SlideShare a Scribd company logo
Understanding Demand 
Dr.Sunitha. S 
Assistant Professor 
School of Management Studies, 
National Institute of Technology (NIT) Calicut
Overview 
• Market (who, what, how) 
• Supply and demand is an economic model 
– Designed to explain how prices are determined 
in certain types of markets 
• What you will learn in this session 
– How the model of supply and demand works and 
how to use it 
1. The law of demand 
2. The law of supply 
3. The determination of market equilibrium 
4. Factors shifting demand or supply curves
Markets 
• In economics, a market is not a place but rather a 
group of buyers and sellers with the potential to 
trade with each other 
– Market is defined not by its location but by its 
participants 
– First step in an economic analysis is to define and 
characterize the market or collection of markets to 
analyze 
• Economists think of the economy as a collection 
of individual markets
Buyers and Sellers 
• Buyers and sellers in a market can be 
– Households 
– Business firms 
– Government agencies 
• All three can be both buyers and sellers in the same 
market, but are not always 
• For purposes of simplification this text will usually 
follow these guidelines 
– In markets for consumer goods, we’ll view business 
firms as the only sellers, and households as only 
buyers 
– In most of our discussions, we’ll be leaving out the 
“middleman”
Using Supply and Demand 
• Supply and demand model is designed to explain 
how prices are determined in competitive markets 
• Supply and demand is one of the most versatile 
and widely used models in the economist’s tool kit
Demand 
• By definition demand refers to 
desire for a commodity backed by 
ability and willingness to pay for it 
in a given period of time. 
– The DEPENDENT variable is the 
quantity demanded. 
– The INDEPENDENT variable is the 
good’s own price.
Demand 
• A household’s quantity demanded of a good 
– Specific amount household would choose to buy 
over some time period, given 
• A particular price that must be paid for the good 
• All other constraints on the household 
 Market quantity demanded (or quantity 
demanded) is the specific amount of a good that 
all buyers in the market would choose to buy over 
some time period, given 
– A particular price they must pay for the good 
– All other constraints on households
TThhee DDeemmaanndd FFuunnccttiioonn:: 
SSoommee DDeeffiinniittiioonnss 
TThhee rreellaattiioonnsshhiipp bbeettwweeeenn qquuaannttiittyy ccoonnssuummeedd aanndd tthhee ffaaccttoorrss 
ddeetteerrmmiinniinngg tthhaatt:: DD == ff ((PP,, PPSS,, PPCC,, II,, EE,, TT,, eettcc..)) 
■ PPrriiccee ooff tthhee ggoooodd iinn qquueessttiioonn——ddeetteerrmmiinneess tthhee llooccaattiioonn aalloonngg aa 
ddeemmaanndd ccuurrvvee 
■ OOtthheerr vvaarriiaabblleess ((rreelleevvaanntt ffaaccttoorrss)) ddeetteerrmmiinnee tthhee ppllaacceemmeenntt ooff aa 
ddeemmaanndd ccuurrvvee:: 
► PPrriicceess ooff rreellaatteedd ggooooddss ((ssuubbssttiittuutteess aanndd ccoommpplleemmeennttss)) 
► IInnccoommee ooff bbuuyyeerrss 
► TTaasstteess ((pprreeffeerreenncceess)) ooff bbuuyyeerrss 
► EExxppeeccttaattiioonnss hheelldd bbyy bbuuyyeerrss,, rreeggaarrddiinngg tthhee ffuuttuurree 
► OOtthheerr mmaatttteerrss ppaarrttiiccuullaarr ttoo aa cceerrttaaiinn ggoooodd
Demand Functions 
• Price of the commodity (Px) 
• Income of the Consumer (Y) 
• Consumer’s taste and preference (T) 
• Price of related commodities (Pr) 
• Consumer Expectation 
• Size and composition of population 
• Advertising and Sales Promotion 
• Other Factors e.g., natural calamities 
Qdx = f (Px, Pr ,Y , T, D, …)
• Demand Schedule: a tabular 
presentation showing different 
quantities of a commodity that would 
be demanded at different prices.
Demand Schedule 
and Demand Curve 
Price per 
unit 
Quantity 
Demanded 
per Week 
(millions) 
a 15 8 
b 12 14 
c 9 20 
d 6 26 
e 3 32
Law of Demand 
• The law of demand says that 
quantity demanded varies inversely 
with price, other things constant. 
• Thus, the higher the price, the 
smaller the quantity demanded.
The Demand Curve 
When the price is Rs 
4.00 per packet, 40,000 
packets are demanded 
(point A). 
Number of packets 
per Month 
Price 
per 
packet 
A 
B 
Rs 4.00 
2.00 
D 
40,000 60,000 
At Rs 2.00 per packet , 
60,000 packets are 
demanded (point B).
Why does the demand curve 
Slope Downwards to the Right? 
• Income Effect – An increase in 
demand on account of increase in 
real income is known as income 
effect. 
• Substitution Effect 
• diminishing marginal utility
Exceptions to the Law of Demand 
• Antique & other collection 
• Gold, diamond etc 
• Giffen paradox: In Britain, Robert 
Giffen observed that low paid British 
wage earners demanded more 
potatoes when its price increased. 
• Conspicuous consumption
Types of Demand 
• Individual demand 
• Market demand 
• Income demand 
• Cross demand 
• Direct Demand 
• Derived Demand
“Shifts” vs. “Movements Along” The 
Demand Curve 
• Move along the demand curve 
– From a change in the price of the good we 
analyze 
– A fall in price would cause a movement to the right along 
the demand curve (point A to B)
• Movement along demand curve Vs. Shift in 
demand curve: 
• Distinction between change in quantity demanded 
and change in demand. 
• Change in quantity demanded – When quantity 
demanded changes ( rise or fall ) as a result of 
change in price alone, other factors remaining the 
same. 
• Contraction/fall in quantity demanded 
• Extension/Rise in quantity demanded 
• The change is depicted/ represented by the 
movement up or down on a given demand 
curve. This does not require drawing a new 
demand curve.
Movements Along and Shifts of The 
Demand Curve 
Quantity 
Price 
P2 
Q2 Q1 Q3 
P1 
P3 
Price increase moves us 
leftward along demand 
curve 
Price decrease moves 
us rightward along 
demand curve
“Shifts” vs. “Movements Along” The Demand 
Curve 
• Shift of demand curve 
– a change in other things than price of the good 
causes a shift in the demand curve itself, for 
example, income 
• In Figure 2 
– Demand curve has shifted to the right of the old 
curve (from Figure 1) as income has risen 
– A change in any variable that affects demand— 
except for the good’s price—causes the demand 
curve to shift
A Shift of The Demand Curve 
An increase in income 
shifts the demand curve 
B C 
2.00 
D1 D2 
60,000 80,000 
from D1 to D2. 
Number of 
Packets per 
Month 
Price 
per 
packet 
At each price, more 
packets are demanded 
after the shift
“Change in Quantity Demanded” vs. 
“Change in Demand” 
• When a change in the price of a good 
moves us along a demand curve, it is a 
change in quantity demand 
• When something other than price changes, 
causing the entire demand curve to shift, it 
is a change in demand
Income: Factors That Shift The Demand 
Curve 
• An increase in income has effect of 
shifting demand for normal goods to 
the right 
– However, a rise in income shifts 
demand for inferior goods to the left 
• A rise in income will increase the 
demand for a normal good, and 
decrease the demand for an inferior 
good 
• Normal good and inferior good are 
defined by the relation between 
demand and income
Wealth: Factors That Shift The 
Demand Curve 
• Your wealth—at any point in time—is 
