HD in Business Management

CMU
Business Economics

Session 2 - Demand and supply

Conducted by;
Yasodara Pemarathne
BSc Sp B. Admin (University of Sri Jayewardenepura)
MBA (University of Colombo)
DBF (Institute of Bankers of Sri Lanka)

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Demand

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Definition of Demand
Demand is the various amounts of a product
that consumers are willing and able to
purchase at each of a series of possible prices
during a specified period of time.

Demand of a consumer can be explained via a

schedule or a curve

Demand shows the quantities of a product that

will be purchased at various possible prices,
when other things are equal
We say “willing and able” because
willingness alone is not effective in the
market..

But, you need to have money to make

the purchase as well..
Law of Demand (D)

Law of Demand – Other things equal, as price

falls, the quantity demanded rises, and as
price rises, the quantity demanded falls

In short, there is a negative or inverse

relationship between price and quantity
demanded

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Demand Curve
The inverse relationship between price and quantity
demanded for any product can be represented on a simple
graph, in which, by convention, we measure quantity
demanded on the horizontal axis and price on the vertical
axis

Due to the inverse relationship between price and demand,

the demand curve is downward sloping
A demand schedule and a
demand curve
Change of quantity
demanded (Qd)

The change of quantity demanded will

be explained by a movement along the
demand curve (up or down)
The determinants of demand

Demand for a commodity is determined by an array of

factors. Following are some of them.

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Price of the Product: Price is the first thing
that people think of when purchasing a
product. And hence, as the price increases,
the quantity demanded decreases following
an inverse relationship
Other Factors impacting demand

Income: Income follows a straight relationship with the quantity

demanded. As the income of a person increased the purchasing
power of the person or individual increases too. Thus, the
quantity demanded (Qd) increases. This is applicable only for
normal goods
Prices of Related Goods or services: Prices of Related Goods or
services include substitutes goods and complementary goods.

Substitute Goods: In the case of substitute goods people prefer

one good over the other thus resulting in an increase in the price
of good A and an increase in demand of good B. As goods A and
B are both substitutes of each other.

Eg: Coke and Pepsi are both substitute good for each other. If
the price of coke increases then people will prefer to buy Pepsi
over coke and thus, demand or say qD (quantity demanded) of
Pepsi increases.
Complimentary goods: In the case of complementary
goods, an increase in the price of Good A will decrease
demand for the complementary good B. As,
complimentary goods are the ones that are used
together. Thus, a change in the price of one of the
goods has an impact on the other good demand or
quantity demanded (Qd).

Eg: Cars and petrol are complementary goods. If the

price of petrol increases, the quantity demanded for
cars decreases.
Tastes or preferences of consumers: an individual’s
taste for the item also has an impact on the quantity
demanded of a product. So, as the taste and preference of
a particular product increase, the quantity demanded (Qd)
of the product also increases, and when the taste and
preference of a product decreases the quantity demanded
(Qd) also decreases.

Expectations or Consumer Expectations: High price

expectation of a product will lead to an increase in quantity
demanded (Qd) at present. Whereas, low price expectation
of will lead to decrease in quantity demanded (Qd) at
present.
Change in Demand

• A change in demand will be resulted due to a change

in any non-price related determinant of demand (i.e
except price of the good)

• Demand Curve will shift either to left or right

• A negative change in demand shifts the curve to left

and both price and quantity will fall

• A positive change in demand shifts the curve to right

and both price and quantity will rise
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Change in Qd Vs. Change in Demand
Activity
Identify the effect on demand curve
(Movement along the curve or a shift?)

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Supply

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Definition of Supply

Supply is amounts of a product that

producers are willing and able to make
available for sale at each of a series of
possible prices during a specific period.

Law of Supply – Producer will supply more of a product

when it’s price increase and less when price decline
As per the Law of Supply, the
supply curve is positively sloped
Supply Schedule and Supply curve
Changes in Quantity Supplied (Qs)
Change in Quantity Supply is indicated by a
movement on the supply curve from one point to
another

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Determinants of Supply
• Resource Prices

• Technology

• Tax & Subsidies

• Price of other Goods

• Price Expectation

• Number of Sellers

• Climatic Factors
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Factor Prices

Production of a good involves many costs. If there is a rise

in the price of a particular factor of production, then the cost
of making goods that use a great deal of
that factors experiences a huge increase.

