Demand, Supply and Price

3- 1
Chapter 3
DEMAND, SUPPLY AND
PRICE
3- 2
Learning Outcomes
The participants in markets and what

motivates them
The main factors that influence how much
of a product consumers wish to buy
The main influences on how much
producers wish to sell
How consumers and producers interact to
determine the market price
How different institutional structures also
affect market prices
3- 3
Demand
Individuals and motives
The nature of Demand
The Determinants of quantity demanded:
the demand function
Demand and Prices: Law of demand
The Demand schedule and Demand curve
Individual and market demand curve
Movement and Shift in the demand curve
3- 4
Demand
Individuals and motives:
Each individual consumer seeks maximum satisfaction
constrained by the availability of Income.
The Nature of Demand:

The amount that an individual wish to purchase called
the quantity of demand.
The quantity of demand is a desired quantity and
expressed in terms of per unit of time.
3- 5
The Demand Function

The Determinants of quantity demanded:
The price of the product
The prices of other products
The consumers income and wealth
The consumers taste
Individual specific and environmental
factors
3- 6
The Demand Function

Demand function:
Qn = f(Pn, P1, Pn-1, Y, S)

Qn
: Quantity demanded for product (n)
Pn
: Price of that product
P1Pn -1
Y
: Price of all other product
: Consumers Income
S : all other factor that varies from individuals to

individual e.g. age, number of children,
place of
residence, assets, weather, season, occasion
3- 7
The Demand Function

f
: functional relationship between set of variables and

the demand for goods. Precise quantitative
relationship.
The condition of Ceteris Paribus (other thing

being equal) is used to understand the influence
of each varaible.
Assuming that all other influences remain
unchanged we explain how quantity demanded
changes when one factor changes.
3- 8
Demand and Price

Basic Question: How will the quantity of a
product demanded vary as its own price varies?
The basic economic hypothesis is that the lower
the price of a product, the larger the quantity that
will be demanded, other things being equal.
The negative relationship between price of the
product and the quantity demanded referred as
Law of Demand.
Why this law of demand holds true?
3- 9
Law of Demand
There is usually more than one product that will satisfy a
given desire or need.
There exists number of substitute product.
If the price of one product increases,
The price of related product become relatively cheaper.
Some will stop buying the product.
They may switch out to buy other products
Some will consume less quantity of it
Some may buy same amount
No rational consumer will buy more.
3- 10
Law of Demand
When price of a product increases or decreases,
the real income of the individual changes.
Substitution Effect.
Diminishing Marginal Utility/satisfaction.
Let the price of product fall,
People will buy more of this good or less of
related/alternative goods.
As other products become relatively expensive
compared to this product.
The Demand Schedule and the Demand Curve
DEMAND SCHEDULE AND CURVE
3- 11
Alices Demand Curve
Reference Letter
a
b
c
d
e
f
Price [ per dozen]
Quantity demanded
[dozen per month]
0.50
1.00
1.50
2.00
2.50
3.00
7.0
5.0
3.5
2.5
1.5
1.0
Price of eggs [ per dozen]
Alices Demand Schedule

3.00
f
e
2.50
d
2.00
c
1.50
1.00
0.50
Quantity of Eggs [dozen per month]
3- 12
The Demand Schedule and Curve

The demand schedule and curve are the
ways of showing relationship between
quantity demanded and price.
A single point on the curve indicate a
single price quantity relationship.
The whole demand curve shows the
complete relationship between quantity
demanded and price.
3- 13
Alices demand schedule for eggs
The table shows the quantity of eggs that

Alice will demand at each selected price,
other things being equal.
For example, at a price of 1.00, Alice
demands 5 dozen eggs per month.
The data is plotted in Figure Alices demand
curve
3- 14
Alices demand curve
Each point on the figure relates to a row on Table

Demand Schedule.
For example, when price is 3.00, 1 dozen are
brought per month (point f ).
When the price is 0.50, 7 dozen are brought (point
a).
The resulting curve relates the price of a commodity to
the amount that Alice wishes to purchase.
The Relation Between Individual and Market Demand Curves

