Demand Supply 1 
Demand and Supply I
Learning Objective:- Demand
• Explain the concepts of demand
• Explain the law of demand
• Distinguish between movement along and shift of the demand curve
• Analyse the effects of changes in the price & the non-price determinants of demand INTRODUCTION
Supply and demand are the two words that economists use most often.
INTRODUCTION
MARKETS
• Buyers determine demand.
• Sellers determine supply.
Demand
• Demand:- quantity which people are willing and able to buy at different prices, in a specified time period, ceteris paribus
Demand Analysis:background
• Willing and able: not just what people want, but also what they can afford to pay for
• Different prices: prices are allowed to vary to see how quantity demanded will change
• Specified time period: demand for a given period of time.
Note:
Ceteris paribus: Latin phrase that means all other things remaining constant.
Law of Demand
When price increase, quantity demanded for a product will decrease
When price decreases, quantity demanded for a product will increase
Price and Quantity Demanded are
inversely related
Explaining the Law of Demand,
Why does a higher price reduce the quantity demanded?
Substitution Effect:
Some consumers switch to lower priced substitutes.
If X and Y are substitutes,
Price(x) ↑→Quantity Demanded (x)↓
demand for Y will ↑
Explaining the Law of Demand,
Why does a higher price reduce the quantity demanded?
Income Effect:
Consumers buy less because of the fall in real income
(or purchasing power)
Price of (X)↑→money income is unchanged but real income↓→Quantity Demanded (x)↓
Note: Real income refers to income adjusted for rise in prices.
Individual A’s Demand for Good X
Price ($ per unit)
Quantity Demanded (units)
5
2
4
4
3
6
2
8
1
10
Demand Curve – A demand curve that reflects the law of demand is downward sloping from left to right
Price $
5
4
3
2
1
D
2
4
6
8
10
Demand curve of Good X for Individual A
Quantity
A
Learning Objective:- Demand
• Explain the concepts of demand
• Explain the law of demand
• Distinguish between movement along and shift of the demand curve
• Analyse the effects of changes in the price & the non-price determinants of demand INTRODUCTION
Supply and demand are the two words that economists use most often.
INTRODUCTION
MARKETS
• Buyers determine demand.
• Sellers determine supply.
Demand
• Demand:- quantity which people are willing and able to buy at different prices, in a specified time period, ceteris paribus
Demand Analysis:background
• Willing and able: not just what people want, but also what they can afford to pay for
• Different prices: prices are allowed to vary to see how quantity demanded will change
• Specified time period: demand for a given period of time.
Note:
Ceteris paribus: Latin phrase that means all other things remaining constant.
Law of Demand
When price increase, quantity demanded for a product will decrease
When price decreases, quantity demanded for a product will increase
Price and Quantity Demanded are
inversely related
Explaining the Law of Demand,
Why does a higher price reduce the quantity demanded?
Substitution Effect:
Some consumers switch to lower priced substitutes.
If X and Y are substitutes,
Price(x) ↑→Quantity Demanded (x)↓
demand for Y will ↑
Explaining the Law of Demand,
Why does a higher price reduce the quantity demanded?
Income Effect:
Consumers buy less because of the fall in real income
(or purchasing power)
Price of (X)↑→money income is unchanged but real income↓→Quantity Demanded (x)↓
Note: Real income refers to income adjusted for rise in prices.
Individual A’s Demand for Good X
Price ($ per unit)
Quantity Demanded (units)
5
2
4
4
3
6
2
8
1
10
Demand Curve – A demand curve that reflects the law of demand is downward sloping from left to right
Price $
5
4
3
2
1
D
2
4
6
8
10
Demand curve of Good X for Individual A
Quantity
A