Lecture 2 Demand and Supply

Department of Accountancy
BSc. Applied Accounting Year 1

2022/23 second Semester
LECTURE 2: DEMAND & SUPPLY
LECTURE 2A: THE THEORY OF DEMAND
Demand is the quantity of a good or service that consumers are willing and able to buy at a
given price in a given time period
Each of us has an individual demand for particular goods and services and our demand at
each price reflects the value that we place on a product, linked usually to the enjoyment or
usefulness that we expect from consuming it. Economists give this a term - utility
Demand is said to exist when the following conditions are present:
 when there is a desire to possess the commodity

 When there is the ability to buy the commodity and
 There is willingness to part with the means (money) to buy the good.
Effective Demand: Demand is different to desire! Effective demand is when a desire to buy
a product is backed up by an ability to pay for it.
Latent Demand: Latent demand exists when there is willingness to buy among people for a
good or service, but where consumers lack the purchasing power to be able to afford the
product.
TYPES OF DEMAND
Complementary demand; this refers to the demand for two or more commodities to satisfy
one want eg, car and fuel.
Derived Demand: This refers to the demand for a commodity not for its own sake but for
what it can be used for. eg. Demand for labor.
Substitute Demand/ competitive demand: this refers to the demand for commodities which
are substitutes. Eg Meat and fish, turkey and chicken.
Composite demand; this refers to the demand for the commodity that can be used for
several Purposes. Eg. Flour can be used to make cake, bread, meat pie. Etc.
The Law of Demand
There is an inverse relationship between the price of a good and demand.
1. As prices fall, we see an expansion of demand.

2. If price rises, there will be a contraction of demand.
Ceteris paribus assumption
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TUTOR: Emmanuel Jam Kamara
Many factors affect demand. When drawing a demand curve, economists assume all factors
are held constant except one – the price of the product itself. Ceteris paribus allows us to
isolate the effect of one variable on another variable
Diagrammatic the law is explained as follows:-
Exceptions to the Law of Demand:-
Giffen goods: These are a

special type of inferior goods
(named after the economist
Sir Robert Giffen who made
this proposition popular)
such that a rise in their price
leads to an increase in quantity
demanded for these goods, and vice versa. In the case of Giffen goods the demand curve
slopes upward and the law of demand does not operate. Example: Cheap bread, cheap
vegetables etc.
Conspicuous consumption: A few goods are purchased by rich and wealthy people of the
society because the prices of these goods are so high that they are beyond the reach of the
common man. More of these commodities are demanded when their prices are very high.
Examples are jewelleries, Porsche cars, latest electronics etc.
Future changes in prices- Consumers sometimes act as speculators. When prices are rising
now, some consumers tend to purchase larger quantities of the commodity, out of
apprehension that prices may go up further. Likewise, when prices are expected to fall, a
reduced price may not be a sufficient incentive to induce households to purchase more.
Example- Company shares at a stock exchange market.
Emergencies: In a situation like that of war or a famine or Ebola outbreak, households

