demand and supply vkfvnknvrgnrnrgnr .pptx
- 2. 03/24/2025 2 INTRODUCTION • In a market and a market economy, The forces of supply and demand work together to set prices. • Demand and supply analysis is an approach or method of economic analysis • Demand can refer to one individual consumer or to the total demand of all consumers in the market (market demand). • Demand in common practice/ordinary language means the desire for an object. • Suppose a person desires to have a car. It is called demand in ordinary usage. But in economics demand has a separate meaning which is quite distinct from the above meaning. • Demand is the desire, willingness, and ability to buy a good or service. • A mere desire cannot become demand in Economics. • A desire which is backed up by- • (i) ability to buy and • (ii) willingness to pay the price, is called demand. • Unless the desire is accompanied by ability to buy and willingness to pay, it cannot be called demand in Economics • Based on definition, can you identify a demand for any good?
- 3. 03/24/2025 3 DEFINITIONS OF DEMAND 1. According to Stonier and Hague, “ Demand in economics means demand backed up by enough money to pay for the goods demanded”` 2. In the words of Benham, “The demand for anything at a given price is the amount of it which will be bought per unit of time at that price ” Demand is always at a price for a definite quantity at a specified time Demand has three essentials i.e., price, quantity and time. Without these three, demand has no significance in economics
- 4. 03/24/2025 4 DEMAND AND SUPPLY Demand Determinants of demand Quantity demanded Demand schedule Demand curve Law of demand Changes in Demand Supply Determinants of supply Quantity supplied Supply schedule Supply curve Law of supply Changes in Supply EQUILIBRIUM
- 5. 03/24/2025 5 DEMAND Demand depends upon several factors known as determinants of demand like- – number of Buyers – Income – Tastes – Expectations – Related goods as compliments and substitutes A 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. A demand schedule can be shown as points on a graph. The graph lists prices on the vertical axis and quantities demanded on the horizontal axis. Each point on the graph shows how many units of the product or service an individual will buy at a particular price. The demand curve is the line that connects these points. Price per unit(Rs.) Quantity Demanded Rs.5 2 Rs. 4 4 Rs. 3 6 Rs. 2 8 Rs. 1 10
- 6. 03/24/2025 6 1 2 3 4 5 6 7 8 9 10 11 $0 $1 $2 $3 $4 $5 $6 Demand Curve Quantity Demanded Price per unit What do you notice about the demand curve? How would you describe the slope of the demand curve? Do you think that price and quantity demanded tend to have this relationship?
- 7. 03/24/2025 7 LAW OF DEMAND According to the law of demand, quantity demanded and price move in opposite directions. 1. ALFRED MARSHALL- “a rise in the price of commodity or service is followed by a reduction in demand and fall in price is followed by an increase in demand, if the conditions of demand remain constant. ” Marshall stated the Law of Demand basing on the law of Diminishing Marginal Utility. 2. In the words of SAMUELSON- “Other things being equal, the quantity demanded increases with a fall in price and decreases with a rise in price. ” The demand curve slopes downward. This shows that people are normally willing to buy less of a product at a high price and more at a low price.
- 8. 03/24/2025 8 REASONS FOR DOWNWARD SLOPING CURVE Why we purchase or buy any product? We buy products for their utility- the pleasure, usefulness, or satisfaction they give us. What is your utility for (any) ……… products? (Measure your utility by the maximum amount you would be willing to pay for this product) One reason the demand curve slopes downward is due to diminish marginal utility – The principle of diminishing marginal utility says that our additional satisfaction tends to go down as we consume more and more units. • To make a buying decision, we consider whether the satisfaction we expect to gain is worth the money we must give up.
- 9. 03/24/2025 9 CHANGES IN DEMAND (PRICE) Change in the quantity demanded due to a price change occurs ALONG the demand curve 1 2 3 4 5 6 7 8 9 10 11 $0 $1 $2 $3 $4 $5 $6 Demand Curve Quantity Demanded Price per unit At $3 per unit, the Quantity demanded is 6. An increase in the Price from $3 to $4 will lead to a decrease in the Quantity Demanded from 6 to 4.
- 10. 03/24/2025 10 CHANGES IN DEMAND (FACTORS OTHER THAN PRICE) • Demand Curves can shift in response to the following factors: – Buyers: changes in the number of consumers – Income: changes in consumers’ income – Tastes: changes in preference or popularity of product/ service – Expectations: changes in what consumers expect to happen in the future – Related goods: compliments and substitutes • Prices of related goods affect on demand – Substitute goods a substitute is a product that can be used in the place of another. The price of the substitute good and demand for the other good are directly related • For example, Coke Price Pepsi Demand – Complementary goods a compliment is a good that goes well with another good. When goods are complements, there is an inverse relationship between the price of one and the demand for the other • For example, Peanut Butter Jam Demand
- 11. 03/24/2025 11 CHANGES IN DEMAND (FACTORS OTHER THAN PRICE) Changes in any of the factors other than price causes the demand curve to shift either: Increase in Demand shifts to the Right (More demanded at each price) OR Decrease in Demand shifts to the Left (Less demanded at each price)
- 12. 03/24/2025 12 CHANGES IN DEMAND 0 2 4 6 8 10 12 14 $0 $1 $2 $3 $4 $5 $6 Increase in Demand Orginal Demand Curve New Demand Curve Quantity Demanded Price per unit Several factors will change the demand for the good (shift the entire demand curve) As an example, suppose consumer income increases. The demand for Widgets at all prices will increase.
