Demand, Supply & Market

Equilibrium
Chapter 2
Instructor: Sajawal Aslam
 Some Basic Concepts
• Demand- The desire, willingness and ability on the part of people to buy
certain quantities of a product or service at different price level.
1. Individual Demand- Is how many goods a single person is willing to buy at
any price.
2. Market Demand- How many goods all people are willing to buy

• Demand Schedule- Is a table that lists the various quantities of a product

or service that someone is willing to buy over a range of possible prices.
Some Basic Concepts

• Law of Diminishing Marginal Utility- law states that the amount of extra or
marginal utility declines as a person consumes more and more of a good.

• Marginal Utility- The increment to your utility is

called marginal utility.

• Utility- The pleasure, usefulness, or enjoyment we get from using a product.

Now we Discuss Law of Demand
Law of Demand
Varying Price /Quantity
An economic law stating that as the price of a good or service increases, the quantity demanded
decreases, and vice versa.

 If an object’s price on the market increases, less people will want to buy them because it is too
expensive. If the object’s price on the market decreases, more people will want to buy them because
they are cheaper.

For example: New Car demand is high and price is also high
Demand Schedule For Milk
Why Demand Curve Slope is
downward ?

A higher price for a good reduces the consumer’s

desired consumption of that commodity; this shows
why demand curves slope downward.
Shifts in Demand

When there are changes in factors other than a good’s own price which
affect the quantity purchased, we call these changes shifts in demand.
Demand increases (or decreases) when the quantity demanded
at each price increases (or decreases)
5 Shifters / Determinants of Demand
• Taste/Preferences ( Example: Everyday Morning drink Milk )

• Number Of Consumers ( If any new product is launched Can increase Consumers )

• Price of Related Goods ( Almond Milk is relatively expensive then Dairy Milk )

• Income (If income increase the buying power increases and also increase in demand)

• Expectations ( Future predictions increase in Price and Buy more today)

 The Impact of a Change in Income

Higher income decreases the Higher income increases the

demand for an inferior good demand for a normal good
Increase in Demand
• When the consumers decided to buy more or less of an item at all
possible prices we experience a change in Demand. If the Demand
Increases, the Demand curve shifts right. If the Demand decreases,
the demand curve shifts left.
An Increase in Demand
Demand Curve shift outwards due to raise in 5 shifters as we discussed earlier.
A Decrease in Demand
The Demand Curve shifts inward
What Happen to the Demand for a product when the price
Increase?

Price Stays the Same but the quantity demand decreases.

Now we Discuss Law of Supply
Law of Supply
Varying Price /Quantity
An economic law stating that as the price of a good or service increases, the
quantity supplied increases, and vice versa

If an object’s price on the market increases, the producers would be willing

to supply more of the product. If the object’s price on the market decreases,
they are less willing to supply a lot and the quantity decreases.

Example: If pizza shop is famous supply increase and price also increases
5 Shifters / Determinants of Supply
• Increase in Resources/Inputs/Raw Material ( If Cows increases supply of milk
increases)

• Increase in Sellers in Market ( If number of producers increase supply also increase)

• Change in Technology ( Advanced machines can produce more milk and supply
increases)

• Taxes & Subsidies ( Government fund to produce more )

• Expectations ( Producer produce products in adavance to supply it later on)

An Increase in Supply
A decrease in price increases supply and shift to the Right
A Decrease in Supply
A increase in price decrease supply and shift to the left
What Happen to the Supply for a product when the price Increase?

Supply Stays the Same but the quantity supply increases.

Some Basic Concepts
• Substitution effect -which occurs because a good becomes relatively
more expensive when its price rises
For example: As the price of beef rises, I eat more chicken

• Income effect- A higher price generally also reduces quantity

demanded through the income effect.
 Some Basic Concepts
• Market- A market is a mechanism through which buyers and sellers interact to determine prices and exchange goods,
services, and assets.

• Market Surplus- Is the amount in which the quantity supply is higher than the quantity demanded.

• Market Shortage- An excessive quantity demanded over quantity supplied

• Market Equilibrium- A market equilibrium represents a balance among all the different buyers and sellers.

• Invisible hand-Private interest can lead to public gain when it takes place
in a well-functioning market mechanism.

• Price ceiling- Government imposes a price ceiling to control the maximum prices that can be charged by suppliers for the
commodity.
• Price flooring- Situation when the price charged is more than or less than the equilibrium price determined by market
forces of demand and supply.
• Perfect competition
This technical term refers to a market in which no firm or consumer is
large enough to affect the market price

• Imperfect competition
Imperfect competition occurs when a buyer or seller can affect a
good’s price
Market Equilibrium
• Price ceiling
Government imposes a price ceiling to control the maximum prices
that can be charged by suppliers for the commodity.

• Price flooring
 Situation when the price charged is more than or less than the
equilibrium price determined by market forces of demand and supply.