(individuals) behave in an abnormal way. Households purchase more of the commodities
even when their prices are going up. Similarly, during depression, no fall in price is a
sufficient inducement for consumers to demand more.
Change in fashion: When the commodity goes out of fashion, no reduction in its price is a
sufficient inducement for a buyer to purchase more of it. Example – Old mobile phone
series like Nokia 320, Baggie Jeans.
Why the Demand Curve Slopes Downward?
Law of Diminishing Marginal Utility: This law states that as the consumption of a
commodity by a consumer increases the satisfaction obtained by the consumer from each
additional unit (marginal utility) of the commodity goes on diminishing. For e.g. a thirsty
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man gets too much satisfaction by drinking the first glass of water, while the second glass
of water will not be as much satisfying to him as the first glass. The satisfaction derived
from the third glass will even be lesser and so on.
Income effect: A fall in the price of a commodity increases the purchasing power (real
income) of the consumer. The money so saved because of a fall in the price of the
commodity can be spent by the consumer in any way he likes. He will spend a part of this
money on buying some more units of the same commodity, whose price has fallen. Thus, a
fall in the price of this commodity increases its demand. This is called income effect.
Substitution effect: When the price of a commodity falls it becomes relatively cheaper than
other commodities whose prices have not fallen. So the consumer substitutes this
commodity for other commodities, which are now relatively expensive. This is known as
substitution effect. The sum of income effect and substitution effect is called price effect.
The demand curve slopes downward, as a fall in the price of a commodity causes more of it
to be demanded and vice versa.
Diverse uses of a commodity: Many commodities can be put to several uses. A commodity
having several uses is said to have a composite demand. For e.g. - electricity can be used
for lighting, cooking and so on. At a higher price, electricity may not be used for all of
these purposes, i.e. the use of electricity may be restricted to lighting only. But if price of
electricity falls, people may afford to use it for other purposes also. Thus the demand of
electricity at a lower price will increase.
Demand and Marginal Utility
Economists use the term utility to describe the amount of usefulness or satisfaction that
someone gets from the use of a product. Marginal Utility-the extra usefulness or satisfaction
a person gets from acquiring or using one more unit of a product-is an important extension of
this concept because it explains so much about demand. Marginal utility can be expressed as
the change in total utility divided by the change in quantity.
The reason we buy something in the first place is because we feel the product is useful and
that it will give us satisfaction. However, as we use more and more of a product , we
encounter the principle of diminishing marginal utility, which states that the extra
satisfaction we get from using additional quantities of the product begins to diminish.
Because of our diminishing satisfaction, we are not willing to pay as much from the second,
third, fourth, and so on, as we did the first. This is why our demand curve is downward-
sloping, and this is why Mary and John won’t want to pay as much for the second CD as they
did for the first. This is something that happens to all of us all the time. For example, when
you buy a cola, why not buy two, or three, or even more? The answer is that you get the most
satisfaction from the first purchase, and so you buy one. You get less satisfaction from the
second purchase and even less from the next-so you simply are not willing to pay as much.
When you reach the point where the marginal utility is less than the price, you stop buying.
The Demand Schedule
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A listing that shows the various quantities demanded of a particular product at all prices that
might prevail in the market at a given time. As you can see below, John would not buy any
CDs at a price of Le 12,000 and Le 10,000, but he would buy one if the price fell to Le 8,000,
and he would buy two if the price were Le 6,000, and so on.
Price in Le Quantity Demanded Comment

5 0 Demand Choke Price
4 200 As price falls quantity rises
The Demand Curve
A demand curve shows the relationship between the price of an item and the quantity
demanded over a period of time. P = a – bx
Therefore, we draw a demand curve that connects all the observed price-quantity
combinations. It is common in economics to plot price on the vertical axis.
Price in Le
1 D
200 400 600 800
Figure X Quantity Demanded
The demand curve for figure X above is given as:
Qd = 800 – 200P
Where Qd = Quantity Demanded
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P = Price
Solving for price as a function of quantity demanded yields the inverse demand curve.
Therefore, Qd = 800 – 200P
200P = 800 – Qd
P = 4 – 0.005Qd (Negatively Slopped)
Hence, P = a – bx
Individual Vs Market Demand Curves
Individual demand is defined as the quantity of a commodity that an individual is willing to

buy at a given price over a given period of time.
The table below shows the demand schedule for RICE by an individual consumer
Price per Quantity demanded per bag

bag ( Le )
70 2
60 5
50 12
40 25
30 45
20 70
10 95
Market demand refers to the total quantity of a commodity that all individuals are willing and
able to purchase at the given price over a given period of time. It is also called aggregate
demand.
Table shows the market demand schedule for two consumers A & B
Price per Quantity Quantity Market demand =

