CHAPTER 3 & 4 (ECONOMICS)

DEMAND & SUPPLY

The Basic Decision-Making Units
• A firm is an organization that transforms
resources (inputs) into products (outputs).
Firms are the primary producing units in a
market economy.
• An entrepreneur is a person who
organizes, manages, and assumes the risks
of a firm, taking a new idea or a new
product and turning it into a successful
business.
• Households are the consuming units in an
economy.
 Input Markets and Output Markets
• Output, or product,
markets are the markets
in which goods and
services are exchanged.
• Input markets are the
markets in which
resources—labor,
• Payments flow in the opposite
capital, and land—used
direction as the physical flow of to produce products, are
resources, goods, and services
(counterclockwise).
exchanged.
(counterclockwise).
 Input Markets
Input markets include:
• The labor market, in which households supply
work for wages to firms that demand labor.
• The capital market, in which households supply
their savings, for interest or for claims to future
profits, to firms that demand funds to buy capital
goods.
• The land market, in which households supply
land or other real property in exchange for rent.
 Definition of Demand
The amount of a product that will be sold
at a certain price for a specified period
&
the number of things consumers want,
called demand.
Example : the higher the price the less
bought….the lower the price the more
purchased
 Definition of ‘demand for tourism’:

The total number of persons who travel or

wish to travel and use tourist facilities and
services at places away from their places
of work or residence

(Cooper et all. 1993)

 Determinants of Household Demand
A household’s decision about the quantity of a particular
output to demand depends on:
• The price of the product in question.
• The income available to the household.
• The household’s amount of accumulated wealth.
• The prices of related products available to the
household. Exp: substitute products (directly competes
with the good in the opinion of the buyer)
complementary products (used with the goods in the
opinion of the buyer)
• The household’s tastes and preferences.
• The household’s expectations about future income,
wealth, and prices.
 Quantity Demanded
• Quantity demanded is the amount (number of
units) of a product that a household would buy in
a given time period if it could buy all it wanted at
the current market price.
• Example : If the local Starbucks lowers their price
of a tall coffee from $1.75 to $1.65, the quantity
demanded will rise from 45 coffees an hour to 48
coffees an hour.
Demand in Output Markets
ANNA'S DEMAND
• A demand schedule
SCHEDULE FOR is a table showing
TELEPHONE CALLS how much of a given
PRICE
QUANTITY
DEMANDED
product a household
(PER (CALLS PER would be willing to
$
CALL)
0
MONTH)
30
buy at different
0.50 25 prices.
3.50 7
7.00 3 • Demand curves are
10.00
15.00
1
0
usually derived from
demand schedules.
The Demand Curve
ANNA'S DEMAND
SCHEDULE FOR
• The demand curve is a
TELEPHONE CALLS graph illustrating how
PRICE
QUANTITY
DEMANDED much of a given
(PER
CALL)
(CALLS PER
MONTH) product a household
$ 0
0.50
30
25 would be willing to
3.50
7.00
7
3 buy at different prices.
10.00 1
15.00 0
The Law of Demand
• The law of demand
states that there is a
negative, or inverse,
relationship between
price and the quantity
of a good demanded
and its price.
• This means that
demand curves slope
downward.

Because of change the Quantity of Demand

 Income and Wealth

• Income is the sum of all households

wages, salaries, profits, interest
payments, rents, and other forms of
earnings in a given period of time. It
is a flow measure.
• Wealth, or net worth, is the total
value of what a household owns
minus what it owes. It is a stock
measure.
 Related Goods and Services

• Normal Goods is anything that you are willing and

able to buy when your income increases or the price
decreases
Example : NEW clothing, NEW car, NEW computer,
roast beef sandwiches

• Inferior Goods is something that is comparable to the

normal good & you are more willing to purchase as
your income decreases or the price increases
USED clothing, USED car, USED computer, bologna
sandwiches
 Related Goods and Services

• Substitutes are goods that can serve as

replacements for one another; when the price of
one increases, demand for the other goes up.
Perfect substitutes are identical products.
For Examples of substitute goods include
margarine and butter, tea and coffee.
• Complements goods are those whose use is
directly related to the use of another product. A
good example of complementary goods are hot
dogs and hot dog buns. If you purchase hot dogs,
it is very likely you will also purchase the buns
Shift of Demand Versus Movement Along a Demand
Curve

• A change in demand is
not the same as a change
in quantity demanded.
• In this example, a higher
price causes lower
quantity demanded.
• Changes in determinants
of demand, other than
price, cause a change in
demand, or a shift of the
entire demand curve, from
DA to DB.
A Change in Demand Versus a Change in Quantity
Demanded

• When demand shifts to

the right, demand
increases. This causes
quantity demanded to be
greater than it was prior to
the shift, for each and
every price level.
 A Change in Demand Versus a Change in Quantity
Demanded

To summarize:
Change in price of a good or service
leads to

Change in quantity demanded

(Movement along the curve).

