Supply and Demand



Market
- environment where demand takes place
- physical space where buyers and seller
meet
- exchange, transaction at a particular price.
- ABSTRACT SENSE:
• Market Transaction
- engaging in a transaction called

Price
exchange
Buyers & Consumers Sellers

Demand side of the supply side of the

market market

Demand Quantity Demanded

• continuous flow of purchases measured
• negative slope, rise over run
over a given period of time
• inverse relationship between price and
quantity demanded
Quantity Demanded
• number of commodities buyers are willing
* All points in the demand curve is Quantity
and able to buy
demanded per unit price
Potential Demand
JUSTIFY CONSUMER BEHAVIOR
• number of commodities are willing but not
necessarily able to buy.
1. Income constraint
- income effect > limits of our demands
Law of Demand - substitution effect
Ceteris paribus -all other things are held 2. Law of Diminishing marginal utility
constant - as …. of a particular commodity is
consumed, the satisfaction derived out
Price goes UP Qd Comes DOWN of the additional unit diminishes.
- utility can be measured = UTIL (s)
Price goes DOWN Qd comes UP - ordinal value
- no use = 0 util = inu tile
Price = independent variable
Qd = dependent variable

Demand curve
• downward curve, downward sloping
Non-price Determinants of
Demand
Law of Supply
1. Income When prices goes up, quantity supplied
• as income increases, demand also also goes up
increases When price goes down, quantity supplied
2. Population also goes down
• Population increases, demand increases Ceteris paribus
3. Price of substitutes
• demand for other commodity
• Price of original > Psub then
• Qd original < Qd sub
4. Price of complements

Price
• pairs, something that you get in pairs
5. tastes of preferences
• Taste goes up , demand goes up
6. Advertising & promotion
• More advertisements , more demand
7. Quality of the Commodity Quantity
• Higher quality, higher demand
8. Expectations of future price changes
• if prices are expected to go high in the JUSTIFICATIONS
future, demand also increases
1. Profit motivation
CHANGE IN QUANTITY 2. Law of Diminishing marginal returns
- as more of a particular commodity is
DEMANDED produced , the returns derived out of
the additional unit diminishes
Movement along the demand curve. - producers produce past their most
- change in quantity demanded is with a efficient level
change in price

Shift in the demand curve

- changes in demands due to non-price
determinants of demand

*examples are in drawings ehe

SUPPLY
Quantity supplied Non-price Determinants of
- number of commodities sellers are willing
& able to sell.
Supply
1. Change in profit motivation
2. Change in Technology
3. Change in Price input
4. Change in price related commodities
5. Price expectations

* Movement along the supply curve

- changes in quantity supplied due to
price
* Shift of the Supply Curve
- changes in supply due to non-price
determinants

Law of Supply
- constant - ceteris paribus
- Price goes up , supply goes up
- if price alone is the basis

* Buyers ask for price, sellers say highest

price possible
* this is profit motivation
* Seller is WILLING TO LOWER PRICE IF
YOU’RE WILLING TO BUY MORE