- 13. 03/24/2025 13 CHANGES IN DEMAND 0 2 4 6 8 10 12 $0 $1 $2 $3 $4 $5 $6 Decrease in Demand Original Demand Curve New Demand Curve Quantity Demanded of Widgets Price per Widget Demand will also decrease due to changes in factors other than price. As an example, suppose Widgets become less popular to own.
- 15. 03/24/2025 15 SUPPLY Why do people start businesses? Supplier’s Motive: PROFIT Def. The difference between the cost to produce a good or service and the amount it is sold for. Ex. It costs Rs. 100 to make a pair of shoes (human, natural and capital resources), I sell it for Rs. 150, my profit is… Rs.50!! Businesses provide goods and services hoping to make a profit. Profit is the money a business has left over after it covers its costs. Businesses try to sell at prices high enough to cover their costs with some profit left over. The higher the price for a good, the more profit a business will make after paying the cost for resources.
- 16. 03/24/2025 16 SUPPLY Supply refers to the various quantities of a good or service that producers are willing to sell at all possible market prices. Supply can refer to the output of one producer or to the total output of all producers in the market (market supply)
- 17. 03/24/2025 17 LAW OF SUPPLY According to the law of supply, suppliers will offer more of a good at a higher price As the price for a good rises, the quantity supplied rises and the quantity demanded falls. As the price falls, the quantity supplied falls and the quantity demanded rises. The law of supply holds that producers will normally offer more for sale at higher prices and less at lower prices. Think about it: If people are willing to pay more for what I am selling, then I want to make as much of that product available as possible. Ex. The price of bread goes from Rs.30 to Rs.35, but it still only costs me Rs.20 to make, I want to make as many as I can to maximize my profit (make as much money as I can!)
- 18. 03/24/2025 18 LAW OF SUPPLY Part 1. As PRICE increases, SUPPLY increases Part 2. As PRICE decreases, SUPPLY decreases PRICE goes up Then… SUPPLY goes up PRICE goes down Then… SUPPLY goes down
- 19. 03/24/2025 19 SUPPLY SCHEDULE A supply schedule is a table that shows the quantities producers are willing to supply at various prices Example of a Supply Schedule Market Supply Schedule for a slice of bread: Price per unit of bread Bread supplied per day Rs.30 1,000 Rs.35 1,500 Rs.40 2,000 Rs.45 2,500 Rs.50 3,000 Rs.55 3,500
- 20. 03/24/2025 20 SUPPLY CURVES A supply schedule can be shown as points on a graph. The graph lists prices on the vertical axis and quantities supplied on the horizontal axis. Each point on the graph shows how many units of the product or service a producer (or group of producers) would willing sell at a particular price. The supply curve is the line that connects these points. A supply curve is a graph of the quantity supplied of a good at different prices.
- 21. 03/24/2025 21 1 2 3 4 5 6 7 8 9 10 11 $0 $1 $2 $3 $4 $5 $6 Supply Curve for bread Supply Curve Quantity Supplied of bread Price per nit of bread What do you notice about the supply curve? How would you describe the slope of the supply curve? Do you think that price and quantity supplied tend to have this relationship?
- 22. 03/24/2025 22 REASON The reason the supply curve slopes upward is due to costs and profit. Producers purchase resources and use them to produce output. Producers will incur costs as they bid resources away from their alternative uses.
- 23. 03/24/2025 23 CHANGES IN SUPPLY (PRICE CHANGE) Change in the quantity supplied due to a price change occurs ALONG the supply curve 1 2 3 4 5 6 7 8 9 10 11 $0 $1 $2 $3 $4 $5 $6 Supply Curve for bread Supply Curve Quantity Supplied of bread Price per bread At $3 per bread, the Quantity supplied of bread is 6. If the price of bread fell to $2, then the Quantity Supplied would fall to 4 bread.
- 24. 03/24/2025 24 CHANGES IN SUPPLY (OTHER THAN PRICE) Supply Curves can also shift in response to the following factors: – Subsidies and taxes: government subsides encourage production, while taxes discourage production – Technology: improvements in production increase ability of firms to supply – Other goods: businesses consider the price of goods they could be producing – Number of sellers: how many firms are in the market – Expectations: businesses consider future prices and economic conditions – Resource costs: cost to purchase factors of production will influence business decisions • factors that shift the supply curve
- 25. 03/24/2025 25 CHANGES Changes in any of the factors other than price causes the supply curve to shift either: Decrease in Supply shifts to the Left (Less supplied at each price) OR Increase in Supply shifts to the Right (More supplied at each price)
- 26. 03/24/2025 26 0 2 4 6 8 10 12 $0 $1 $2 $3 $4 $5 $6 Decrease in Supply Original Supply Curve New Supply Curve Quantity Supplied of bread Price per bread Supply can also decrease due to factors other than a change in price. As an example, suppose that a large number of bread producers go out of business, decreasing the number of suppliers.