the total value of everything you own 
minus the total Rupees of amount 
you owe 
- Example 
• An increase in wealth will 
– Increase demand (shift the curve 
rightward) for a normal good 
– Decrease demand (shift the curve 
leftward) for an inferior good
Prices of Related Goods: Factors that 
Shift the Demand Curve 
• Substitute—good that can be used in place of 
some other good and that fulfills more or less the 
same purpose 
– Example 
– A rise in the price of a substitute increases the 
demand for a good, shifting the demand curve to 
the right 
• Complement—used together with the good we 
are interested in 
– Example 
– A rise in the price of a complement decreases the 
demand for a good, shifting the demand curve to 
the left
Other Factors That Shift the Demand 
Curve 
• Population 
– As the population increases in an area 
• Number of buyers will ordinarily increase 
• Demand for a good will increase 
• Expected Price 
– An expectation that price will rise (fall) in the future shifts 
the current demand curve rightward (leftward) 
• Tastes 
– Combination of all the personal factors that go into 
determining how a buyer feels about a good 
– When tastes change toward a good, demand increases, 
and the demand curve shifts to the right 
– When tastes change away from a good, demand 
decreases, and the demand curve shifts to the left
Small Summary 
-- Factors Affecting Demand 
• Income (depends on good’s nature: 
normal or inferior) 
• Wealth (depends on good’s nature) 
• Prices of substitutes (positively 
related) 
• Prices of complements (negatively 
related) 
• Population (positively related) 
• Expected price (positively related) 
• Tastes (positively related)
Movements Along and Shifts of The 
Demand Curve 
Entire demand curve shifts 
rightward when: 
• income or wealth ↑ 
• price of substitute ↑ 
• price of complement ↓ 
• population ↑ 
• expected price ↑ 
• tastes shift toward good 
Quantity 
Price 
D2 
D1
Movements Along and Shifts of The 
Demand Curve 
Entire demand curve shifts 
leftward when: 
• income or wealth ↓ 
• price of substitute ↓ 
• price of complement ↑ 
• population ↓ 
• expected price ↓ 
• tastes shift toward good 
Quantity 
Price 
D1 D2
Supply 
• A firm’s quantity supplied of a good is the specific 
amount its managers would choose to sell over 
some time period, given 
– A particular price for the good 
– All other constraints on the firm 
 Market quantity supplied (or quantity supplied) is 
the specific amount of a good that all sellers in the 
market would choose to sell over some time 
period, given 
– A particular price for the good 
– All other constraints on firms
The Law of Supply 
• The law of supply holds that other 
things equal, as the price of a good 
rises, its quantity supplied will rise, 
and vice versa. 
• Why do producers produce more 
output when prices rise? 
– They seek higher profits 
– They can cover higher marginal costs of 
production
Supply Curve 
The supply curve has a positive slope, consistent with 
the law of supply.
Shift in the Supply Curve 
For an given rental price, quantity supplied is now lower than 
before.
Quantity Supplied 
• Implies a choice 
– Quantity that gives firms the highest possible profits 
when they take account of the constraints presented to 
them by the real world 
• Is hypothetical 
– Does not make assumptions about firms’ ability to sell 
the good 
– How much would firms’ managers want to sell, given the 
price of the good and all other constraints they must 
consider? 
• Stresses price 
– The price of the good is just one variable among many 
that influences quantity supplied 
– We’ll assume that all other influences on supply are held 
constant, so we can explore the relationship between 
price and quantity supplied
The Law of Supply 
• States that when the price of a good 
rises and everything else remains the 
same, the quantity of the good 
supplied will rise 
– The words, “everything else remains the 
same” are important 
• In the real world many variables change 
simultaneously 
• However, in order to understand the 
economy we must first understand each 
variable separately 
• We assume “everything else remains the 
same” in order to understand how supply 
reacts to price
The Supply Schedule and The Supply 
Curve 
• Supply schedule—shows quantities 
of a good or service firms would 
choose to produce and sell at 
different prices, with all other 
variables held constant 
• Supply curve—graphical depiction of 
a supply schedule 
– Shows quantity of a good or service 
supplied at various prices, with all other 
variables held constant
The Supply Curve 
F 
G 
2.00 
S 
40,000 60,000 
Rs4.00 
At Rs 4.00 per packet, 
quantity supplied is 
60,000 packets (point 
G). 
When the price is Rs 2.00 per 
packet, 40,000 are supplied 
(point F). 
Number of 
Packets per 
Month 
Price 
per 
Packet
Shifts vs. Movements Along the 
Supply Curve 
• A change in the price of a good causes a 
movement along the supply curve 
• A rise (fall) in price would cause a rightward 
(leftward) movement along the supply curve 
• A drop in transportation costs will cause a shift in 
the supply curve itself 
– In Figure 5 
• Supply curve has shifted to the right of the old 
curve (from Figure 4) as transportation costs have 
dropped 
• A change in any variable that affects supply— 
except for the good’s price—causes the supply 
curve to shift
A Shift of The Supply Curve 
S2 
S1 
G J 
60,000 
Rs4.00 
80,000 
A decrease in transportation 
costs shifts the supply curve for 
the good from S1 to S2. 
Number of 
Bottles per 
Month 
Price 
per 
Bottle 
At each price, more bottles 
are supplied after the shift
Factors That Shift the Supply Curve 
• Input prices 
– A fall (rise) in the price of an input causes an increase 
(decrease) in supply, shifting the supply curve to the 
right (left) 
• Price of Related Goods 
– When the price of an alternate good rises (falls), the 
supply curve for the good in question shifts leftward 
(rightward) 
• Technology 
– Cost-saving technological advances increase the 
supply of a good, shifting the supply curve to the right
Factors That Shift the Supply Curve 
• Number of Firms 
– An increase (decrease) in the number of 
sellers—with no other changes—shifts 
the supply curve to the right (left) 
• Expected Price 
– An expectation of a future price increase 
(decrease) shifts the current supply 
curve to the left (right)
Factors That Shift the Supply Curve 
• Changes in weather 
– Favorable weather 
• Increases crop yields 
• Causes a rightward shift of the supply curve for 
that crop 
– Unfavorable weather 
• Destroys crops 
• Shrinks yields 
• Shifts the supply curve leftward 
• Other unfavorable natural events may effect all 
firms in an area 
– Causing a leftward shift in the supply curve
Changes in Supply and in Quantity 
Supplied 
P2 
Q3 Q1 Q2 
P1 
P3 
Quantity 
Price Price increase moves 
us rightward along 
supply curve 
S 
Price decrease 
moves us leftward 
along supply curve
Changes in Supply and in Quantity 
Supplied 
Quantity 
Price 
S2 
S1 Entire supply curve shifts 
rightward when: 
• price of input ↓ 
• price of alternate good ↓ 
• number of firms ↑ 
• expected price ↑ 
• technological advance 
• favorable weather
Changes in Supply and in Quantity 
Supplied 
Quantity 
