Concepts of Supply and Demand

• Supply and demand are the two words that

economists use most often.
• Supply and demand are the forces that make
market economies work.
• Modern microeconomics is about supply,
demand, and market equilibrium.
A market is a group of buyers and sellers of a
particular good or service.
The terms supply and demand refer to the behavior
of people . . . as they interact with one another in
markets.
 Demand Analysis

Demand can be referred as the number of units

of a product that the consumer are willing and
able to buy at given price.
 Determinant of Demand
• Price of the Product
• Income of the consumer
• Taste and Preference of the consumer
• Price of other products
• Size of the Population
• Consumers' future expectation
• Climatic Condition
• Government Policies
 DEMAND

Demand Schedule and Demand Curve

The demand schedule is a table that shows the
relationship between the price of the good and
the quantity demanded.
Catherine’s Demand Schedule
• Demand Curve
The demand curve is a graph of the relationship
between the price of a good and the quantity
demanded
Figure 1 Catherine’s Demand Schedule and
Demand Curve
Price of
Ice-Cream Cone
$3.00

2.50

1. A decrease
2.00
in price ...

1.50

1.00

0.50

0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
Market Demand versus Individual Demand

• Market demand refers to the sum of all

individual demands for a particular good or
service.
• Graphically, individual demand curves are
summed horizontally to obtain the market
demand curve.
 The Market Demand Curve
When the price is $2.00, When the price is $2.00, The market demand at $2.00
Catherine will demand 4 ice- Nicholas will demand 3 ice- will be 7 ice-cream cones.
cream cones. cream cones.

Catherine’s Demand + Nicholas’s Demand = Market Demand

Price of Ice- Price of Ice- Price of Ice-
Cream Cone Cream Cone Cream Cone

2.00 2.00 2.00

1.00 1.00 1.00

3 5 7 13
4 8
Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones

When the price is $1.00, When the price is $1.00, The market demand at
Catherine will demand 8 ice-Nicholas will demand 5 ice- $1.00, will be 13 ice-cream
cream cones. cream cones. cones.
 Movement along the Demand Curve

• Change in Quantity Demanded

Movement along the demand curve.

Caused by a change in the price of the
product.
 Changes in Quantity Demanded
A tax on sellers of ice-
Price of Ice-
Cream cream cones raises the
Cones
price of ice-cream cones
B and results in a
$2.00
movement along the
demand curve.

1.00 A

D
0 4 8 Quantity of Ice-Cream Cones
• Change in Demand

A shift in the demand curve, either to the left or

right.
Caused by any change that alters the quantity
demanded at every price.
 Shifts in the Demand Curve
Price of
Ice-Cream
Cone

Increase
in demand

Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0 Quantity of
Ice-Cream Cones
 Factors affecting shift in Demand Curve

Consumer Income
As income increases the demand for a normal
good will increase.
As income increases the demand for an
inferior good will decrease.
 Consumer Income Normal Good
Price of Ice-
Cream Cone
$3.00 An increase in
2.50 income...
Increase
2.00 in demand

1.50

1.00

0.50
D2
D1 Quantity of
Ice-Cream
0 1 2 3 4 5 6 7 8 9 10 11 12 Cones
Consumer Income Inferior Good
Price of Ice-Cream
Cone
$3.00

2.50 An increase in
2.00
income...
Decrease
1.50 in demand
1.00

0.50

D2 D1 Quantity of
Ice-Cream
0 1 2 3 4 5 6 7 8 9 10 11 12 Cones
Prices of Related Goods
When a fall in the price of one good reduces the demand
for another good, the two goods are called substitutes.
When a fall in the price of one good increases the
demand for another good, the two goods are called
complements.

Exceptions of Law of Demand

a. Giffen Goods
b. Future Income
c. Future Prices
Table 1 Variables That Influence Buyers
 MARKET DEMAND FUNCTION
The market demand function for a product is a statement of the
relation between the aggregate quantity demanded and all factors
that affect this quantity. In functional form, a demand function may
be expressed as
Quantity of product X demanded = Qx = f (Price of X,Prices of
Related Good, Expectations of Price Changes, Consumer Incomes,
Tastes and Preferences, Advertising Expenditures, and so on)

To illustrate what is involved, assume that the demand function for

the automobile industry is
Q = a P + a PI + a I + a Pop + a i + a A
1 2 3 4 5 6

This equation states that the number of new domestic automobiles demanded during a given year (in
millions), Q, is a linear function of the average price of new domestic cars (in $), P; the average price
for new import cars (in $), PI; disposable income per household (in $), I; population (in millions), Pop;
average interest rate on car loans (in percent), i; and industry advertising expenditures (in $ millions),
A. The terms a1, a2, . . ., a6 are called the parameters of the demand function.
Q = –500P + 210PI + 200I + 20,000Pop – 1,000,000i + 600A
 Law of Demand

The law of demand states that, other things

remaining the same, the quantity demanded of
a good falls when the price of the good rises or
vice-versa.
 Law of Demand

Assumptions of Law of Demand

• There should be no change in the income of the consumer

• There should be no change in the price of the related
goods
• There should be no change in the Taste and preference of
the consumer
• There should be no change in the government policy
• There should be no change in the consumer’s expectations
about prices
 Why Law of Demand Works

• Income Effect
• Substitution Effect
• Diminishing Marginal Utility
 Exceptions of Law of Demand
• Future Prices
• Prestigious goods
• Giffen Goods