- 27. 03/24/2025 27 0 2 4 6 8 10 12 14 $0 $1 $2 $3 $4 $5 $6 Increase in Supply Original Supply Curve New Supply Curve Quantities Supplied of bread Price per bread Several factors will change the demand for the good (shift the entire demand curve) As an example, suppose that there is an improvement in the technology used to produce bread.
- 28. 03/24/2025 28 Cost to Produce Amount of Supply Supply Curve Shifts Cost of Resources Falls Cost of Resources Rises Productivity Decreases Productivity Increases New Technology Higher Taxes Lower Taxes Government Pays Subsidy
- 30. 03/24/2025 30 SUPPLY AND DEMAND/ MARKET EQUILIBRIUM Markets bring buyers and sellers together The forces of demand and supply work together in markets to establish prices. In a market economy, prices form the basis of economic decisions.
- 31. 03/24/2025 31 SUPPLY AND DEMAND SCHEDULE Supply and Demand Schedule can be combined into one chart. Price per unit($) Quantity Demanded per day Quantity Supplied per day $5 2 10 $4 4 8 $3 6 6 $2 8 4 $1 10 2
- 32. 03/24/2025 32 SUPPLY AND DEMAND 1 2 3 4 5 6 7 8 9 10 11 $0 $1 $2 $3 $4 $5 $6 Supply and Demand Demand Curve Supply Curve Quantity Price per unit
- 33. 03/24/2025 33 EXCESS SUPPLY A surplus is the amount by which the quantity supplied is higher than the quantity demanded. – A surplus signals that the price is too high. – At that price, consumers will not buy all of the product that suppliers are willing to supply. – In a competitive market, a surplus will not last. Sellers will lower their price to sell their goods. 1 2 3 4 5 6 7 8 9 10 11 $0 $1 $2 $3 $4 $5 $6 Supply and Demand Demand Curve Supply Curve Quantity Price per unit Suppose that the price in market is $4. At $4, Quantity demanded will be 4 units At $4, Quantity supplied will be 8 units At $4, there will be a surplus of 4 units
- 34. 03/24/2025 34 SHORTAGE A shortage is the amount by which the quantity demanded is higher than the quantity supplied A shortage signals that the price is too low. At that price, suppliers will not supply all of the product that consumers are willing to buy. In a competitive market, a shortage will not last. Sellers will raise their price. 1 2 3 4 5 6 7 8 9 10 11 $0 $1 $2 $3 $4 $5 $6 Supply and Demand Demand Curve Supply Curve Quantity Price per unit Suppose that the price in the market is $2. At $2, Quantity supplied will be 4 units At $2, Quantity demanded will be 8 units At $2, there will be a shortage of 4 units
- 35. 03/24/2025 35 FREE MARKET OPERATION/EQUILIBRIUM • When operating without restriction, our market economy eliminates shortages and surpluses. – Over time, a surplus forces the price down and a shortage forces the price up until supply and demand are balanced. – The point where they achieve balance is the equilibrium price. At this price, neither a surplus nor a shortage exists. • Once the market price reaches equilibrium, it tends to stay there until either supply or demand changes. – When that happens, a temporary surplus or shortage occurs until the price adjusts to reach a new equilibrium price.
- 36. 03/24/2025 36 EQUILIBRIUM 1 2 3 4 5 6 7 8 9 10 11 $0 $1 $2 $3 $4 $5 $6 Supply and Demand Demand Curve Supply Curve Quantity Price per unit Suppose that the price in the market is $3. At $3, Quantity supplied will be 6 units At $3, Quantity demanded will be 6 units At $3, there will be neither a surplus or a shortage.
- 38. 03/24/2025 38 APPLICATION OF DEMAND AND SUPPLY ANALYSIS 1. Farm Products 2. Price Control 3. Black Market 4. Consumer’s Surplus and Producers’ Surplus 5. Minimum Wage Legislation 6. Subsidy 7. Taxation
- 40. 03/24/2025 40 AGRICULTURAL PRICE SUPPORT The government fixes minimum prices: (i) To protect farmers’ incomes from price fluctuations of farm products, and (ii) To create buffer stocks to prevent possible future shortages of farm products. The surplus is eliminated by the government generally in three ways: (i) Supply i.e., limiting the acreage of land for the farmers to grow certain agricultural commodities; (ii) Stimulating demand i.e., new uses for farm products are sought; and (iii)Purchasing surpluses i.e., certain farm products are bought and stored by the government for future use as “buffer stocks”.
- 43. 03/24/2025 43 4. CONSUMER’S SURPLUS AND PRODUCERS’ SURPLUS
- 44. 03/24/2025 44 5. MINIMUM WAGE LEGISLATION