Chapter 2

Basic Element of Supply and Demand

 Demand
1. What is demand ?
2. What is Quantity Demanded ?
3. Law of demand .
4. Demand table .
5. Demand curve .
6. Movement along demand curve, and shift in
the demand curve.
 Difference between demand and
quantity demanded?
• Demand can be explained at different quantities of a
product or service, which could be purchased at various
prices/income/price of related goods at a given period.
• Quantity Demanded refers to how much of an economic
good or service is demanded by a consumer or a group of
consumers at a given period at a certain price.
• There are two important points related to quantity
demanded which are,
• It is always expressed at a given price, in essence, different
quantities are demanded at different prices.
• It is a flow which means quantity demanded doesn’t indicate
a single purchase rather a continuous flow of purchases.
• Quantity Demanded represents an
exact quantity (how much) of a good or
service is demanded by consumers at a
particular price.
• Demand refers to the graphing of all
the quantities that can be purchased
at different prices.
• On the contrary, quantity demanded, is the
actual amount of goods desired at a certain
price
 The demand schedule
• There exists a definite relationship between the
market price of a good and the quantity
demanded of that good, other things held
constant.
• This relationship between price and quantity
bought is called demand schedule, or the
demand curve.
 The demand schedule
• There exists a definite relationship between the
market price of a good and the quantity
demanded of that good, other things held
constant. This relationship between price and
quantity bought is called demand schedule, or
the demand curve.
Demand Schedules for Cornflakes
Price Quantity
“P” demanded “Q”

A 5 9

B 4 10

C 3 12

D 2 15

E 1 20
Law of downward-sloping demand
• When the price of a commodity is raised (and
other things are held constant), buyers tend to
buy less of the commodity. Similarly, when
the price is lowered, other things being
constant, quantity demanded increases.
Movement along demand curve
Factors affecting the demand curve Example for automobiles
As incomes rise, people increase car
1. Average income
purchases.
A growth in population increases car
2. Population
purchases.
Lower gasoline prices raise the demand
3. Prices of related goods
for cars.
Having a new car becomes a status
4. Tastes
symbol.

Special influences include availability of

alternative forms of transportation,
5. Special influences
safety of automobiles, expectations of
future price increases, etc.
Expectation of future:
a. Future price: consumers’ current demand will increase if they
expect higher future prices; their demand will decrease if they
expect lower future prices.
b. Future income: consumers’ current demand will increase if
they expect higher future income;
their demand will decrease if they expect lower future income.
• A substitute is a good that can be used in
place of another good.
• Ex:
• a bus ride is a substitute for a train ride.
• A hamburger is a substitute for a hot dog .
• A complement is a good that is used in
conjunction with another good.
• hamburger and fries are complements
• Energy bars and exercise.
• A normal good is one for which demand
increases as income increases.
• An inferior good is one for which demand
decrease as income increase.
• Preferences: demand depend on preferences.
Preferences determine the value that people
place on each good and service.
• Preferences depend on such things as the
weather, information, and fashion.
• For example : greater health and fitness awareness has shifted
preferences in favor of energy bars, so the demand for energy bars has
increased.
 Chapter 3
Figure 3-4
Increase in Demand for
Automobiles
 The supply schedule
• The supply schedule or supply curve for a
commodity shows the relationship between its
market price and the amount of that
commodity that producers are willing to
produce and sell, other things held constant.
 The Supply Schedule
Price Quantity
“P” supplied “Q”

A 5 18

B 4 16

C 3 12

D 2 7

E 1 0
Movement along supply curve
Factors affecting the supply curve
1. Technology
2. Input prices
3. Prices of related goods
4. Government policy
5. Special influences
Example for automobiles
Computerized manufacturing lower
production costs & increases supply.
A reduction in the wage paid to
autoworkers lower production costs and
increases supply.
If truck prices fall, the supply of cars
rises.
Removing quotas and tariffs on
imported automobiles increases total
automobile supply.
Internet shopping and auctions allow
consumers to compare the prices of
different dealers more easily and drives
high-cost sellers out of business.
• A market equilibrium comes at the price at which
quantity demanded equals quantity supplied. At that
equilibrium, there is no tendency for the price to raise or
fall.
 Chapter 3
Figure 3-9

Shifts of and Movements along Curves

Ex: From the following data, plot the supply and demand curve
and determine the equilibrium price and quantity:
Price ($ per Qd (pizzas Qs (pizzas
pizza ) per per semester
semester ) )
10 0 40
8 10 30
6 20 20
4 30 10
2 40 0
0 125 0

• What would happen if the demand for pizzas tripled at each

price? what would occur if the price were initially set as $4 per
pizza?