unit(Le) demanded by demanded by A+B
consumer A consumer B
70 2 0 2
60 5 4 9
50 12 10 22
40 25 18 43
30 45 35 80
20 70 45 115
Alternatively, the market demand is the sum total of all individual demands for a particular
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commodity in a market. The table above is deduced into the graphs below:
FACTORS AFFECTING DEMAND
The demand function explains the relationship between the quantity of a commodity and its
determinants in a given market at a given period of time.
The demand function is expressed mathematically as Q=f (P, Pr, Y, T, E, O)
Where ‘Q’ refers to the quantity demanded of the commodity, ‘P’ refers to the price of the
commodity, ‘Pr’ refers to prices of other commodities, ‘Y’ refers to income of the
consumer, ‘T’ refers to tastes and preferences of the consumer, ‘E’ refers to the
expectations of future prices and ‘O’ refers to other factors.
The demand curve is a graphical representation of the quantities that people are willing to
purchase at all possible prices that might prevail in the market. Occasionally, however,
something happens to change people’s willingness and ability to buy. These changes are
usually of two types: a change in quantity demanded, and a change in demand.
Change in Quantity Demanded
Movement along the demand curve which is change in quantity demanded is as a result of a
change in the price of a commodity. We have mentioned earlier in page 3 why the demand
curve slopes downwards and these are the reasons why more is demanded as price falls. We
already know that the principle of diminishing marginal utility provides an intuitive
explanation of why the demand curve is downward sloping. Added to that, diverse uses of a
commodity also explains why the demand curve slopes downwards. As we will see below, the
income and substitution effects as mentioned in page 3 help in explaining the behavior of the
demand curve.
1. The Income Effect: There is an income effect when the price of a good falls because the
consumer can maintain the same consumption for less expenditure. Provided that the good is
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normal, some of the resulting increase in real income is used to buy more of this product
(Refer to page 3).
2. The Substitution Effect: There is a substitution effect when the price of a good falls
because the product is now relatively cheaper than an alternative item and some consumers
switch their spending from the alternative good or service (Refer to page 3).
3. The Law of Diminishing Marginal Utility (Refer to page 3)
4. Diverse Uses of the Commodity (Refer to page 3)
Using the Demand Curve to Illustrate Change in Quantity Demanded
Change in Demand
Sometimes something happens to cause the demand curve itself to shift. This is known as a
change in demand because people are now willing to buy different amounts of the product at
the same prices. As a result, the entire demand curve shifts-to the right to show an increase in
demand or to the left to show a decrease in demand for the product. Therefore, a change in
demand results in an entirely new curve.
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Price Causes: income rises (if the good

is a normal good); price of a
complement goes down
(substitute goes up), people
Income falls; like the good more; or they
or prices or expect it to become more
tastes change valuable
Quantity
The demand curve can change for several reasons. When this happens, a new schedule or
curve must be constructed to reflect the new demand at all possible prices. Demand can
change because changes in income, tastes, the price of related goods, expectations, and the
number of consumers.
1. Consumer Income: Changes in consumer income can cause a change in demand.

When your income goes up, you can afford to buy more goods and services. As
incomes rise, consumers are able to buy more products at each and every price. When
this happens the demand curve shifts to the right. Suppose, for example John and
Mary gets raise, which allows them to buy more CDs. Instead of each buying 3 for a
total of 6, they can now each buy 5-for a total of 10.
Exactly the opposite could happen if there was a decrease in income. If John and
Mary’s raise turned out to be temporary, then the loss in income would cause them to
buy less of the good at each and every price. The demand curve then shifts to the left,
showing a decrease in demand.
2. Consumer Tastes: Consumers do not always want the same things. Advertising,
news reports, fashion trends, the introduction of new products, and even changes in
the season can affect consumer tastes. For example, when a product is successfully
advertised in the media or on the internet, its popularity increases and people tend to
buy more of it. If consumers want more of an item, they would buy more of it at each
and every price. As a result, the demand curve shifts to the right.
On the other hand, if people get tired of a product, they will buy less at each and every
price, causing the demand curve to shift to the left. This is exactly what happened to
the demand for Sony’s PlayStation. The introduction of a new and superior product
took consumers away from Sony, causing the number of units demanded at each and
every possible price to decline.
In addition, the development of new products can have an effect on consumer tastes.
Years ago, many students carried slide rules to school to work out math and science
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problems. Now they use pocket calculators instead of slide rules. The demand for
calculators has increased while the demand for slide rules has decreased.
Sometimes tastes and preferences change by themselves over time. In recent years,
consumer concerns about health have greatly increased the demand for healthier, less-
fattening foods. Demand for smaller, more fuel-efficient cars has grown, driven by a
change in tastes.
3. Prices of other Commodities: Other commodities refers to the following goods:
 Substitutes: A change in the price of related products can cause a change in

demand. Some products are known as substitutes because they can be used in
place of other products. For example, butter and margarine are substitutes. A
rise in the price of butter causes an increase in the demand for margarine.
Likewise, a rise in the price of margarine would cause the demand for butter to
increase. In general, the demand for a product tends to increase if the price of
its substitute goes up. The demand for a product tends to decrease if the price
of its substitute goes down.
 Complements: Other related goods are known as complements, because the