Price 
S1 
S2 
Entire supply curve shifts 
rightward when: 
• price of input ↑ 
• price of alternate good ↑ 
• number of firms ↓ 
• expected price ↑ 
• unfavorable weather
Summary: Factors That Shift The 
Supply Curve 
• The short list of shift-variables for supply that we 
have discussed is far from exhaustive 
• In some cases, even the threat of such events 
can cause serious effects on production 
• Basic principle is always the same 
– Anything that makes sellers want to sell more or 
less of a good at any given price will shift supply 
curve
Equilibrium 
• In economics, an equilibrium is a 
situation in which: 
– there is no inherent tendency to change, 
– quantity demanded equals quantity 
supplied, and 
– the market just clears.
Equilibrium 
Equilibrium occurs at a price of $3 and a quantity of 30 
units.
Equilibrium After a Supply 
Shift 
The shift in the supply curve moves the market equilibrium from 
point A to point B, resulting in a higher price and lower quantity.
Shortages and Surpluses 
• A shortage occurs when quantity 
demanded exceeds quantity 
supplied. 
– A shortage implies the market price is 
too low. 
• A surplus occurs when quantity 
supplied exceeds quantity 
demanded. 
– A surplus implies the market price is too 
high.
Shift in the Demand Curve 
• A change in any variable other than price that 
influences quantity demanded produces a shift in 
the demand curve or a change in demand. 
• Factors that shift the demand curve include: 
– Change in consumer incomes 
– Population change 
– Consumer preferences 
– Prices of related goods: 
• Substitutes: goods consumed in place of one 
another 
• Complements: goods consumed jointly
Shift in the Demand Curve 
This demand curve has shifted to the right. Quantity 
demanded is now higher at any given price.
Equilibrium After a Demand 
Shift 
The shift in the demand curve moves the market equilibrium 
from point A to point B, resulting in a higher price and higher 
quantity.
Shift in the Supply Curve 
• A change in any variable other than 
price that influences quantity 
supplied produces a shift in the 
supply curve or a change in supply. 
• Factors that shift the supply curve 
include: 
– Change in input costs 
– Increase in technology 
– Change in size of the industry
Equilibrium: Putting Supply and 
Demand Together 
• When a market is in equilibrium 
– Both price of good and quantity bought and sold 
have settled into a state of rest 
– The equilibrium price and equilibrium quantity are 
values for price and quantity in the market but, 
once achieved, will remain constant 
• Unless and until supply curve or demand curve 
shifts 
• The equilibrium price and equilibrium quantity can 
be found on the vertical and horizontal axes, 
respectively 
– At point where supply and demand curves cross
Market Equilibrium 
E 
3.00 
1.00 H J 
4. until price reaches its 
D 
S 
Excess Demand 
25,000 50,000 75,000 
equilibrium value of 
Rs.3.00. 
2causes the price to 
rise . . . 
3. shrinking the 
excess demand . . . 
1. At a price of Rs1.00 per 
bottle an excess demand 
of 50,000 bottles . . . 
Number of 
Bottles per 
Month 
Price 
per 
Bottle
Excess Demand 
• Excess demand 
– At a given price, the excess of quantity 
demanded over quantity supplied 
• Price of the good will rise as buyers 
compete with each other to get more 
of the good than is available
Excess Supply and Price Adjustment 
3. shrinking the 
excess supply . . . 
Excess Supply at Rs5.00 
K L 
E 3.00 
D 
S 
Rs5.00 
35,000 50,000 65,000 
2. causes the 
price to drop, 
4. until price reaches its 
equilibrium value of 
Rs3.00. 
Number of Bottles 
per Month 
Price 
per 
Bottle 
1. At a price of Rs5.00 per 
bottle an excess supply 
of 30,000 bottles . . .
Excess Supply 
• Excess Supply 
– At a given price, the excess of quantity 
supplied over quantity demanded 
• Price of the good will fall as sellers 
compete with each other to sell more 
of the good than buyers want
Income Rises: What Happens When 
Things Change 
• Income rises, causing an increase in 
demand 
– Rightward shift in the demand curve 
causes rightward movement along the 
supply curve 
– Equilibrium price and equilibrium 
quantity both rise 
• Shift of one curve causes a 
movement along the other curve to 
new equilibrium point
1. An increase in 
3. to a new 
equilibrium. 
F' 
E demand . . . 
3.00 
D1 
D2 
S 
4.00 
50,000 60,000 
5. and equilibrium quantity 
increases too. 
2. moves us along 
the supply 
curve . . . 
Number of Boxes per 
Period 
Price 
per 
box 
4. Equilibrium 
price 
increases
A natural calamity hits: What Happens 
When Things Change 
• Say a Tsunami/ severe drought 
causes a decrease in supply 
– Weather is a shift variable for supply 
curve 
• Any change that shifts the supply curve 
leftward in a market will increase the 
equilibrium price 
– And decrease the equilibrium quantity in that 
market
A Shift of Supply and A New 
Equilibrium 
S2 S1 
E' 
3.00 E 
D 
5.00 
35,000 50,000 
Number of 
packets 
Price 
per 
packet
Using Supply and Demand: The 
Invasion of Kuwait 
• Why did Iraq’s invasion of Kuwait 
cause the price of oil to rise? 
– Immediately after the invasion, United 
States led a worldwide embargo on oil 
from both Iraq and Kuwait 
– A significant decrease in the oil 
industry’s productive capacity caused a 
shift in the supply curve to the left 
• Price of oil increased
The Market For Oil 
P2 
D 
E' 
P1 E 
Q2 Q1 
S2 
S1 
Barrels of Oil 
Price 
per 
Barrel of 
Oil
Using Supply and Demand: The 
Invasion of Kuwait 
• Why did the price of natural gas rise 
as well? 
– Oil is a substitute for natural gas 
– Rise in the price of a substitute 
increases demand for a good 
– Rise in price of oil caused demand 
curve for natural gas to shift to the right 
• Thus, the price of natural gas rose
The Market For Natural Gas 
Cubic Feet of Natural Gas 
Price per 
Cubic Foot 
of Natural 
Gas 
P4 
P3 
F 
Q3 Q4 
S 
D2 
F' 
D1
Both Curves Shift 
• When just one curve shifts (and we know the 
direction of the shift) we can determine the 
direction that both equilibrium price and quantity 
will move 
• When both curves shift (and we know the 
direction of the shifts) we can determine the 
direction for either price or quantity—but not both 
– Direction of the other will depend on which curve 
shifts by more
The Three Step Process 
• Key Step 1—Characterize the Market 
– Decide which market or markets best suit problem 
being analyzed and identify decision makers 
(buyers and sellers) who interact there 
• Key Step 2—Find the Equilibrium 
– Describe conditions necessary for equilibrium in 
the market, and a method for determining that 
equilibrium 
• Key Step 3—What Happens When Things 
Change 
– Explore how events or government polices change 
market equilibrium
Summary 
• Through the study of this session, you will be able to 
• Characterize a market. 
• Use a demand schedule and a demand curve to 
demonstrate the law of demand. 
• Explain the difference between a change in demand (shift 
of the curve) and a change in quantity demanded 
(movement along the curve). 
• Explain how equilibrium price and quantity are determined 
in a competitive market. 
• Explain what will happen in a competitive market after a 
shift in the supply curve, the demand curve, or both. 
Thank You