The cost of production of goods that use relatively smaller

amounts of the said factor increases marginally.

For example, a rise in the cost of land will have a large

effect on the cost of producing wheat and a small effect on
the cost of producing automobiles.
Technology

Technological innovations and inventions

tend to make it possible to produce better
quality and/or quantity of goods using the
same resources. Therefore, the state of
technology can increase or decrease the
supply of certain goods.
Taxes and Subsidies

Commodity taxes like excise duty, import duties,

GST, etc. have a huge impact on the cost of
production. These taxes can raise overall costs.
Hence, the supply of goods that are impacted by
these taxes increases only when the price
increases.

On the other hand, subsidies reduce the cost of

production and usually lead to an increase in
supply.
Price of Other Goods

Let’s say that the price of wheat rises. Hence, it

becomes more profitable for firms to supply wheat
as compared to corn or soya bean. Hence, the
supply of wheat will rise, whereas the supply of
corn and soya bean will experience a fall.

Hence, we can say that if the price of related

goods rises, then the firm increases the supply of
the goods having a higher price. This leads to a
drop in the supply of the goods having a lower
price.
Change in Supply

• Change in Supply – shift entire supply

curve to left or to right

• Change in a determinant of supply

except price

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Activity Identify the effect on supply
curve.. Shift or movement?

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 Market Equilibrium
 Market equilibrium is the point at which
the quantity demanded and the quantity
supplied are in balance.

 Known as market clearing point

 This can be explained by 2 methods

 By a schedule
 By a graph
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Market Equilibrium-
schedule
Total Total Surplus (+)
quantity Price quantity
per Shortage (-
supply per Demand per
week Bushel week )
12000 $5 2000 +10000
10000 $4 4000 + 6000
7000 $3 7000 0
4000 $2 11000 - 7000
1000 $1 16000 - 15000

• Surplus – Excess Supply (in this case Corn)

• Shortage – Excess Demand
• Equilibrium Price and Quantity – where the
demand equals to
supply (market clearing point) 15
Market Equilibrium-
Graph

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P = 50 – 2Q
P = 10 + 2Q

50 – 2Q = 10 + 2Q
50 -2P+2P = 10 + 2Q +2Q
50 = 10 + 4Q
50 – 4Q = 10 +4Q-4Q
-4Q = 10-50
-4Q = -40
-4Q/-4 = -40/-4
Q = 10
 Activity
Angela Leung has recently launched her collection of
wedding dresses and set up her store in the city. At a
price of $1500 per dress, she offered 100 dresses in the
first month, but only sold 30. Next month, when she
reduced the price to $1400 and offered 80 dresses,
she was able to sell 50 dresses. She decided to cut
the price to $1000 and offered 50 dresses the following
month. All gowns were sold, but there was a demand
for 50 more dresses. In the fourth month, she offered 70
dresses at a price of $1200 and all of them were sold,
with no extra demand. Complete the following table

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Activity

cont….

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 Activity

Look at your completed graph. Answer these questions.

1. How much is the surplus of shirts at the price of $50 per shirt?
2. How much is the shortage when the price is $30 per shirt?
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Changes in
equilibrium

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Changes in demand and equilibrium
price

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Changes in supply and equilibrium price

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Four Complex
Cases (S & D both
Shift)
• Effects of change in both Supply
and Demand

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 Effect on Effect on
Change Change in
Equilibrium Equilibrium
in Demand
Price Quantity
Suppl
y
Increase Increase Indeterminate Increase
If the increase in supply is greater than the
increase in demand, the equilibrium price
will fall. If the opposite holds, the
equilibrium price will rise.

Decrease Decrease Indeterminate Decrease

If the decrease in supply is greater than
the decrease in demand, equilibrium price
will rise. If the reverse is true, equilibrium
price will fall.

Decrease Increase Increase Indeterminate

. If the decrease in supply is

larger than the increase in
demand, the equilibrium quantity
will decrease.

Increase Decrease Decrease Indeterminate

If the increase in supply is larger

than the decrease in demand, the
equilibrium quantity will
increase. But if the decrease in
demand is greater than the
increase in supply, the
equilibrium quantity will
Activity
Draw all 8 graphs and find the
impact towards equilibrium
price and quantity.

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Thank You!