3.00
2.00
1.00
3.00
2
[i]. William
Quantity of Eggs
[dozen per month]
3.00
2.00
2.00
1.00
10
12
Quantity of Eggs
[dozen per month]
1.00
[ii]. Sarah
3- 15
[iii]. Total Demand William & Sarah

2
Quantity of Eggs
[dozen per month]
14
3- 16
The relation between individual and market demand curves
The figure illustrates aggregation over two

individuals, William and Sarah.
For example, at a price of 2.00 per dozen William
purchases 2.4 dozen and Sarah purchases 3.6
dozen
Together they purchase 6 dozen.
In general the market demand curve is the
horizontal sum of the demand curves of all
consumers in the market.
A Market Demand Schedule for Eggs
3- 17
Reference Letter
Price [ per dozen]
Quantity demanded
[000 dozen per month]
0.50
110.0
1.00
90.0
1.50
77.5
2.00
67.5
2.50
62.5
3.00
60.0
3- 18
A Market Demand Schedule for Eggs
The table shows the quantity of eggs that would be

demanded by all consumers at selected prices,
ceteris paribus.
For example, row W indicates that if the price of eggs
were 1.50 per dozen, consumers would want to
purchase 77,500 dozen per month.
The data in this table are plotted in Figure next
A Market Demand Curve for Eggs
3- 19
3.50
D
Z
3.00
2.50
2.00
W
1.50
V
1.00
U
0.50
20
40
60
80
100
Quantity of Eggs
[thousand dozen per month]
120
140
3- 20
A Market Demand Curve for Eggs
The figure illustrates aggregation over two individuals,

William and Sarah.
For example, at a price of 2.00 per dozen William
purchases 2.4 dozen and Sarah purchases 3.6 dozen
Together they purchase 6 dozen.
In general the market demand curve is the horizontal
sum of the demand curves of all consumers in the
market.
Two Demand Curves for Eggs
3- 21
3.50
D0
3.00
2.50
2.00
1.50
1.00
0.50
20
40
60
80
100
120
Quantity of Eggs
140
Two Demand Curves for Eggs
3- 22
3.50
D1
D0
3.00
2.50
Z
Y
2.00
1.50
W
V
1.00
0.50
20
40
60
80
100
120
Quantity of Eggs
140
3- 23
Two demand curves for eggs
When the curve shifts from D0 to D1, more is

demanded at each price and a higher price is paid for
each quantity.
At price 1.50, quantity demanded rises from 77.5
thousand dozen (point W) to 100 (point W).
The quantity of 90 thousand dozen, which was
formerly bought at a price of 1.00 (point V), will be
brought at a price 2.00 after the shift (point X)
Shifts in the Demand Curve
3- 24
Price
D0
Quantity
3- 25
D1
Price
D0
Quantity
3- 26
D1
D0
Price
D2
Quantity
3- 27
Shifts in the demand curve

When the demand curve shifts from D0 to D1, more is
demanded at each price.
Such and increase in demand can be caused by:
A rise in the price of a substitute
A fall in the price of a complement
A rise in income
A redistribution of income towards those who favors the
commodity
A change in tastes that favors the commodity
When the demand curve shifts from D0 to D2, less is demanded
at each price.
Such a decrease in demand can be caused by:
3- 28
Supply
The Basic motive of the producer/firm is
Profit.
Profit = Revenue Cost
Revenue depends on price of the product
and quantity sold.
Cost depends on the amount of inputs,
price of the inputs and technology
3- 29
Supply
(a)
(b)
(c)
Supply decision depends on:

Maximization of revenue
Method of production that minimizes cost
Price of inputs
(a)
(b)
(c)
The Determinants of quantity supplied:

Price of the product,
price of the inputs to production
state of technology
3- 30
Supply
Supply Function: Qn = f (Pn , F1 Fm, T)
Price and Quantity Supplied:
Ceteris paribus, the quantity of any product that the firm
will produce and offer for sale is positively related to the
products own price, rising when rises and falling when
price falls.
Supply Schedule: A table showing how much of a

product firm will supply at different prices.
Supply Curve: A graph shows the quantity produced and

offered for sale at each price.
A Market Supply Schedule for for Eggs
3- 31
Reference Letter
Price [ per dozen]
Quantity demanded
0.50
5.0
1.00
46.0
1.50
77.5
2.00
100.0
2.50
115.0
3.00
122.5
A Supply Curve For Eggs
3- 32
3.50
S
Z
3.00
Y
2.50
X
2.00
W
1.50
V
1.00
U
0.50
20
40
60
80
100
120
Quantity of Eggs[thousand dozen per month]
140
3- 33
A supply curve for eggs