More Related Content

PPT
Shift in demand curve
PPTX
Shifts In Demand And Supply And Market Equilibrium
PPTX
Demand, Supply, and Equilibrium
PPT
Supply and Demand
PPT
Demand and Supply Analysis (Economics) Lecture Notes
PPTX
Demand, supply and equilibrium
PPT
Determinants of demand
PPTX
Price determination and simple applications
Shift in demand curve
Shifts In Demand And Supply And Market Equilibrium
Demand, Supply, and Equilibrium
Supply and Demand
Demand and Supply Analysis (Economics) Lecture Notes
Demand, supply and equilibrium
Determinants of demand
Price determination and simple applications

What's hot (20)

PPT
3 supply and demand
PPTX
Law of Supply and Demand
PPT
Demand and supply .ppt
PPT
Basic of Supply and Demand - Economic
PPT
Price Determination
PPTX
Factors affecting demand and supply by jaya singh
DOC
Determinants Of Demand
PPT
Supply Demand and Equilibrium
PPTX
Theory of supply
PPTX
How prices are determined
PPT
Demand 110223202936-phpapp01
PPTX
Law of demand and its exceptions
PPTX
Unit 2 supply.ppt
PPT
market forces of supply and demand
PPT
Elements of Demand and Supply
PDF
demand and supply, a free market, equilibrium in market
PPT
Supply & demand pe student notes
PPTX
Demand.
DOCX
Demand schedule-or-demand-curve
PPTX
Economic theory market demand and supply
3 supply and demand
Law of Supply and Demand
Demand and supply .ppt
Basic of Supply and Demand - Economic
Price Determination
Factors affecting demand and supply by jaya singh
Determinants Of Demand
Supply Demand and Equilibrium
Theory of supply
How prices are determined
Demand 110223202936-phpapp01
Law of demand and its exceptions
Unit 2 supply.ppt
market forces of supply and demand
Elements of Demand and Supply
demand and supply, a free market, equilibrium in market
Supply & demand pe student notes
Demand.
Demand schedule-or-demand-curve
Economic theory market demand and supply
Ad

Viewers also liked (7)

PPT
Supply and Demand: Supply Increases and Decreases
PDF
Demand and supply
PPT
Demand & Supply Shifters
PPT
Supply and Demand: Demand Increase and Decrease
PPTX
Simultaneous changes in demand & supply
PPT
The law of supply and demand
PPTX
Supply and Demand, Law of Demand,Law of Supply, Equilibrium
Supply and Demand: Supply Increases and Decreases
Demand and supply
Demand & Supply Shifters
Supply and Demand: Demand Increase and Decrease
Simultaneous changes in demand & supply
The law of supply and demand
Supply and Demand, Law of Demand,Law of Supply, Equilibrium
Ad

Similar to Lecture 3 understanding demand (20)

