2 4
3 1 0 1
• Demand curve- graphical representation of demand
schedule. Each point on the demand curve represents a
specific quantity that will be demanded at a given
price.
 • Market demand curve- is the horizontal sum of the
demand curves of all consumers in the market.

Demand curve of Consumer A Demand curve of Consumer B Market Demand curve

• Law of demand- in a given time period, the quantity
demanded of a good increases as its price falls, other
things remaining the same (ceteris paribus).
• Qd=f(price)

• Negative relationship
• When price of product rises?
• When price of product falls?
• Change in quantity demanded- is a movement along the
demand curve due to price changes, if other factors are held
constant.
• Upward movement along the demand curve due to a price rise
leads to a decrease in quantity demanded.
• Downward movement along the demand curve due to a price
fall leads to an increase in quantity demanded.

Price
D

Quantity
 Determinants of demand
(Non-price determinants of demand)

Qd=f(tastes and preferences, income of the

consumer, prices of related goods, expectations,
number of buyers)
1. tastes and preferences-likes and dislikes of
consumers. It is also influenced by advertisement.
2. income-as income increases demand also increases
3. prices of related goods- a good is related to another
by being a substitute or complement.
substitute goods-goods that can be substituted for
each other. When the price of good X increases, the
demand for good Y increases.
 complementary goods- goods that are consumed together
or in combination. When price of good X rises, the
demand for good Y falls.
4. expectations- expectation of a price rise in the future may
cause current demand to increase.
Eg. Financial instruments, agricultural commodities
5. number of buyers- if it increases demand also increases
and vice versa.
A demand curve is valid only so long as the underlying
determinants of demand remain constant. But these
determinants of demand can and do change. Thus, if
ceteris paribus is violated, demand curve will shift to
new position.
Change in demand- shift in demand curve due to changes in other factors,
and price is held constant.
increase in demand-represented by a rightward shift of the demand curve
decrease in demand-represented by a leftward shift of the demand curve
• Shifts in the demand curve - Any change that raises the quantity that
buyers wish to purchase at a given price shifts the demand curve to
the right. Any change that lowers the quantity that buyers wish to
purchase at a given price shifts the demand curve to the left.
• In short, the change in the determinants of quantity demanded is
represented as follows:
Identify whether the following causes a movement or
shift in the demand curve? Give reasons.
• An increase in income of the consumer
• A policy to discourage smoking
• A tax that raises the price of cigarettes
 Supply
• Supplier’s/firms→ profit maximization
• Quantity supplied-amount of product the firms are able and willing
to offer for sale.
• Qs=f (price)
• Supply schedule- a table that shows the relationship between the
price of a good and the quantity supplied.
• Individual supply schedule-
Price Quantity
0.5 0
1 1
1.5 2
2 3
2.5 4
3 5
• Market supply schedule- the quantity supplied in a
market is the sum of the quantities supplied by all the
sellers.
• Supply curve- a graph of the relationship between the
price of a good and the quantity supplied.
• Law of supply-holding other things constant, the quantity
supplied increases with increase in its own price in a given
time period.
• positive relationship between price and quantity supplied.
• Change in quantity supplied- movements along the supply
curve. An upward movement along the supply curve due to a
price rise increases the quantity supplied. A downward
movement along the supply curve due to a price fall decreases
the quantity supplied.
Price S

Quantity
 Determinants of supply

• Qs=f (price of inputs, technology, expectations,

number of sellers)
1. Input prices-supply of a good is negatively related to
prices of inputs.
2. Technology- advances in technology increases the
supply
3. Expectations-expectation of a price rise in the future
leads to less supply today.
4. Number of sellers- if it increases, supply increases
and vice versa
• Change in supply- due to factors other than price. It is represented
by the shift of the supply curve.
• Shifts in the supply curve- Any change that raises the quantity that
sellers wish to produce at a given price shifts the supply curve to the
right(increase in supply). Any change that lowers the quantity that
sellers wish to produce at a given price shifts the supply curve to the
left(decrease in supply).
S2
Price
S

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su rea
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pp a s
su cre

S2
De

S
S1
Quantity
 Market Equilibrium
• Market Equilibrium- point where demand and supply
intersect with each other.
Equilibrium price- the price that balances supply and
demand.
Equilibrium quantity- the quantity supplied and the
quantity demanded when the price has adjusted to
balance supply and demand.
• At equilibrium price, the quantity of the good that
buyers are willing and able to buy exactly balances the
quantity that sellers are willing and able to sell.
• This equilibrium price is sometimes called the market-
clearing price.
 Market Equilibrium

Price Demand Supply

0.5 6 0
1 5 1
1.5 4 2
2 3 3
2.5 2 4
3 1 5
 Price D S

Eq. price

2 E

S D
3
Quantity

Eq. quantity
• Surplus (excess supply)- a situation in which quantity supplied
is greater than quantity demanded.
• Shortage (excess demand)-a situation in which quantity
demanded is greater than quantity supplied.
• How does the market restore the equilibrium price (P0)and
quantity(q0), if there is excess supply or excess demand?
Price D Excess supply S

P0 E

Excess demand
S D

Q0 Quantity
• What is the effect on equilibrium price and quantity if,

1. No change in supply and

a) if demand rises dd curve shifts to right →P? Q?
b) if demand falls dd curve shifts to left→ P? Q?
2. No change in demand and
a) if supply rises ss curve shifts to right →P? Q?
b) if supply falls ss curve shifts to left → P? Q?
3. If both demand and supply shifts to the right by the same
amount, what is its effect on new equilibrium price and
quantity?
 Fig.1.a. Fig.1.b.

Price D1 Price
S D
D S
p1 E1 D1
p E
p E
D1 p1
E1
S D D
S D1
q q1 Quantity q1 q Quantity

1. a. If there is no change in supply and if demand rises,

at new equilibrium E1 price increases and quantity
increases.
1. b. If there is no change in supply and if demand falls,
at new equilibrium E1, price decreases and quantity
decreases.
 Fig.3.

Price
D1
D S
S1

P E E1

D1
S
S1 D

q q1 Quantity

3. At the new equilibrium E1, price remains unchanged

whereas quantity increases from q to q1.