The six points correspond to the price-quantity
combinations shown in Table A Market Supply
Schedule for Eggs
The curve drawn through these points, labeled S, is the
supply curve showing the quantity of eggs that will be
supplied at each price of eggs.
The supply curves positive slope indicates that

quantity supplied increases as price increases.
Two Alternative Market Supply Schedule for Eggs
3- 34
Price of Eggs
[ per dozen]
Original quantity
supplied [000
dozen per month]
New quantity
supplied [000
dozen per month]
[1]
[2]
[3]
[4]
[5]
0.50
5.0
28.0
1.00
46.0
76.0
1.50
77.5
102.0
2.00
100.0
120.0
2.50
115.0
132.0
3.00
122.5
140.0
Two Supply Curves for Eggs
3- 35
3.50
S0
Z
3.00
Y
2.50
X
2.00
W
1.50
V
1.00
U
0.50
20
40
60
80
100
120
Quantity of Eggs [thousand dozen per month]
140
Two Supply Curves for Eggs
3- 36
3.50
S0
Z
3.00
Y
2.50
S1
2.00
W
1.50
V
1.00
U
0.50
20
40
60
80
100
120
140
3- 37
Two supply curves for eggs
The rightward shift in the supply curve from S0 to S1

indicates an increase in the quantity supplied at each
price.
Increase in the Quantity of supplied Vs.

Increase in Supply:
*When there is a change in any of the variables
(other than the products own price) the whole
supply curve for that product will shift.
Shifts in the Supply Curve
3- 38
Price
S0
Quantity
3- 39
S0
Price
S1
Quantity
3- 40
Price
S2
Quantity
S0
3- 41
S2
S0
Price
S1
Quantity
3- 42
Shifts in the supply curve

A shift in the supply curve from S0 to S1 indicates
more is supplied at each price.
Such an increase in supply can be caused by:
Improvements in the technology of producing the
commodity
A fall in the price of inputs that are important in
producing the commodity
A shift in the supply curve from S0 to S2 indicates less
is supplied at each price.
Such a decrease in supply can be caused by:
A rise in the price of inputs that are important in
producing the commodity
Changes in technology that increase the costs of
producing the commodity (rare).
3- 43
The Determination of Price

This shows how the actual price of a
product and the actual quantity bought
and sold are determined in the free and
competitive markets.
Concept of Market: An area over which
buyers and sellers negotiate the exchange
of some products.
3- 44
Demand and Supply Schedules for Eggs and Equilibrium Price

Price
[ per dozen]
Quantity
demanded
[000 dozen
per month]
Quantity supplied
[000 dozen
per month]
Excess Demand [quantity

demanded minus
quantity supplied]
0.50
110.0
5.0
+ 105.0
1.00
90.0
46.0
+ 44.0
1.50
77.5
77.5
0.0
2.00
67.5
100.0
- 32.5
2.50
62.5
115.0
- 52.5
3.00
60.0
122.5
- 62.5
3- 45
Demand and supply schedules for eggs and equilibrium price
Equilibrium occurs where the quantity demanded

and the quantity supplied are equal.
In the table the equilibrium price is 1.50

The equilibrium quantity bought and sold is 77.5
thousand dozen per month.
For prices below the equilibrium, such as 0.50,
quantity demanded (110) exceeds quantity supplied
(5).
For prices above the equilibrium, such as 3.00,
quantity demanded (60) is less than quantity
supplied (122.5).
The data in this table are plotted in the following
figure
Determination of the Equilibrium Price of Eggs
3- 46
3.50
D
Z
3.00
2.50
2.00
1.50
W
V
1.00
U
0.50
20
40
60
80
100
120
140
Determination of the Equilibrium Price of Eggs
3- 47
3.50
D
Z
3.00
Z
Y
2.50
2.00
1.50
1.00
U
0.50
20
40
60
80
100
120
140
3- 48
Law of Determination of the equilibrium price