PPTX
Module 2 Demand Analysis (1).pptx
PPTX
PPTX
Demand Introduction to macroeconomics for Grade 9-12
PPTX
Demand
 
PPT
Class 2a
PDF
Macro Economy and Micro Economy Principles
PPT
New demand ppt
PPT
New demand ppt
PDF
Lecture 2 demand and supply
PPTX
PDF
1. Demand and Supply dau cj economics micro.pdf
PPT
ch04.ppt
PPT
ch0gdtdydydydydydydydydydydydydydydydyd4.ppt
PPT
ch04.ppt
PPTX
Demand Theory.pptx
PPTX
DEMAND AND SUPPLY.pptx
PPTX
16.terms used in_economics_viz_demand_and_supply_
PPT
Demand analysis ppts
PPTX
DEMAND AND SUPPLY THEORY AND MARKET EQUILIBRIUM
PPTX
Demand Supply Microeco.pptx by zothaniii
Module 2 Demand Analysis (1).pptx
Demand Introduction to macroeconomics for Grade 9-12
Demand
 
Class 2a
Macro Economy and Micro Economy Principles
New demand ppt
New demand ppt
Lecture 2 demand and supply
1. Demand and Supply dau cj economics micro.pdf
ch04.ppt
ch0gdtdydydydydydydydydydydydydydydydyd4.ppt
ch04.ppt
Demand Theory.pptx
DEMAND AND SUPPLY.pptx
16.terms used in_economics_viz_demand_and_supply_
Demand analysis ppts
DEMAND AND SUPPLY THEORY AND MARKET EQUILIBRIUM
Demand Supply Microeco.pptx by zothaniii

More from Mohammed Shefin (7)

PPT
Nifty stock market indices
PPT
Money m arket 1
PPT
Capital market
PPT
Lecture 2 orientation
PPT
Lecture 1 course content
PPT
Lecture 5 cost analysis
PPT
Lecture 4 elsasticity
Nifty stock market indices
Money m arket 1
Capital market
Lecture 2 orientation
Lecture 1 course content
Lecture 5 cost analysis
Lecture 4 elsasticity

Recently uploaded (20)

PDF
How to join illuminati agent in Uganda Kampala call 0782561496/0756664682
PDF
Dr Tran Quoc Bao the first Vietnamese speaker at GITEX DigiHealth Conference ...
PPTX
4.5.1 Financial Governance_Appropriation & Finance.pptx
PDF
THE EFFECT OF FOREIGN AID ON ECONOMIC GROWTH IN ETHIOPIA
PPTX
How best to drive Metrics, Ratios, and Key Performance Indicators
PDF
ECONOMICS AND ENTREPRENEURS LESSONSS AND
PDF
Buy Verified Stripe Accounts for Sale - Secure and.pdf
PDF
how_to_earn_50k_monthly_investment_guide.pdf
PPTX
Session 3. Time Value of Money.pptx_finance
PDF
Understanding University Research Expenditures (1)_compressed.pdf
PPTX
Who’s winning the race to be the world’s first trillionaire.pptx
PPTX
Basic Concepts of Economics.pvhjkl;vbjkl;ptx
PPTX
FL INTRODUCTION TO AGRIBUSINESS CHAPTER 1
PDF
Predicting Customer Bankruptcy Using Machine Learning Algorithm research pape...
PDF
NAPF_RESPONSE_TO_THE_PENSIONS_COMMISSION_8 _2_.pdf
PPTX
Session 14-16. Capital Structure Theories.pptx
PDF
caregiving tools.pdf...........................
PPT
KPMG FA Benefits Report_FINAL_Jan 27_2010.ppt
PDF
Corporate Finance Fundamentals - Course Presentation.pdf
PPTX
Introduction to Customs (June 2025) v1.pptx
How to join illuminati agent in Uganda Kampala call 0782561496/0756664682
Dr Tran Quoc Bao the first Vietnamese speaker at GITEX DigiHealth Conference ...
4.5.1 Financial Governance_Appropriation & Finance.pptx
THE EFFECT OF FOREIGN AID ON ECONOMIC GROWTH IN ETHIOPIA
How best to drive Metrics, Ratios, and Key Performance Indicators
ECONOMICS AND ENTREPRENEURS LESSONSS AND
Buy Verified Stripe Accounts for Sale - Secure and.pdf
how_to_earn_50k_monthly_investment_guide.pdf
Session 3. Time Value of Money.pptx_finance
Understanding University Research Expenditures (1)_compressed.pdf
Who’s winning the race to be the world’s first trillionaire.pptx
Basic Concepts of Economics.pvhjkl;vbjkl;ptx
FL INTRODUCTION TO AGRIBUSINESS CHAPTER 1
Predicting Customer Bankruptcy Using Machine Learning Algorithm research pape...
NAPF_RESPONSE_TO_THE_PENSIONS_COMMISSION_8 _2_.pdf
Session 14-16. Capital Structure Theories.pptx
caregiving tools.pdf...........................
KPMG FA Benefits Report_FINAL_Jan 27_2010.ppt
Corporate Finance Fundamentals - Course Presentation.pdf
Introduction to Customs (June 2025) v1.pptx

