Demand and Supply 4

Abu Naser Mohammad Saif

Assistant Professor
Faculty of Business Studies
University of Dhaka
Cell: 01717686005
 Market and Prices
A market is any arrangement that brings
buyers and sellers together.
A market might be a physical place or a
group of buyers and sellers spread
around the world who never meet.
A competitive market is a market that
has many buyers and many sellers, so no
single buyer or seller can influence the
price.
 Demand
Quantity demanded is the amount
of a good, service, or resource that
people are willing and able to buy
during a specified period at a
specified price.
 Law of Demand
Other things remaining the same,
• If the price of the good rises, the
quantity demanded of that good
decreases.
• If the price of the good falls, the
quantity demanded of that good
increases.
 Law of Demand
The law of demand results from
▪ Substitution effect
▪ Income effect
Substitution Effect
When the relative price of a good or service
rises, people seek substitutes for it, so the
quantity demanded of the good or service
decreases.

Income Effect
When the price of a good or service rises
relative to income, people cannot afford all
the things they previously bought, so the
quantity demanded of the good or service
decreases.
A substitute is a good that can be
consumed in place of another good.
For example, apples and oranges are
substitutes.

The demand for a good increases if

the price of one of its substitutes
rises.
The demand for a good decreases if
the price of one of its substitutes falls.
A complement is a good that is
consumed with another good.
For example, ice cream and fudge
sauce are complements.

The demand for a good increases if

the price of one of its complements
falls.
The demand for a good decreases if
the price of one of its complements
rises.
 Expected Future Prices
A rise in the expected future price of a
good increases the current demand for
that good.
A fall in the expected future price of a
good decreases current demand for that
good.
For example, if the price of a computer is
expected to fall next month, the demand
for computers today decreases.
Demand Schedule and Demand
Curve
Demand is the relationship between
the quantity demanded and the price of
a good when all other influences on
buying plans remain the same.
Demand is illustrated by a demand
schedule and a demand curve.
Demand schedule is a list of the
quantities demanded at each different
price when all the other influences on
buying plans remain the same.
Demand curve is a graph of the
relationship between the quantity
demanded of a good and its price
when all other influences on buying
plans remain the same.
 Demand
This figure shows a demand curve for energy bars.
Market Demand versus Individual Demand
▪ The quantity demanded in the market is the sum of the
quantities demanded by all buyers at each price.
▪ Suppose Helen and Ken are the only two buyers in
the Latte market. (Qd = quantity demanded)
Price Helen’s Qd Ken’s Qd Market Qd
$0.00 16 + 8 = 24
1.00 14 + 7 = 21
2.00 12 + 6 = 18
3.00 10 + 5 = 15
4.00 8 + 4 = 12
5.00 6 + 3 = 9
6.00 4 + 2 = 6
 The Market Demand Curve for Lattes

Qd
P P
(Market)
$6.00
$0.00 24
$5.00 1.00 21
$4.00 2.00 18

$3.00
3.00 15
4.00 12
$2.00
5.00 9
$1.00 6.00 6
$0.00 Q
0 5 10 15 20 25
A rise in the price, other things remaining the
same, brings a decrease in the quantity
demanded and a movement up along the
demand curve.

A fall in the price,

other things
remaining the
same, brings an
increase in the
quantity demanded
and a movement
down along the
demand curve.
 A Change in Demand
When some influence on buying plans other
than the price of the good changes, there is a
change in demand for that good.
The quantity of the good that people plan to
buy changes at each and every price, so
there is a new demand curve.
When demand increases, the demand curve
shifts rightward.
When demand decreases, the demand curve
shifts leftward.
Six main factors that change demand
are:
▪ The prices of related goods
▪ Expected future prices
▪ Income
▪ Expected future income and credit
▪ Population
▪ Preferences
 Prices of Related Goods
A substitute is a good that can be used
in place of another good.
A complement is a good that is used in
conjunction with another good.
When the price of substitute for an
energy bar rises or when the price of a
complement of an energy bar falls, the
demand for energy bars increases.
 Expected Future Prices
If the expected future price of a good rises, current
demand for the good increases and the demand
curve shifts rightward.