use of one increases the use of the other. Personal computers and software are
two complementary goods. When the price of computers decreases, consumers
buy more computers and more software. In the same way, if the price of
computers spirals upward, consumers would buy fewer computers and less
software. Thus, an increase in the price of one good usually leads to a decrease
in the demand for its complement.
Companies have made use of this relationship for a number of years. For
example, the Gillette Corporation makes razor handles and razor blades. To
generate a high demand for their products, the price of razor handles is kept
low. The profit earned on each razor handle is small, but the razor blades are
sold at very profitable prices. As a result, the company is able to use the
profits on the blades to more than offset the losses on the two products, it is
unlikely that demand for Gillette blades would have been as high if the
handles had been more expensive.
4. Change in Expectations: “Expectations” refers to the way people think about the
future. For example, suppose that a leading maker of audio products announces a
technological breakthrough that would allow more music to be recorded on a smaller
disk at a lower cost than before. Even if the new product might not be available for
another year, some consumers might decide to buy fewer musical CDs today simply
because they want to wait for a better product. Purchasing less at each and every price
would cause demand to decline, which will cause a shift of the demand curve to the
left.
Of course, expectations can also have a very different effect on market demand. For
example, if the weather service forecasts a bad year for crops, people might stock up
on some foods before they actually become scarce. The willingness to buy more at
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each and every price because of expected future shortages would cause demand to
increase, which is demonstrated by a shift of the demand curve to the right.
5. Number of Consumers: A change in income, tastes, and prices of related products

affects individual demand schedules and curves-and hence the market demand curve,
which is the sum of all individual demand curves. It follows, therefore, that an
increase in the number of consumers can cause the market demand curve to shift.
6. Other factors: like composition of population, distribution of income, size of

population also influence consumers demand.
Factor changing demand Effect on demand Direction of shift in

demand curve
Increase in the Increase Rightward
consumer money
Decrease in consumer Decrease Leftward
money income
Increase in tastes Increase Rightward

and preferences for
the commodity
Decrease in the tastes and Decrease Leftward
preferences for the
commodity
The Law of Demand
 As price falls, a person switches away from rival products towards the product
 As price falls, a person's willingness and ability to buy the product increases
 As price falls, a person's opportunity cost of purchasing the product falls
Note: Many demand curves are drawn as straight lines to make the diagrams easier to
interpret.
Note: Nominal Income is your income in actual currency terms unadjusted for what is termed
as inflation. Real income is simply inflation-adjusted income. To exemplify, the nominal
income increased today by 10 percent from last year, the real income remains the same as
that from before if the prevailing inflation rate today is 10 percent.
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Checking for Understanding
 Define demand, microeconomics, demand schedule, demand curve, Law of Demand,

market demand curve, marginal utility, diminishing marginal utility.
 How does income effect affects demand and the demand curve?
 Explain the change in quantity demanded that takes place when the price goes down?
 Describe the relationship between the demand schedule and demand curve.
 Describe how the slope of the demand curve can be explained by the principle of
diminishing marginal utility.
 Describe the difference between a change in quantity demanded and a change in
demand.
 Explain how a change in price affects the demand for a product’s substitute(s).
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LECTURE 2B: THE THEORY OF SUPPLY
SUPPLY
Supply is defined as the total quantity of a commodity that a seller is willing to produce and
sell at a given price over a given period of time.
The supply of a commodity is always in reference to a particular price, time period and to a
particular market.
The Law of Supply

The law of supply states that the quantity supplied of a commodity is directly related to the
price of a commodity, other things remain the same. In other words, a higher price will
increase the sellers profit incentive to supply the commodity and induce him to supply a
greater amount, ceteris paribus.
The Law of
supply exist
because
of the stated
reasons :
 Law of
Diminishing Marginal Productivity (Production and Cost): As production increase

gradually, beyond a certain limit, the additional return to the variable factor
diminishes. Both marginal and average cost of production increases as a result. This
implies that more quantity of the commodity can only be produced and supplied at a
higher price so as to reduce the production cost. When output expands, a firm's
production costs tend to rise, therefore a higher price is needed to cover these extra
costs of production. This may be due to the effects of diminishing returns as more
factor inputs are added to production.
 Profit maximization (Profit Motive): Suppliers supply a commodity to maximise profits.