Lecture 3 understanding demand

  • 1. Understanding Demand Dr.Sunitha. S Assistant Professor School of Management Studies, National Institute of Technology (NIT) Calicut
  • 2. Overview • Market (who, what, how) • Supply and demand is an economic model – Designed to explain how prices are determined in certain types of markets • What you will learn in this session – How the model of supply and demand works and how to use it 1. The law of demand 2. The law of supply 3. The determination of market equilibrium 4. Factors shifting demand or supply curves
  • 3. Markets • In economics, a market is not a place but rather a group of buyers and sellers with the potential to trade with each other – Market is defined not by its location but by its participants – First step in an economic analysis is to define and characterize the market or collection of markets to analyze • Economists think of the economy as a collection of individual markets
  • 4. Buyers and Sellers • Buyers and sellers in a market can be – Households – Business firms – Government agencies • All three can be both buyers and sellers in the same market, but are not always • For purposes of simplification this text will usually follow these guidelines – In markets for consumer goods, we’ll view business firms as the only sellers, and households as only buyers – In most of our discussions, we’ll be leaving out the “middleman”
  • 5. Using Supply and Demand • Supply and demand model is designed to explain how prices are determined in competitive markets • Supply and demand is one of the most versatile and widely used models in the economist’s tool kit
  • 6. Demand • By definition demand refers to desire for a commodity backed by ability and willingness to pay for it in a given period of time. – The DEPENDENT variable is the quantity demanded. – The INDEPENDENT variable is the good’s own price.
  • 7. Demand • A household’s quantity demanded of a good – Specific amount household would choose to buy over some time period, given • A particular price that must be paid for the good • All other constraints on the household  Market quantity demanded (or quantity demanded) is the specific amount of a good that all buyers in the market would choose to buy over some time period, given – A particular price they must pay for the good – All other constraints on households
  • 8. TThhee DDeemmaanndd FFuunnccttiioonn:: SSoommee DDeeffiinniittiioonnss TThhee rreellaattiioonnsshhiipp bbeettwweeeenn qquuaannttiittyy ccoonnssuummeedd aanndd tthhee ffaaccttoorrss ddeetteerrmmiinniinngg tthhaatt:: DD == ff ((PP,, PPSS,, PPCC,, II,, EE,, TT,, eettcc..)) ■ PPrriiccee ooff tthhee ggoooodd iinn qquueessttiioonn——ddeetteerrmmiinneess tthhee llooccaattiioonn aalloonngg aa ddeemmaanndd ccuurrvvee ■ OOtthheerr vvaarriiaabblleess ((rreelleevvaanntt ffaaccttoorrss)) ddeetteerrmmiinnee tthhee ppllaacceemmeenntt ooff aa ddeemmaanndd ccuurrvvee:: ► PPrriicceess ooff rreellaatteedd ggooooddss ((ssuubbssttiittuutteess aanndd ccoommpplleemmeennttss)) ► IInnccoommee ooff bbuuyyeerrss ► TTaasstteess ((pprreeffeerreenncceess)) ooff bbuuyyeerrss ► EExxppeeccttaattiioonnss hheelldd bbyy bbuuyyeerrss,, rreeggaarrddiinngg tthhee ffuuttuurree ► OOtthheerr mmaatttteerrss ppaarrttiiccuullaarr ttoo aa cceerrttaaiinn ggoooodd
  • 9. Demand Functions • Price of the commodity (Px) • Income of the Consumer (Y) • Consumer’s taste and preference (T) • Price of related commodities (Pr) • Consumer Expectation • Size and composition of population • Advertising and Sales Promotion • Other Factors e.g., natural calamities Qdx = f (Px, Pr ,Y , T, D, …)
  • 10. • Demand Schedule: a tabular presentation showing different quantities of a commodity that would be demanded at different prices.
  • 11. Demand Schedule and Demand Curve Price per unit Quantity Demanded per Week (millions) a 15 8 b 12 14 c 9 20 d 6 26 e 3 32
  • 12. Law of Demand • The law of demand says that quantity demanded varies inversely with price, other things constant. • Thus, the higher the price, the smaller the quantity demanded.
  • 13. The Demand Curve When the price is Rs 4.00 per packet, 40,000 packets are demanded (point A). Number of packets per Month Price per packet A B Rs 4.00 2.00 D 40,000 60,000 At Rs 2.00 per packet , 60,000 packets are demanded (point B).
  • 14. Why does the demand curve Slope Downwards to the Right? • Income Effect – An increase in demand on account of increase in real income is known as income effect. • Substitution Effect • diminishing marginal utility
  • 15. Exceptions to the Law of Demand • Antique & other collection • Gold, diamond etc • Giffen paradox: In Britain, Robert Giffen observed that low paid British wage earners demanded more potatoes when its price increased. • Conspicuous consumption
  • 16. Types of Demand • Individual demand • Market demand • Income demand • Cross demand • Direct Demand • Derived Demand
  • 17. “Shifts” vs. “Movements Along” The Demand Curve • Move along the demand curve – From a change in the price of the good we analyze – A fall in price would cause a movement to the right along the demand curve (point A to B)
  • 18. • Movement along demand curve Vs. Shift in demand curve: • Distinction between change in quantity demanded and change in demand. • Change in quantity demanded – When quantity demanded changes ( rise or fall ) as a result of change in price alone, other factors remaining the same. • Contraction/fall in quantity demanded • Extension/Rise in quantity demanded • The change is depicted/ represented by the movement up or down on a given demand curve. This does not require drawing a new demand curve.
  • 19. Movements Along and Shifts of The Demand Curve Quantity Price P2 Q2 Q1 Q3 P1 P3 Price increase moves us leftward along demand curve Price decrease moves us rightward along demand curve
  • 20. “Shifts” vs. “Movements Along” The Demand Curve • Shift of demand curve – a change in other things than price of the good causes a shift in the demand curve itself, for example, income • In Figure 2 – Demand curve has shifted to the right of the old curve (from Figure 1) as income has risen – A change in any variable that affects demand— except for the good’s price—causes the demand curve to shift
  • 21. A Shift of The Demand Curve An increase in income shifts the demand curve B C 2.00 D1 D2 60,000 80,000 from D1 to D2. Number of Packets per Month Price per packet At each price, more packets are demanded after the shift
  • 22. “Change in Quantity Demanded” vs. “Change in Demand” • When a change in the price of a good moves us along a demand curve, it is a change in quantity demand • When something other than price changes, causing the entire demand curve to shift, it is a change in demand
  • 23. Income: Factors That Shift The Demand Curve • An increase in income has effect of shifting demand for normal goods to the right – However, a rise in income shifts demand for inferior goods to the left • A rise in income will increase the demand for a normal good, and decrease the demand for an inferior good • Normal good and inferior good are defined by the relation between demand and income
