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3 demand and supply

Nov 01, 2014




  • 2. Significance: The tools of demand and supply can be applied to arange of important topics such as: evaluating how global weather conditions will affectagricultural production and market prices of agriculturalcommodities; assessing the impact of government rent control on thehousing market; understanding how taxes, subsidies, and other governmentpolicies affect both consumers and producers. Demand and supply analysis deals with how prices ofproducts and resources are determined.2
  • 3. The Concept of DEMAND: Demand - refers to the various quantities of a good orservice that consumers are willing and able topurchase at alternative prices, ceteris paribus (other thingsremaining equal). It conveys both the elements of desire for the commodityand capacity to pay (must be willing and able). It emphasizes the relationship between quantity bought andits price, although there may be other factors that determinehow much a consumer wants to purchase.3
  • 4. The Law of Demand: Asserts that the quantity demanded of a good orservice is negatively or inversely related to itsown price the First Law of Demand. When the price increases, less of the good or servicewill be bought When the price decreases, more of the commoditywill be purchased.WHY SO?4
  • 5. Two Reasons for the InverseRelationship: Substitution effect When price of a good decreases, the consumersubstitutes the lower priced good for the moreexpensive ones. Income effect When price decreases, the consumers real income(or purchasing power) increases, so he tends to buymore of the good.P Q5
  • 6. Presentation of the DemandRelationship:The relationship between quantity purchasedand alternative prices may be presented in 3ways: Demand schedule in tabular form. Demand curve in graphical form. Demand function in equation form.6
  • 7. Demand Schedule:Demand Schedule for ShoesPrice of a pair of shoes(in pounds) Quantity demanded/year0 850 7100 6150 5200 4250 3300 2350 1400 07
  • 8. 8Demand Curve:QuantityPrice(inpounds)PQ0 2 4 6 8100200300400DFigure 1: Demand Curve. The negative slope of thedemand curve depicts the inverse relationship betweenprice and quantity demanded.
  • 9. Demand Function: Quantity demanded (Q) is expressed as a mathematicalfunction of price (P). The demand function may thus bewritten as:Qd = a - bPwhere a is the horizontal intercept of the equation or the quantitydemanded when price is zero. (- b) is the slope of the function. Example: Qd = 8 - 0.02P9
  • 10. Important Factors AffectingDemand:1. Price of the commodity.2. Consumer incomes.3. Prices of related commodities (substitutes andcomplements).4. Tastes and preferences.5. Consumer expectations.6. Number of consumers.10
  • 11. (Cont.) Income:As income changes, demand for a commodityusually changes. Normal goods are goods whose demand respondspositively to changes in income. Most goods are normal goods. As income increases, moreof shoes, TVs, clothes, are bought. Inferior goods are goods whose demand respondsnegatively to changes in income. Few but existent. Examples: old cell phone models, usedcars, some food items.11
  • 12. (Cont.) Prices of Related Commodities in Consumption: Substitutes are goods that are substitutable with each other(not necessarily perfect). Examples are coffee and tea, Coke and Pepsi. When the price of a substitute increases (Py ), quantity bought of theother good (Qx) increases - (direct relationship) Complements are goods that are used or consumedtogether. Examples are coffee and sugar, bread and butter, tennis rackets andtennis balls, computers and software packages. When the price of a complement increases, quantity bought of theother good decreases - (inverse relationship).12
  • 13. (Cont.) Consumer Tastes and Preferences: When consumer tastes shift towards a particular good, greateramounts of a good are demanded at each price. Example: if consumers preference for drinking bottled waterincreases its demand curve will shift rightward. If consumer preferences change away from a good, itsdemand will decrease. At every possible price less of the goodis demanded than before. Example: the demand for cassette tapes decreased due to preferencefor DVDs.13
  • 14. (Cont.) Consumer Expectations:Expectations about future prices and incomes affectcurrent demand for many goods and services. If we expect price of sugar to increase, we might stock up onthe good to avoid the expected price increase. Thus, currentdemand for sugar might increase. Those who expect to lose their jobs due to bad economicconditions, will reduce their demand for a variety of goods inthe current period.14
  • 15. (Cont.) Number of Consumers:It affects the total demand for a good. Total demand is also known as market demand. It is thehorizontal summation of the individual demands of allconsumers. An increase in the number of consumers shifts themarket demand curve to the right. Example: demand for housing and transportation increaseswith an increase in population. On the other hand, less consumers will cause themarket demand to decrease, resulting in a shift to theleft of the entire demand curve.15
  • 16. Change in Quantity Demanded vs.Change in Demand: Change in quantity demanded is a movementalong the same demand curve, due solely to achange in price, i.e., all other factors heldconstant. Change in demand is a shift in the entiredemand curve (either to the left or to the right)as a result of changes in other factors affectingdemand.16
  • 17. Change in quantity demanded:PriceQuantityp1p2q1 q2D A decrease in price from p1to p2 brings about anincrease in quantitydemanded from q1 to q2 It is shown as a movementalong the same demandcurve from A to B17AB
  • 18. Change in demand:PriceQuantityp1q1 An increase in demandmeans that at the sameprice such as p1 more will bebought, due to other factorssuch as increasedincomes, increase in numberof consumers, etc. It is shown as a shift in theentire demand curve.D0D1q2This is adecrease indemandD218
  • 19. Change in Demand:PQDDIncrease in DemandPQDDDecrease in Demand19
  • 20. The Concept of SUPPLY: Supply refers to the various quantities of a good orservice that producers are willing to sell at alternativeprices, ceteris paribus. Obviously, firms are motivated to produce and sell more athigher prices. Supply emphasizes the relationship between quantity sold ofa commodity and its price. However, there are other factorsthat determine how much a producer would like to produceand sell.20
  • 21. The Law of Supply: It states that the quantity sold of a good orservice is positively or directly related to its ownprice. When the price increases, more of the good orservice will be supplied. When the price decreases, less of the commodity willbe supplied.21
  • 22. Presentation of the SupplyRelationship:The relationship between quantity suppliedand alternative prices may be presented in 3ways: Supply schedule in tabular form. Supply curve in graphical form Supply function in equation form22
  • 23. Supply Schedule:Supply Schedule of ShoesPrice of a pair of shoes(in pounds) Quantity supplied/year0 050 1100 2150 3200 4250 5300 6350 7400 823
  • 24. Supply Curve:QuantityPrice(inpesos)PQ0 2 4 6 8100200300400SFigure 2: Supply Curve. The positive slope of the supplycurve depicts the direct relationship between price andquantity supplied.24
  • 25. Supply Function: Quantity supplied (Qs) is expressed as a mathematicalfunction of price (P). The supply function may thus bewritten as:Qs = c + dPwhere c is the horizontal intercept of the equation or the quantitysupplied when price is zero d is the slope of the function. Example: Qs = 0 + 0.02P25
  • 26. Factors Affecting Supply: There are other factors aside from price thataffect the supply schedule. Some of the mostimpo