Therefore an increase in the price of a commodity raises the level of profit when
production cost remains constant. Hence, suppliers increase the quantity supply of
the commodity.
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 New entrants coming into the market: Higher prices may create an incentive for other
businesses to enter the market leading to an increase in total supply.
Market supply
Exceptions to the Law of Supply
Non Maximization of profits: Sometimes, the goal of firm is not to maximize the profits,
but to maximize the sales. In that case, the quantity supplied may increase even when price
does not rise. This usually happens when firm is interested in the maximization of long term
profits.
Subsistence farming: In underdeveloped countries , where agricultural farms are in

subsistence rather than commercial , as prices of food grains rise , marketable surplus of
food grains fall rather than rising, resulting in backward sloping supply curve. With rise in
the prices of food grains, farmer can get the required amount of income by selling less and
keeping the balance for their own consumption than before.
Factors other than price not remain constant: The law of supply is stated on the
assumption that factors other than price of the commodity remain constant. The quantity
supplied of a commodity may fall at a given price, if prices of other commodities show a
rising trend. The change in a state of technology can also bring about a change in the
quantity supplied even if the price of that commodity does not undergo a change. Similarly,
expectations of rise in the price in the future may induce the sellers to withhold supplies so
as to get greater profits later on.
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The Supply Schedule
A listing that shows the various quantities of a particular product supplied at all possible
prices in the market. The table below shows the quantities of a commodity Y that would be
supplied at various prices, other things being equal.
Price in Le Quantity Comment

Supplied
6 6 Quantity Supplied falls as price decreases
1 0 Supply Choke Price – Suppliers find it unprofitable to sell any
of commodity Y so they are unwilling to supply any at Le1.
The Supply Curve
The supply curve shows the amount of good or service suppliers will be willing and able to
sell at a particular time at a particular price, ceteris Paribus. The supply curve is upward
sloping because, all else being equal, as the price of a good rises, people are willing to sell a
greater quantity of the good.
Just as with demand, we connect the observed price-quantity combinations using a supply
curve.
P = a + bx
Price in Le
200 400 600 800 1,000
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Figure Y Quantity Supplied
As the price increases beyond Le1, suppliers will provide more and more of commodity Y to
the market.
The supply curve for figure Y is mathematically given as:
Qs = 200P – 1,000
Where; Qs = Quantity Supplied
P = Price
The inverse supply curve is given as:
Qs = 200P – 1,000
Qs + 1,000 = 200P
P = 5 + 0.005Qs (Positively Slopped)
P = a + bx
CHANGE IN QUANTITY SUPPLIED
The own price of the commodity supplied: There is the direct and positive relationship
between the price per unit of the commodity and the quantity supplied, ceteris paribus.
This is the change in the amount offered for sale in response to a change in price. For
example, 400 units of commodity Y are supplied when the price is Le3. If the price increases
to Le 4, the supplier will supply 600 units. If the price changes to Le6, the supplier will
supply 1,000 units.
These changes illustrate a change in the quantity supplied which- like the case of demand –
shows a movement along the supply curve.
Note: The change in quantity supplied can be an increase (expansion) or a decrease

(contraction), depending on whether more or less of a product is offered when the price goes
up or down as seen on the diagrams below.
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An Expansion of Supply A Contraction of Supply
In a competitive economy, producers usually react to changing prices in just this way. While
the interaction of supply and demand usually determines the final price for the product, the
producer has the freedom to adjust production. Take oil as an example. If the price of oil
falls, the producer may offer less for sale, or even leave the market altogether if the price
goes too low. If the price rises, the oil producer may offer more units for sale to take
advantage of the better prices. This will be discussed further in market equilibrium.
CHANGE IN SUPPLY
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Sometimes something happens to cause a change in supply, a situation where suppliers offer
different amounts of products for sale at all possible prices in the market.
When both old and new quantities supplied are plotted in the form of a graph, a right ward
shift indicates an increase in supply which means more would be supplied for sale at each
and every price. For a decrease in supply to occur, less would be offered for sale at each and
every price, and the supply curve would shift to the left.
Causes: increase in cost of inputs; inefficiency;