  • 24. Wealth: Factors That Shift The Demand Curve • Your wealth—at any point in time—is the total value of everything you own minus the total Rupees of amount you owe - Example • An increase in wealth will – Increase demand (shift the curve rightward) for a normal good – Decrease demand (shift the curve leftward) for an inferior good
  • 25. Prices of Related Goods: Factors that Shift the Demand Curve • Substitute—good that can be used in place of some other good and that fulfills more or less the same purpose – Example – A rise in the price of a substitute increases the demand for a good, shifting the demand curve to the right • Complement—used together with the good we are interested in – Example – A rise in the price of a complement decreases the demand for a good, shifting the demand curve to the left
  • 26. Other Factors That Shift the Demand Curve • Population – As the population increases in an area • Number of buyers will ordinarily increase • Demand for a good will increase • Expected Price – An expectation that price will rise (fall) in the future shifts the current demand curve rightward (leftward) • Tastes – Combination of all the personal factors that go into determining how a buyer feels about a good – When tastes change toward a good, demand increases, and the demand curve shifts to the right – When tastes change away from a good, demand decreases, and the demand curve shifts to the left
  • 27. Small Summary -- Factors Affecting Demand • Income (depends on good’s nature: normal or inferior) • Wealth (depends on good’s nature) • Prices of substitutes (positively related) • Prices of complements (negatively related) • Population (positively related) • Expected price (positively related) • Tastes (positively related)
  • 28. Movements Along and Shifts of The Demand Curve Entire demand curve shifts rightward when: • income or wealth ↑ • price of substitute ↑ • price of complement ↓ • population ↑ • expected price ↑ • tastes shift toward good Quantity Price D2 D1
  • 29. Movements Along and Shifts of The Demand Curve Entire demand curve shifts leftward when: • income or wealth ↓ • price of substitute ↓ • price of complement ↑ • population ↓ • expected price ↓ • tastes shift toward good Quantity Price D1 D2
  • 30. Supply • A firm’s quantity supplied of a good is the specific amount its managers would choose to sell over some time period, given – A particular price for the good – All other constraints on the firm  Market quantity supplied (or quantity supplied) is the specific amount of a good that all sellers in the market would choose to sell over some time period, given – A particular price for the good – All other constraints on firms
  • 31. The Law of Supply • The law of supply holds that other things equal, as the price of a good rises, its quantity supplied will rise, and vice versa. • Why do producers produce more output when prices rise? – They seek higher profits – They can cover higher marginal costs of production
  • 32. Supply Curve The supply curve has a positive slope, consistent with the law of supply.
  • 33. Shift in the Supply Curve For an given rental price, quantity supplied is now lower than before.
  • 34. Quantity Supplied • Implies a choice – Quantity that gives firms the highest possible profits when they take account of the constraints presented to them by the real world • Is hypothetical – Does not make assumptions about firms’ ability to sell the good – How much would firms’ managers want to sell, given the price of the good and all other constraints they must consider? • Stresses price – The price of the good is just one variable among many that influences quantity supplied – We’ll assume that all other influences on supply are held constant, so we can explore the relationship between price and quantity supplied
  • 35. The Law of Supply • States that when the price of a good rises and everything else remains the same, the quantity of the good supplied will rise – The words, “everything else remains the same” are important • In the real world many variables change simultaneously • However, in order to understand the economy we must first understand each variable separately • We assume “everything else remains the same” in order to understand how supply reacts to price
  • 36. The Supply Schedule and The Supply Curve • Supply schedule—shows quantities of a good or service firms would choose to produce and sell at different prices, with all other variables held constant • Supply curve—graphical depiction of a supply schedule – Shows quantity of a good or service supplied at various prices, with all other variables held constant
  • 37. The Supply Curve F G 2.00 S 40,000 60,000 Rs4.00 At Rs 4.00 per packet, quantity supplied is 60,000 packets (point G). When the price is Rs 2.00 per packet, 40,000 are supplied (point F). Number of Packets per Month Price per Packet
  • 38. Shifts vs. Movements Along the Supply Curve • A change in the price of a good causes a movement along the supply curve • A rise (fall) in price would cause a rightward (leftward) movement along the supply curve • A drop in transportation costs will cause a shift in the supply curve itself – In Figure 5 • Supply curve has shifted to the right of the old curve (from Figure 4) as transportation costs have dropped • A change in any variable that affects supply— except for the good’s price—causes the supply curve to shift
  • 39. A Shift of The Supply Curve S2 S1 G J 60,000 Rs4.00 80,000 A decrease in transportation costs shifts the supply curve for the good from S1 to S2. Number of Bottles per Month Price per Bottle At each price, more bottles are supplied after the shift
  • 40. Factors That Shift the Supply Curve • Input prices – A fall (rise) in the price of an input causes an increase (decrease) in supply, shifting the supply curve to the right (left) • Price of Related Goods – When the price of an alternate good rises (falls), the supply curve for the good in question shifts leftward (rightward) • Technology – Cost-saving technological advances increase the supply of a good, shifting the supply curve to the right
  • 41. Factors That Shift the Supply Curve • Number of Firms – An increase (decrease) in the number of sellers—with no other changes—shifts the supply curve to the right (left) • Expected Price – An expectation of a future price increase (decrease) shifts the current supply curve to the left (right)
  • 42. Factors That Shift the Supply Curve • Changes in weather – Favorable weather • Increases crop yields • Causes a rightward shift of the supply curve for that crop – Unfavorable weather • Destroys crops • Shrinks yields • Shifts the supply curve leftward • Other unfavorable natural events may effect all firms in an area – Causing a leftward shift in the supply curve
  • 43. Changes in Supply and in Quantity Supplied P2 Q3 Q1 Q2 P1 P3 Quantity Price Price increase moves us rightward along supply curve S Price decrease moves us leftward along supply curve
  • 44. Changes in Supply and in Quantity Supplied Quantity Price S2 S1 Entire supply curve shifts rightward when: • price of input ↓ • price of alternate good ↓ • number of firms ↑ • expected price ↑ • technological advance • favorable weather
  • 45. Changes in Supply and in Quantity Supplied Quantity Price S1 S2 Entire supply curve shifts rightward when: • price of input ↑ • price of alternate good ↑ • number of firms ↓ • expected price ↑ • unfavorable weather