Income
When income increases, consumers buy more of
most goods and the demand curve shifts rightward.
A normal good is one for which demand increases
as income increases.
An inferior good is a good for which demand
decreases as income increases.
 Expected Future Income and Credit
When expected future income increases or
when credit is easy to obtain, the demand
might increase now.
Population
The larger the population, the greater is the
demand for all goods.
Preferences
People with the same income have different
demands if they have different preferences.
The figure shows an
increase in demand.
Because an energy
bar is a normal good,
an increase in
income increases the
demand for energy
bars.
 Demand Curve Shifters
▪ The demand curve shows how price
affects quantity demanded, other things
being equal.
▪ These “other things” are non-price
determinants of demand (i.e., things
that determine buyers’ demand for a
good, other than the good’s price).
▪ Changes in them shift the D curve…
Demand Curve Shifters: # of Buyers

▪ Increase in number of buyers

increases quantity demanded
at each price, shifts D curve to
the right.
 Demand Curve Shifters: # of Buyers

P Suppose the number

$6.00 of buyers increases.
Then, at each P,
$5.00
Qd will increase
$4.00 (by 5 in this example).
$3.00
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25 30
 Demand Curve Shifters: Income

▪ Demand for a normal good is positively

related to income.
▪ Increase in income causes increase in
quantity demanded at each price,
shifts D curve to the right.
(Demand for an inferior good is
negatively related to income. An
increase in income shifts D curve to the
left.)
Demand Curve Shifters: Prices of
Related Goods
▪ Two goods are substitutes if an increase in the
price of one causes an increase in demand for the
other.
▪ Example: pizza and hamburgers.
An increase in the price of pizza increases demand
for hamburgers, shifting hamburger demand curve
to the right.
▪ Other examples: Coke and Pepsi,
laptops and desktop computers,
CDs and music downloads.
Demand Curve Shifters: Prices of
Related Goods
▪ Two goods are complements if
an increase in the price of one
causes a fall in demand for the other.
▪ Example: computers and software.
If price of computers rises,
people buy fewer computers,
and therefore less software.
Software demand curve shifts left.
▪ Other examples: college tuition and textbooks,
bagels and cream cheese, eggs and bacon
Demand Curve Shifters: Tastes
▪ Anything that causes a shift in tastes toward a
good will increase demand for that good
and shift its D curve to the right.
▪ Example:
The Atkins diet became popular in the ’90s,
caused an increase in demand for eggs,
shifted the egg demand curve to the right.
Demand Curve Shifters: Expectations
▪ Expectations affect consumers’ buying decisions.
▪ Examples:
▪ If people expect their incomes to rise,
their demand for meals at expensive
restaurants may increase now.
▪ If the economy sours and people worry about
their future job security, demand for new autos
may fall now.
Summary: Variables That Influence Buyers
Variable A change in this variable…

Price …causes a movement

along the D curve
# of buyers …shifts the D curve
Income …shifts the D curve
Price of
related goods …shifts the D curve
Tastes …shifts the D curve
Expectations …shifts the D curve
ACTIVE LEARNING 1
Demand Curve
Draw a demand curve for music downloads.
What happens to it in each of
the following scenarios? Why?

A. The price of iPods

falls
B. The price of music
downloads falls
C. The price of CDs falls
ACTIVE LEARNING 1
A. Price of iPods falls
Music downloads
Price of and iPods are
music
down- complements.
loads A fall in price of
iPods shifts the
P1 demand curve for
music downloads
to the right.
D1 D2

Q1 Q2 Quantity of
music downloads
ACTIVE LEARNING 1
B. Price of music downloads falls
Price of
music The D curve
down- does not shift.
loads
Move down along
P1 curve to a point with
lower P, higher Q.
P2

D1

Q1 Q2 Quantity of
music downloads
ACTIVE LEARNING 1
C. Price of CDs falls
Price of CDs and
music music downloads
down- are substitutes.
loads
A fall in price of CDs
P1 shifts demand for
music downloads
to the left.