Change in income, preferences, or

prices of other goods or services
leads to

Change in demand
(Shift of curve).
From Household to Market Demand

• Demand for a good or service can be defined

for an individual household, or for a group of
households that make up a market.
• Market demand is the sum of all the
quantities of a good or service demanded per
period by all the households buying in the
market for that good or service.
Demand analysis Exercise

The demand curve

 The demand curve:
The demand for potatoes (monthly)
Question: Draw the demand curve based on the table
below .
 SUPPLY

The number of things

made available, called
supply
 Example
First
• When consumers start paying more for cupcakes
than for donuts, bakeries will increase their output of
cupcakes and reduce their output of donuts in order
to increase their profits.
Second
• When college students learn computer engineering
jobs pay more than English professor jobs, the supply
of students with majors in computer engineering will
increase.
 Supply in Output Markets
CLARENCE BROWN'S • A supply schedule is a table
SUPPLY SCHEDULE showing how much of a product
FOR SOYBEANS
firms will supply at different
QUANTITY
SUPPLIED prices.
PRICE (THOUSANDS
(PER OF BUSHELS • Quantity supplied represents the
BUSHEL) PER YEAR)
$ 2 0 number of units of a product that
1.75
2.25
10
20
a firm would be willing and able to
3.00 30 offer for sale at a particular price
4.00
5.00
45
45
during a given time period.
 The Supply Curve and
the Supply Schedule
• A supply curve is a graph illustrating how much
of a product a firm will supply at different prices.
CLARENCE BROWN'S
SUPPLY SCHEDULE
FOR SOYBEANS
QUANTITY
SUPPLIED
PRICE (THOUSANDS
(PER OF BUSHELS
BUSHEL) PER YEAR)
$
1.75 10
2.25 20
3.00 30
4.00 40
5.00 50
The Law of Supply
• The law of supply
states that there is a
positive relationship
between price and
quantity of a good
supplied.
• This means that
supply curves
typically have a
positive slope.
 Determinants of Supply
• The price of the good or service.
• The cost of producing the good, which in turn depends
on:
– The price of required inputs (labor, capital, and land),
– The technologies that can be used to produce the
product,
• The prices of related products.
exp:substitute products (directly competes with the good in
the opinion of the buyer)
complementary products (used with the good in the
opinion of the buyer)
 A Change in Supply Versus
a Change in Quantity Supplied

• A change in supply is
not the same as a
change in quantity
supplied.
• In this example, a higher
price causes higher
quantity supplied, and
a move along the
demand curve.
• In this example, changes in determinants of supply, other
than price, cause an increase in supply, or a shift of the
entire supply curve, from SA to SB.
 A Change in Supply Versus
a Change in Quantity Supplied

• When supply shifts

to the right, supply
increases. This
causes quantity
supplied to be
greater than it was
prior to the shift, for
each and every price
level.
 A Change in Supply Versus
a Change in Quantity Supplied

To summarize:
Change in price of a good or service
leads to

Change in quantity supplied

(Movement along the curve).

Change in costs, input prices, technology, or prices of

related goods and services
leads to

Change in supply
(Shift of curve).
 From Individual Supply
to Market Supply
• The supply of a good or service can be
defined for an individual firm, or for a group
of firms that make up a market or an industry.
• Market supply is the sum of all the quantities
of a good or service supplied per period by all
the firms selling in the market for that good
or service.
 The supply curve:
The supply of potatoes (monthly)
Exercise: Based on the table below draw the supply graph to
determine the supply of potatoes
Demand and supply analysis

Shifts in the
supply curve
 Market Equilibrium
• The operation of the market
depends on the interaction
between buyers and sellers.
• An equilibrium is the condition
that exists when quantity supplied
and quantity demanded are equal.
• At equilibrium, there is no
tendency for the market price to
change.
Market Equilibrium
• Only in equilibrium
is quantity supplied
equal to quantity
demanded.
• At any price level
other than P0, the
wishes of buyers
and sellers do not
coincide.
Market Disequilibria
• Excess demand, or
shortage, is the condition
that exists when quantity
demanded exceeds quantity
supplied at the current
price.
• When quantity demanded
exceeds quantity
supplied, price tends to
rise until equilibrium is
restored.
Market Disequilibria
• Excess supply, or surplus, is
the condition that exists
when quantity supplied
exceeds quantity demanded
at the current price.

• When quantity supplied

exceeds quantity
demanded, price tends to
fall until equilibrium is
restored.
Equilibrium price and output:
The Market Demand and Supply of Potatoes (Monthly)
 The determination of market equilibrium
(potatoes: monthly)

E e

Supply
D d
Price (pence per kg)

Cc

b B

a A

Demand

Quantity (tonnes: 000s)

 The determination of market equilibrium
(potatoes: monthly)

E e

Supply
D SURPLUS d
Price (pence per kg)

(330 000)
Cc

b B

a A

Demand

Quantity (tonnes: 000s)

 The determination of market equilibrium
(potatoes: monthly)

E e

Supply
D d
Price (pence per kg)

Cc

b SHORTAGE B
(300 000)
a A

Demand

Quantity (tonnes: 000s)

 The determination of market equilibrium
(potatoes: monthly)

E e

Supply
D d
Price (pence per kg)

b B

a A

Demand

Qe
Quantity (tonnes: 000s)
THANK YOU