  • 46. Summary: Factors That Shift The Supply Curve • The short list of shift-variables for supply that we have discussed is far from exhaustive • In some cases, even the threat of such events can cause serious effects on production • Basic principle is always the same – Anything that makes sellers want to sell more or less of a good at any given price will shift supply curve
  • 47. Equilibrium • In economics, an equilibrium is a situation in which: – there is no inherent tendency to change, – quantity demanded equals quantity supplied, and – the market just clears.
  • 48. Equilibrium Equilibrium occurs at a price of $3 and a quantity of 30 units.
  • 49. Equilibrium After a Supply Shift The shift in the supply curve moves the market equilibrium from point A to point B, resulting in a higher price and lower quantity.
  • 50. Shortages and Surpluses • A shortage occurs when quantity demanded exceeds quantity supplied. – A shortage implies the market price is too low. • A surplus occurs when quantity supplied exceeds quantity demanded. – A surplus implies the market price is too high.
  • 51. Shift in the Demand Curve • A change in any variable other than price that influences quantity demanded produces a shift in the demand curve or a change in demand. • Factors that shift the demand curve include: – Change in consumer incomes – Population change – Consumer preferences – Prices of related goods: • Substitutes: goods consumed in place of one another • Complements: goods consumed jointly
  • 52. Shift in the Demand Curve This demand curve has shifted to the right. Quantity demanded is now higher at any given price.
  • 53. Equilibrium After a Demand Shift The shift in the demand curve moves the market equilibrium from point A to point B, resulting in a higher price and higher quantity.
  • 54. Shift in the Supply Curve • A change in any variable other than price that influences quantity supplied produces a shift in the supply curve or a change in supply. • Factors that shift the supply curve include: – Change in input costs – Increase in technology – Change in size of the industry
  • 55. Equilibrium: Putting Supply and Demand Together • When a market is in equilibrium – Both price of good and quantity bought and sold have settled into a state of rest – The equilibrium price and equilibrium quantity are values for price and quantity in the market but, once achieved, will remain constant • Unless and until supply curve or demand curve shifts • The equilibrium price and equilibrium quantity can be found on the vertical and horizontal axes, respectively – At point where supply and demand curves cross
  • 56. Market Equilibrium E 3.00 1.00 H J 4. until price reaches its D S Excess Demand 25,000 50,000 75,000 equilibrium value of Rs.3.00. 2causes the price to rise . . . 3. shrinking the excess demand . . . 1. At a price of Rs1.00 per bottle an excess demand of 50,000 bottles . . . Number of Bottles per Month Price per Bottle
  • 57. Excess Demand • Excess demand – At a given price, the excess of quantity demanded over quantity supplied • Price of the good will rise as buyers compete with each other to get more of the good than is available
  • 58. Excess Supply and Price Adjustment 3. shrinking the excess supply . . . Excess Supply at Rs5.00 K L E 3.00 D S Rs5.00 35,000 50,000 65,000 2. causes the price to drop, 4. until price reaches its equilibrium value of Rs3.00. Number of Bottles per Month Price per Bottle 1. At a price of Rs5.00 per bottle an excess supply of 30,000 bottles . . .
  • 59. Excess Supply • Excess Supply – At a given price, the excess of quantity supplied over quantity demanded • Price of the good will fall as sellers compete with each other to sell more of the good than buyers want
  • 60. Income Rises: What Happens When Things Change • Income rises, causing an increase in demand – Rightward shift in the demand curve causes rightward movement along the supply curve – Equilibrium price and equilibrium quantity both rise • Shift of one curve causes a movement along the other curve to new equilibrium point
  • 61. 1. An increase in 3. to a new equilibrium. F' E demand . . . 3.00 D1 D2 S 4.00 50,000 60,000 5. and equilibrium quantity increases too. 2. moves us along the supply curve . . . Number of Boxes per Period Price per box 4. Equilibrium price increases
  • 62. A natural calamity hits: What Happens When Things Change • Say a Tsunami/ severe drought causes a decrease in supply – Weather is a shift variable for supply curve • Any change that shifts the supply curve leftward in a market will increase the equilibrium price – And decrease the equilibrium quantity in that market
  • 63. A Shift of Supply and A New Equilibrium S2 S1 E' 3.00 E D 5.00 35,000 50,000 Number of packets Price per packet
  • 64. Using Supply and Demand: The Invasion of Kuwait • Why did Iraq’s invasion of Kuwait cause the price of oil to rise? – Immediately after the invasion, United States led a worldwide embargo on oil from both Iraq and Kuwait – A significant decrease in the oil industry’s productive capacity caused a shift in the supply curve to the left • Price of oil increased
  • 65. The Market For Oil P2 D E' P1 E Q2 Q1 S2 S1 Barrels of Oil Price per Barrel of Oil
  • 66. Using Supply and Demand: The Invasion of Kuwait • Why did the price of natural gas rise as well? – Oil is a substitute for natural gas – Rise in the price of a substitute increases demand for a good – Rise in price of oil caused demand curve for natural gas to shift to the right • Thus, the price of natural gas rose
  • 67. The Market For Natural Gas Cubic Feet of Natural Gas Price per Cubic Foot of Natural Gas P4 P3 F Q3 Q4 S D2 F' D1
  • 68. Both Curves Shift • When just one curve shifts (and we know the direction of the shift) we can determine the direction that both equilibrium price and quantity will move • When both curves shift (and we know the direction of the shifts) we can determine the direction for either price or quantity—but not both – Direction of the other will depend on which curve shifts by more
  • 69. The Three Step Process • Key Step 1—Characterize the Market – Decide which market or markets best suit problem being analyzed and identify decision makers (buyers and sellers) who interact there • Key Step 2—Find the Equilibrium – Describe conditions necessary for equilibrium in the market, and a method for determining that equilibrium • Key Step 3—What Happens When Things Change – Explore how events or government polices change market equilibrium
  • 70. Summary • Through the study of this session, you will be able to • Characterize a market. • Use a demand schedule and a demand curve to demonstrate the law of demand. • Explain the difference between a change in demand (shift of the curve) and a change in quantity demanded (movement along the curve). • Explain how equilibrium price and quantity are determined in a competitive market. • Explain what will happen in a competitive market after a shift in the supply curve, the demand curve, or both. Thank You

Editor's Notes

  • #6: (example: laptop computers; orange juice)
  • #14: Maple syrup example Horizontal axis; Vertical axis Points A and B, interpretation Negative relations Move along the curve – price change