Equilibrium price is where the demand and supply
curves intersect, point E in the figure.
Equilibrium is a point of balance or rest, a point
towards which there is a tendency to move. There is
no tendency to move away.
Dis-equilibrium: When quantity demanded does not
equal quantity supplied.
At all prices above equilibrium there is excess supply
and downward pressure on price.
At all prices below equilibrium there is excess demand
and upward pressure on price
3- 49
Implications
Uniqueness: There is no more than one price at
which quantity demanded equals quantity
supplied equilibrium is unique
Fluctuations: when demand or/and supply curve
shift, the equilibrium price and quantity will
change.
Stability: The market is stable in the sense that
forces exist to move the prices towards its
market clearing level.
3- 50
The Laws of Demand and Supply
Price
Price
Quantity
[ii]. The effects of shifts in the supply curve
Quantity
[i]. The effects of shifts in the demand curve
3- 51
S0
Price
E0
p0
S
Price
D0
q0
Quantity
p0
E0
q0
Quantity
3- 52
The Predictions of the Demand and

Supply Analysis
A rise in the demand for a product, causes an
increase in both price and quantity bought and
sold.
A fall in demand for a product, causes a
decrease in both price and quantity.
A rise in the supply of a product, causes a
decrease in the equilibrium price and increase in
the quantity bought and sold.
A fall in the supply of product, causes an
increase in the equilibrium price and decrease in
the quantity bought and sold.
3- 53
S0
S1
Price
E0
p0
D1
p1
Price
D0
E1
q0
E1
p1
q1
Quantity
p0
E0
q0
q1
Quantity
3- 54
The laws of demand and supply (i) shifts in demand
The original curves are D0 and S, which intersect to produce

equilibrium at E0.
Price is p0, and quantity q0.
An increase in demand shifts the demand curve to D1 .
Price rises to p1 and quantity rises to q1 taking the new
equilibrium to E1 .
A decrease in demand now shifts the demand curve to D0.
Price falls to p0 and quantity falls to q0 taking the new
equilibrium to E0.
Thus, an increase in demand raises both price and quantity
while a decrease in demand lowers both price and quantity
3- 55
The laws of demand and supply (ii) shifts in supply
The original demand and supply curves are D and S0,

which intersect to produce an equilibrium at E0, price p0 and
quantity q0.
An increase in supply shifts the supply curve to S1. Price
falls to p1 and quantity rises to q1, taking the new equilibrium
to E1 .
A decrease in supply shifts the supply curve back to S0.
Price rises to p0 and quantity falls to q0 taking the new
equilibrium to E0.
Thus an increase in supply raises quantity but lowers prices
while a decrease in supply lowers quantity but raises price.
3- 56
Simultaneous Shift in Supply and

Demand
A fall in Supply and rise in demand
A rise in supply and fall in demand
An increase in the demand and increase
in supply
A decrease in demand and decrease in
supply
3- 57
CHAPTER 3: DEMAND, SUPPLY AND PRICE
The decision-taking units in economic theory are called

agents.
They are [a] individuals, for the demand in goods markets
and for supply in factor markets; [b] firms, for supply in
goods markets and demand in factor markets; and [c]
governments, for supply of some goods and for regulation
and control of the private sector [see Chapter 5].
Given the resources at their command, each individual is
assumed to maximize his or her satisfaction, and each
firm is assumed to maximize its profit.
3- 58

Demand
An individual consumers demand curve shows the relation between the
price of a product and the quantity of that product the customer wishes to
purchase per period of time.
It is drawn on the assumption that all other prices, income, and tastes
remain constant.
Its negative slope indicates that the lower the price of the product, the more
the consumer wishes to purchase.
The market demand curve is the horizontal sum of all the individual
consumers.
The demand curve for a normal good shifts to the right when the price of a
substitute rises, when the price of a complement falls, when total income
rises, when the distribution of income changes in favour of those with large
demands for the product, and when tastes change in favour of the product It
shifts to the left with the opposite changes.
3- 59