Price taxes; reduction in the number S
of sellers and so on
Causes: decrease in cost of inputs; increase in

efficiency; subsidies; technological
innovation and so on
Quantity
Changes in supply, whether increases or decreases, can occur for several reasons. As you
read, keep in mind that all but the last reason – the number of sellers – affects both the
individual and the market supply curves.
1. Objective of the Seller: The seller may be guided by the objective of either sales
maximization or the profit maximization. If the seller is guided by the sales
maximization objective then he will be able to sell a larger quantity compared to a
seller guided by the profit maximization objective.
2. The price of the other commodities: Suppose that the seller produces two
commodities – x and y. if the price of the good x rises and the price of the good y
remains the same, the seller would prefer to direct the resources from the production
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of good y and utilize them in the production of good x. the production and supply of
good y will decrease without there being a change in its price. The given example
holds true only when x and y are substitutes in the production.
3. Cost of Inputs (Price of the Factor of Production): A change in the cost of inputs
can cause a change in the supply. Supply might increase because of a decrease in the
cost of inputs, such as labour or packaging. If the price of the inputs (say labour and
capital used in the production of the commodity) drops, producers are willing to
produce more of a product at each and every price, thereby shifting the supply curve
to the right. An increase in the cost of inputs has the opposite effect that is, if labour
or other costs rise, producers would not be willing to produce as many units at each
and every price. Instead would offer fewer products for sale, and the supply curve
would shift to the left.
Therefore, only when prices rise and cover the increased cost of factor of production
that quantity supplied shall increase.
4. Productivity: When management motivates its workers, or if workers decide to work

more efficiently, productivity should increase. The result is that more CDs are
produced at every price, which shifts the supply curve to the right. On the other hand,
if workers are unmotivated, untrained, or unhappy, productivity could decrease. The
supply curve shifts to the left because fewer goods are brought to the market at every
possible price.
5. Technology (State of the Technology): New technology tends to shift the supply
curve to the right. The introduction of a new machine, chemical, or industrial process
can affect supply by lowering the cost of production or by increasing productivity. For
example, improvements in the fuel efficiency of aircraft engines have lowered the
cost of providing passenger air service. When production costs go down, the producer
is usually able to produce more goods and services at each and every price in the
market.
New technologies do not always work as expected, of course. Equipment can break
down, or the technology – or even replacement parts – might be difficult to obtain.
This would shift the supply curve to the left. These examples are exceptions, however.
New technology far more often increases supply. Therefore, the ratio in which the
factors are combined reflects the “technology” used in the production. An
improvement in the state of the technology would result in more quantity being
produced at the same cost or the same quantity being produced at a lower cost. In
both the cases the seller shall be able to increase the quantity supplied at its original
price or even at the lower price.
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6. Government Policy: The government policy with respect to the certain commodities
in specified quantities, levy of the excise duty on some commodities, subsidy policy
etc. all influence the supply of that particular commodity on which that policy is
applicable. For example, when the government imposes an excise duty on the good its
cost will increase and it may be passed on to consumers in terms of higher prices or
less quantity may be supplied at the old price. Also for taxes and subsidies:
Taxes and Subsidies – Firms view taxes as costs. If the producer’s inventory is taxed
or if fees are paid to receive a license to produce, the cost of production goes up. This
causes the supply curve to shift to the left. Or, if taxes go down, supply then increases
and the supply curve shifts to the right. A subsidy is a government payment to an
individual, business, or other group to encourage or protect a certain type of economic
activity. Subsidies lower the cost of production, encouraging current producers to
remain in the market and new producers to enter. When subsidies are replaced, costs
go up, producers leave the market, and the supply curve shifts to the left.
Historically, many farmers in the milk, corn, wheat, and soybean industries received
substantial subsidies to support their income. While many farmers would have gone
out of business without these subsidies, the fact that they were paid ensured their
ability to remain operational and the market supply curve shifted to the right.
7. Expectations: Expectations about the future price of a product can also affect the
supply curve. If producers think the price of their product will go up, they may
withhold some of the supply. This causes supply to decrease and the supply curve to
shift to the left. On the other hand, producers may expect lower prices for their output
in the future. In this situation, they may try to produce and sell as much as possible
right away, causing the supply curve to shift to the right.
8. Government Regulations: When the government establishes new regulations, the

cost of production can be affected, causing a change in supply. For example, when the
government mandates new auto safety features such as air bags or emission controls,
cars cost more to produce. Producers adjust to the higher production costs by
producing fewer cars at each and every price in the market.
In general, increased – or tighter – government regulations restrict supply, causing the