D2 D1

Q2 Q1 Quantity of
music downloads
Movement Along the
Demand Curve
When the price of the
good changes and
everything else
remains the same, the
quantity demanded
changes and there is a
movement along the
demand curve.
 A Shift of the
Demand Curve
If the price remains
the same but one of
the other influences
on buyers’ plans
changes, demand
changes and the
demand curve shifts.
 Supply
If a firm supplies a good or service, then the firm
1. Has the resources and the technology to produce it,
2. Can make profit from producing it, and
3. Has made a definite plan to produce and sell it.
Resources and technology determine what it is
possible to produce. Supply reflects a decision about
which technologically feasible items to produce.
The quantity supplied of a good or service is the
amount that producers plan to sell during a given time
period at a particular price.
 Supply
The Law of Supply states:
Other things remaining the same, the higher the
price of a good, the greater is the quantity supplied;
and the lower the price of a good, the smaller is the
quantity supplied.
The law of supply results from the general
tendency for the marginal cost of producing a good
or service to increase as the quantity produced
increases.
Producers are willing to supply a good only if they
can at least cover their marginal cost of production.
 Supply
Supply Curve and Supply Schedule
The term supply refers to the entire
relationship between the quantity supplied
and the price of a good.
The supply curve shows the relationship
between the quantity supplied of a good
and its price when all other influences on
producers’ planned sales remain the
same.
The Supply Schedule
▪ Supply schedule: Price Quantity
of of lattes
A table that shows the
lattes supplied
relationship between the
$0.00 0
price of a good and the
1.00 3
quantity supplied.
2.00 6
▪ Example: 3.00 9
Starbucks’ supply of lattes. 4.00 12
5.00 15
▪ Notice that Starbucks’
6.00 18
supply schedule obeys the
law of supply.
Starbucks’ Supply Schedule & Curve
Price Quantity
P of of lattes
$6.00 lattes supplied
$5.00 $0.00 0
1.00 3
$4.00
2.00 6
$3.00 3.00 9
$2.00 4.00 12
5.00 15
$1.00
6.00 18
$0.00 Q
0 5 10 15
Market Supply versus Individual Supply
▪ The quantity supplied in the market is the sum of
the quantities supplied by all sellers at each price.
▪ Suppose Starbucks and Jitters are the only two
sellers in this market. (Qs = quantity supplied)
Price Starbucks Jitters Market Qs
$0.00 0 + 0 = 0
1.00 3 + 2 = 5
2.00 6 + 4 = 10
3.00 9 + 6 = 15
4.00 12 + 8 = 20
5.00 15 + 10 = 25
6.00 18 + 12 = 30
 The Market Supply Curve
QS
P
(Market)
P
$6.00 $0.00 0
1.00 5
$5.00
2.00 10
$4.00 3.00 15
$3.00 4.00 20
$2.00 5.00 25
6.00 30
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
 Supply
A Change in Supply
When some influence on selling plans other than the
price of the good changes, there is a change in
supply of that good.
The quantity of the good that producers plan to sell
changes at each and every price, so there is a new
supply curve.
When supply increases, the supply curve shifts
rightward.
When supply decreases, the supply curve shifts
leftward.
 Supply
Factors that change supply of a good are:
▪ The prices of factors of production
▪ The prices of related goods produced
▪ Expected future prices
▪ The number of suppliers
▪ Technology
▪ State of nature
 Supply
Prices of Factors of Production
If the price of a factor of production used
to produce a good rises, the minimum
price that a supplier is willing to accept for
producing each quantity of that good
rises.
So a rise in the price of a factor of
production decreases supply and shifts
the supply curve leftward.
 Supply
Prices of Related Goods Produced
A substitute in production for a good is another
good that can be produced using the same
resources.
The supply of a good increases if the price of a
substitute in production falls.
Goods are complements in production if they
must be produced together.
The supply of a good increases if the price of a
complement in production rises.
 Supply
Expected Future Prices
If the expected future price of a good rises,
the supply of the good today decreases and
the supply curve shifts leftward.
The Number of Suppliers
The larger the number of suppliers of a
good, the greater is the supply of the good.
An increase in the number of suppliers
shifts the supply curve rightward.
 Supply
Technology
Advances in technology create new products and
lower the cost of producing existing products.
So advances in technology increase supply and
shift the supply curve rightward.
The State of Nature
The state of nature includes all the natural forces
that influence production—for example, the weather.
A natural disaster decreases supply and shifts the
supply curve leftward.
 Supply Curve Shifters
▪ The supply curve shows how price
affects quantity supplied, other things
being equal.
▪ These “other things” are non-price
determinants of supply.
▪ Changes in them shift the S curve…
Supply Curve Shifters: Input Prices

▪ Examples of input prices:

wages, prices of raw materials.
▪ A fall in input prices makes production
more profitable at each output price,
so firms supply a larger quantity at
each price,
and the S curve shifts to the right.
 Supply Curve Shifters: Input Prices

P Suppose the
$6.00 price of milk falls.
At each price,
$5.00
the quantity of
$4.00 lattes supplied
will increase
$3.00
(by 5 in this
$2.00 example).
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
 Supply Curve Shifters: Technology

▪ Technology determines how much

inputs are required to produce a unit of
output.
▪ A cost-saving technological
improvement has the same effect as a
fall in input prices,
shifts S curve to the right.
Supply Curve Shifters: # of Sellers

▪ An increase in the number of

sellers increases the quantity
supplied at each price,
shifts S curve to the right.
Supply Curve Shifters: Expectations
▪ Example:
▪ Events in the Middle East lead to
expectations of higher oil prices.
▪ In response, owners of Texas oilfields
reduce supply now, save some
inventory to sell later at the higher
price.
▪ S curve shifts left.
Summary: Variables that Influence Sellers

Variable A change in this variable…

Price …causes a movement
along the S curve
Input Prices …shifts the S curve
Technology …shifts the S curve
# of Sellers …shifts the S curve
Expectations …shifts the S curve
 Supply

Movement Along the

Supply Curve
When the price of the
good changes and
other influences on
sellers’ plans remain
the same, the quantity
supplied changes and
there is a movement
along the supply
curve.
 Supply
A Shift of the
Supply Curve
If the price remains
the same but some
other influence on
sellers’ plans
changes, supply
changes and the
supply curve shifts.
ACTIVE LEARNING 2
Draw a supply curve for tax
return preparation software.
What happens to it in each
of the following scenarios?
A. Retailers cut the price of
the software.
B. A technological advance
allows the software to be
produced at lower cost.
C. Professional tax return preparers raise the
price of the services they provide.
A. Fall in price of tax return software

Price of
tax return S curve does
S1
software not shift.
P1 Move down
along the curve
P2 to a lower P
and lower Q.

Q2 Q1 Quantity of tax
return software
B. Fall in cost of producing the software

Price of
tax return S curve shifts
S1 S2
software to the right:
at each price,
P1
Q increases.

Q1 Q2 Quantity of tax
return software
C. Professional preparers raise their price

Price of
tax return
S1 This shifts the
software
demand curve for
tax preparation
software, not the
supply curve.

Quantity of tax
return software
 Equilibrium
Equilibrium is a situation in which opposing
forces balance each other. Equilibrium in a
market occurs when the price balances the
plans of buyers and sellers.
The equilibrium price is the price at which
the quantity demanded equals the quantity
supplied.
The equilibrium quantity is the quantity
bought and sold at the equilibrium price.
 Supply and Demand Together

P Equilibrium:
$6.00 D S
P has reached
$5.00 the level where
$4.00 quantity supplied
$3.00
equals
quantity demanded
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
 Equilibrium price:
the price that equates quantity supplied
with quantity demanded
P
$6.00 D S
P QD QS
$5.00 $0 24 0
$4.00 1 21 5

$3.00 2 18 10
3 15 15
$2.00
4 12 20
$1.00
5 9 25
$0.00 Q 6 6 30
0 5 10 15 20 25 30 35
 Equilibrium quantity:
the quantity supplied and quantity demanded
at the equilibrium price
P
$6.00 D S
P QD QS
$5.00 $0 24 0
$4.00 1 21 5

$3.00 2 18 10
3 15 15
$2.00
4 12 20
$1.00
5 9 25
$0.00 Q 6 6 30
0 5 10 15 20 25 30 35