A movement along a demand curve indicates a change in quantity
demanded in response to a change in the products own price; a shift
in a demand curve indicates a change in the quantity demanded at
each price in response to a change in one of the conditions held
constant along a demand curve.
Supply
The supply curve for a product shows the relationship between its
price and the quantity that producers wish to produce and offer for
sale per period of time.
It is drawn on the assumption that all other forces that influence
quantity supplied remain constant, and its positive slope indicates that
the higher price, the more producers wish to sell.
3- 60

The Determination of Price
At the equilibrium price the quantity demanded equals the
quantity supplied.
Graphically, equilibrium occurs where the demand and supply
curves intersect.
At any price below equilibrium there will be excess demand
and price will tend to rise; at any price above equilibrium there
will be excess supply and price will tend to fall.
A rise in demand raises both equilibrium price and quantity; a
fall in demand lowers both.
A rise in supply raises equilibrium quantity but lowers
equilibrium price; a fall in supply lowers equilibrium quantity
but raises equilibrium price.
These are those so-called laws of supply and demand.
3- 61
Price theory is most simply developed in the context of a

constant price level.
Price changes discussed in the theory are changes
relative to the average level of all prices.
In an inflationary period, a rise in the relative price of one
product means that its price rises by more than the rise
in the general price level; a fall in its relative price means
that its price rises by less than the rise in the general
price level.
3- 62

Individual markets, sectors, and the economy
Markets are partially separated from each other because
different products are sold in each, and because of barriers to
the movement of products among such markets as transport
costs [a natural barrier] and tariffs [ a policy-induced barrier].
For various types of study, data for individual markets are
aggregated into sectors.
Examples are primary, secondary, and tertiary, a distinction on
the types of goods produced; private and public, a distinction
depending on whether or not the costs of production are
recovered by selling products to their users.

Demand, Supply and Price

Încărcat de

Informații document

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Demand, Supply and Price

Încărcat de

Drepturi de autor:

Formate disponibile

3- 1

The participants in markets and what

The Nature of Demand:

The Demand Function

The Demand Function

Qn = f(Pn, P1, Pn-1, Y, S)

: Quantity demanded for product (n)

: Price of that product

: Price of all other product

S : all other factor that varies from individuals to

The Demand Function

: functional relationship between set of variables and

The condition of Ceteris Paribus (other thing

Demand and Price

DEMAND SCHEDULE AND CURVE

Alices Demand Curve

Price [ per dozen]

Price of eggs [ per dozen]

Alices Demand Schedule

Quantity of Eggs [dozen per month]

The Demand Schedule and Curve

Alices demand schedule for eggs

The table shows the quantity of eggs that

Alices demand curve

Each point on the figure relates to a row on Table

The Relation Between Individual and Market Demand Curves

Price of eggs [ per dozen]

Price of eggs [ per dozen]

Price of eggs [ per dozen]

[iii]. Total Demand William & Sarah

The relation between individual and market demand curves

The figure illustrates aggregation over two

A Market Demand Schedule for Eggs

Price [ per dozen]

A Market Demand Schedule for Eggs

The table shows the quantity of eggs that would be

A Market Demand Curve for Eggs

Price of eggs [ per dozen]

A Market Demand Curve for Eggs

The figure illustrates aggregation over two individuals,

Two Demand Curves for Eggs

Price of eggs [ per dozen]

Two Demand Curves for Eggs

Price of eggs [ per dozen]

Two demand curves for eggs

When the curve shifts from D0 to D1, more is

Shifts in the Demand Curve

Shifts in the Demand Curve

Shifts in the Demand Curve

Shifts in the demand curve

Supply decision depends on:

The Determinants of quantity supplied:

Supply Schedule: A table showing how much of a

Supply Curve: A graph shows the quantity produced and

A Market Supply Schedule for for Eggs

Price [ per dozen]

A Supply Curve For Eggs

Price of eggs [ per dozen]

Quantity of Eggs[thousand dozen per month]

A supply curve for eggs

The supply curves positive slope indicates that

Two Alternative Market Supply Schedule for Eggs

Two Supply Curves for Eggs