supply curve to shift to the left. Relaxed regulations allow producers to lower the cost
of production, which results in a shift of the supply curve to the right.
9. Number of Sellers (Nature and Size of the Industry): All of the factors you just read
about can cause a change in an individual firm’s supply curve and, consequently, the
market supply curve. It follows, therefore, that a change in the number of suppliers
causes the market supply curve to shift to the right or left.
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As more firms enter an industry, the supply curve shifts to the right. In other words,
the larger the number of suppliers, the greater the market supply. If some suppliers
leave the market, fewer products are offered for sale at all possible prices. This causes
supply to decrease, shifting the curve to the left. Therefore, attracted by the profits
earned by existing firms, if new firms enter the industry and start production, supply
will increase. Generally the greater the number of sellers the better shall be the
supply position.
In the real world, sellers are entering the market and leaving the market all the time.
Some economic analysts believe that, at least initially, the development of the internet
will result in larger numbers entering the market than in leaving. They point out that
almost anyone with internet experience and a few thousand dollars can open up his or
her own internet store. Because of the ease of entry into these new markets, being a
seller is no longer just for the big firms.
Checking for Understanding
 What is the difference between the supply schedule and the supply curve?
 Explain how market supply curves are derived.
 Specify the reasons for a change in supply.
 Define the terms; supply, Law of supply, supply schedule, supply curve, market
supply curve, quantity supplied, change in quantity supplied, change in supply,
subsidy, supply elasticity
PRACTICE QUESTION
1. The following table shows a demand schedule for a normal good.
Price in Le Quantity
Demanded
5,000 10
4,000 13
3,000 16
2,000 19
a. Do you think that the increase in quantity demanded (say, from 13 to 19 in the table)
when price decreases (from Le4,000 to Le2,000) is due to a rise in consumers’ income?
Explain clearly (and briefly) why or why not.
b. Now suppose that the good is an inferior good. Would the demand schedule still be valid
for an inferior good?
Page 20 of 21
c. Lastly, assume you do not know whether the good is normal or inferior. Devise an
experiment that would allow you to determine which one it was. Explain.
NOTE: More questions on demand and supply will be treated upon completion of market
equilibrium on a subsequent lecture!
Page 21 of 21

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Department of Accountancy

BSc. Applied Accounting Year 1

LECTURE 2A: THE THEORY OF DEMAND

Demand is said to exist when the following conditions are present:

 when there is a desire to possess the commodity

The Law of Demand

There is an inverse relationship between the price of a good and demand.

1. As prices fall, we see an expansion of demand.

Ceteris paribus assumption

Diagrammatic the law is explained as follows:-

Exceptions to the Law of Demand:-

Giffen goods: These are a

Emergencies: In a situation like that of war or a famine or Ebola outbreak, households

Why the Demand Curve Slopes Downward?

Demand and Marginal Utility

The Demand Schedule

Price in Le Quantity Demanded Comment

The Demand Curve

200 400 600 800

Figure X Quantity Demanded

The demand curve for figure X above is given as:

Where Qd = Quantity Demanded

Therefore, Qd = 800 – 200P

P = 4 – 0.005Qd (Negatively Slopped)

Individual Vs Market Demand Curves

Individual demand is defined as the quantity of a commodity that an individual is willing to

Price per Quantity demanded per bag

Price per Quantity Quantity Market demand =

FACTORS AFFECTING DEMAND

The demand function is expressed mathematically as Q=f (P, Pr, Y, T, E, O)

Change in Quantity Demanded

3. The Law of Diminishing Marginal Utility (Refer to page 3)

4. Diverse Uses of the Commodity (Refer to page 3)

Using the Demand Curve to Illustrate Change in Quantity Demanded

Price Causes: income rises (if the good

1. Consumer Income: Changes in consumer income can cause a change in demand.

3. Prices of other Commodities: Other commodities refers to the following goods:

 Substitutes: A change in the price of related products can cause a change in

 Complements: Other related goods are known as complements, because the

5. Number of Consumers: A change in income, tastes, and prices of related products

6. Other factors: like composition of population, distribution of income, size of

Factor changing demand Effect on demand Direction of shift in

Increase in tastes Increase Rightward

The Law of Demand

Checking for Understanding

 Define demand, microeconomics, demand schedule, demand curve, Law of Demand,

LECTURE 2B: THE THEORY OF SUPPLY

The Law of Supply

Diminishing Marginal Productivity (Production and Cost): As production increase

 Profit maximization (Profit Motive): Suppliers supply a commodity to maximise profits.

Exceptions to the Law of Supply

Subsistence farming: In underdeveloped countries , where agricultural farms are in

The Supply Schedule

Price in Le Quantity Comment

The Supply Curve

200 400 600 800 1,000

The supply curve for figure Y is mathematically given as: