Chapter Two

Demand and Supply Analysis

 2.1 Theory of Demand
• Demand Defined
• Demand Schedule
• Law of Demand
– Diminishing Marginal Utility
– Income Effect
– Substitution Effect
• Demand Curve
– Individual Demand
– Market Demand
• Determinants of Demand
 Definition
• The desire to buy goods and services with the ability
to pay;

Law of demand
• Other things remaining the same, if the price of a good
rises, the quantity demanded of that good decreases;
and if the price of a good falls, the quantity demanded
of that good increases.
• P ↑ Qd ↓ vice versa.
• Negative relationship between P and Qd.
Individual Demand
• Demand of one consumer.
• Individual demand curve is demand curve of a person.

Market Demand
• Demand made by all consumers or the sum of the
demands of all the buyers in a market.
• Market demand curve is demand curve of all
consumers in the market.
• Market demand curve (total demand) is found by
summing horizontally the individual demand curves
of all consumers in the market.
 Individual Demand

P
6

Individual
5
Demand

Price (per bushel)

P Qd 4
$5 10
3
4 20

3 35 2

2 55 1
D
1 80
0 Q
10 20 30 40 50 60 70 80
Quantity Demanded (bushels per week)
 Determinants of Demand
(Factors Influencing Demand)

i) Income

ii) Tastes and preferences

iii) Prices of related goods

- Substitute goods (a good that can be consumed in place of
another good)
- Complementary goods (a good that is consumed with another good)

iv) Consumer Expectations of future price, Incomes and Availability of

Output

v) Number of buyers - Size and structure of the population

vi) Government policies

• Others (weather and seasonal factors)
Demand Can Increase or Decrease

P
6

Individual
5
Demand

Price (per bushel)

P Qd Increase in Demand
4
$5 10
3
4 20

3 35 2
D2

2 55 1
Decrease in Demand D1
D3
1 80
0
2 4 6 8 10 12 14 16 18 Q
Quantity Demanded (bushels per week)
Demand Can Increase or Decrease
An Increase in Demand
P Means a Movement
6

Individual of the Line

5 A Movement Between
Demand

Price (per bushel)

Any Two Points on a
P Qd 4 Demand Curve is
$5 10 Called a Change in
3
Quantity
4 20 Demanded

3 35 2
D2

2 55 1
Decrease in Demand D1
D3
1 80
0
2 4 6 8 10 12 14 16 18 Q
Quantity Demanded (bushels per week)
 2.2 Theory of Supply
• Supply Defined

• Supply Schedule

• Law of Supply
– Revenue Implications
– Marginal Cost

• Supply Curve

• Market Supply
Definition
• the amount of particular good that producers willing and
plan to sell in a given period of time at particular price .

Law of Supply
• Other things remaining the same, if the price of a good
rises, the quantity supplied of that good increases; and if
the price of a good falls, the quantity supplied of that
good decreases.

• In other words the higher the price of a good, the greater

is the quantity supplied for that good and the lower the
price, the lower the quantity supplied, ceteris paribus.

• P  Qs  ; vice versa.

• Positive relationship between P and Qs.

Individual Supply
• Supply of one seller.
• Individual supply curve is supply curve of a seller.

Market Supply
• Supply made by all sellers.
• Or the sum of the supply of all the sellers in a market.
• Market supply curve is supply curve of all sellers in the
market.
• Market supply curve (total supply) is found by summing
horizontally the individual supply curves of all sellers in
the market
 Individual Supply

P
6

Individual S1
5
Supply

Price (per bushel)

P Qs 4
$5 60
3
4 50

3 35 2

2 20 1

1 5
0
10 20 30 40 50 60 70 Q
Quantity Supplied (bushels per week)
 Determinants of supply
(Factors that influence supply)

i) Number of Sellers
ii) Technology
iii) Resource Price
iv) Expectations of Producers
v) Prices of Other Goods the Firm could produce
vi) Government policies
- Taxes
- Subsidies
Supply Can Increase or Decrease
P
6
S3
Individual S1
5
Supply S2

Price (per bushel)

P Qs 4
$5 60
3
4 50

3 35 2

2 20 1

1 5
0
2 4 6 8 10 12 14 Q
Quantity Supplied (bushels per week)
Supply Can Increase or Decrease

P A Movement Between
6
Any Two Points on a S3
Individual Supply Curve is Called S1
5 a Change in Quantity
Supply S2

Price (per bushel)

Supplied
P Qs 4
$5 60
3
4 50

3 35 2

An Increase in Supply
2 20 1
Means a Movement
1 5 of the Line
0
2 4 6 8 10 12 14 Q
Quantity Supplied (bushels per week)
 Change in quantity supplied and
change in supply

Changes in quantity supplied

P
E S
D

0 Qs
• cause of change is due to change in price of good itself
• Involve movement from one point to another along the
supply curve.
• Increase in price; D → E; extension
• Decrease in price; D → F; contraction
Changes in supply
P
SS1 SS0 SS2

0 Qs
• cause of change is due to NON-PRICE factors.
• shift in the supply curve; to the right or left.
leftward shift (ss0 to ss1) → decrease in supply; and
rightward shift (ss0 to ss2)→ increase in supply
End of Chapter Two