NEDUET
DEMAND & SUPPLY
Instructor: Kamal Hayder
1
Basic Concepts
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Demand?
Quantity Demand? (by other
factors)
Change in Quantity
Demand? (by own price)
Movement along the Curve
Movement across the Curve
Change in Demand ?
Supply?
Quantity Supply?
Change in Quantity Supply?
Change in Supply?
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Demand?


Demand
is
an
economic
principle
referring
to
a
consumer's desire to purchase
goods
and
services
and
willingness to pay a price for a
specific good or service.
For example: you desire to have
a bike, but you don’t have
enough money to buy it. The
desire become demand only
when you are ready to spend
money to buy bike.
3
Demand by Economists?

Demand refers to the
quantities of commodity that
the consumers are able to
buy at each possible price
during a given period of time,
other things being equal .
(By: Ferguson)
 Demand is the ability and
willingness to buy specific
quantity of a good at
alternative prices in a given
time period, ceteris paribus.
(by: B.R.Schiller)
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Features of Demand



Desire and demand: demand is
the amount of commodity for which
consumer has willingness and
ability to buy.
Demand and price: demand is
always at a price. Unless price is
stated, the commodity has no
meaning. The consumer must
know both the price and the
commodity.
Utility: demand depend upon
utility of the commodity. A
consumer is rational and demands
only those commodities which
provide utility.
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Purpose of Demand Study
a) Demand Forecasting:
Forecasting of demand is the
art of predicting demand for a
product or a service at some
future date on the basis of
certain present and past
behavior pattern of some
related events.
b) Production planning: demand
analysis is prerequisite for the
production planning of a
business firm.
c) Sales forecasting: sales
forecasting is based on the
demand analysis.
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Purpose of Demand Study
d) Control of Business: It is
essential for controlling the
business, to have a well
conceived budgeting of costs
and profits that is based on
the estimation of yearly
demand/sales and prices.
Furthermore purposes may be:
i: inventory control
ii: Growth and long term
investment decisions
iii: economic planning and
policy making for planners or
engineers
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Factors affecting Demand

Price of related goods: Demand
for a commodity is also influenced
by change in price of related goods.
For example: substitute goods,
complementary goods.

Size of population: demand rises
with the rise in population and vice
versa.

Price of the commodity: The law
of states that other things remain
constant the demand of the
commodity is inversely related to its
price. It implies that the when price
of commodity increases the fall of
demand of commodity and vice
versa.
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Factors affecting Demand

Expectations: if the consumer
expect that price in future will
increase, he/she will purchase
more quantity in present, at
existing price. Likewise, if he/she
hopes that price in future will
decline, he/she will purchase less
quantity in present, or may even
postpone his/her demand.

Consumer’s Income: the ability
to purchase a commodity depends
upon the consumer’s income.
When the income increases so the
consumer would purchase more
and when vice versa.
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Factors affecting Demand


Taste & Preference: it includes
fashion, customs etc, it can be
influenced through advertisements
change in fashion new inventions etc.
other things being equal, demand for
those goods rises for which consumer
develop tastes and preferences.
Furthermore, if he/she has no taste or
preference for a product, its demand
would fall.
Income distribution: If income is
equally distributed there will be more
demand and vice versa. Moreover, in
the situation of unequal distribution
most will not have enough money to
buy things.
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Law of Demand
An economic law stating that as
the price of a good or service
increases,
the
quantity
demanded decreases but other
factors
remain
constant
(ceteris paribus). In other
words, there is an inverse
relationship between quantity
demanded of a commodity and
its price. The word ceteris
paribus
implies
that
consumer’s income, taste &
preferences, price of related
goods remains constant.
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Law of Demand: Assumptions
1.
2.
3.
4.
There is no change in
the consumer’s income
Don’t change price of
related goods.
Taste & preferences of
consumers
remain
constant
In
near
future,
consumers don’t expect
any change in the price
of commodity
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Increase in Demand
13
Decrease in Demand
14
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Example
Price (per gallon)
Quantity
Demanded
(millions of
gallons)
$1.00
800
$1.20
700
$1.40
600
$1.60
550
$1.80
500
$2.00
460
$2.20
420
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Supply?
Supply is a fundamental
economic concept that
describes the total amount
of a specific good or
service that is available to
consumers.
For example, a company A
will make more software
systems if the price of
those systems increases.
The opposite is true if the
price
of
systems
decreases.
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Supply by Economists?

Supply refers to the amounts of
a goods that producers in a
given market desire to sell,
during a given time period at
various prices, ceteris paribus.
(By: Samuelson)
The Supply of goods is the
quantity offered for sale in a
given market at a given time at
various prices.
(By: Thomas)

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Aspects of Supply

Supply is desired
quantity.
 Supply is always
showed with
reference to
price.
 Time duration
which it is offered
for sale.
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Factors affecting Supply


Price of commodity: there is a direct relationship
between price of commodity and its quantity supplied
when price increases supply also increases because its
motivate the firm to supply more in order to get more
profit and vice versa.
Price of related goods: producers always have the
tendency of shifting from the production of one
commodity to another commodity. If the prices of another
commodity increases specially substitute goods
producers will find it more profitable to produce that
commodity by reducing the production of the exiting
commodity.
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Factors affecting Supply

E.g: let suppose the seller of tea
notice that the price of coffee
increases. They may reduce the
amount of resources devoted to
the selling of tea in favour of
coffee.

Number of firms: Market supply
of a commodity depends upon
number of firms in the market.
Increase in the number of firms
implies increase in the market
supply, and decrease in the
number of firms implies decrease
in the market supply of a
commodity.
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Factors affecting Supply

Goal of the firm: If goal of the firm is to
maximize profits, more quantity of the
commodity will be offered at a higher
price. Furthermore, if goal of the firm is
to maximize sale more will be supplied
even at the same price.

Price of factor of Production: Supply
of a commodity is also affected by the
price of factors used for the production
of commodity. If the factor price
decreases, cost of production also
reduces. Accordingly, more of the
commodity is supplied at its existing
price. Conversely, if the factor price
increases cost of production also
increases. In such situation less of the
commodity is supplied at its existing
price.
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Factors affecting Supply

Change in technology: It also
affects
supply
of
commodity.
Improvement in the technique of
production reduce the cost of
production. consequently, more of
the commodity is supplied at its
existing price.
e.g….PC -------laptop-----mobile

Expected future price: if the
producer expects price of the
commodity to rise in the near future,
current supply of the commodity will
reduce. On the other hand, if fall in
the price is expected, current supply
will increase.
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Factors affecting Supply

Government
policy:
The government policies
also affect the market
supply of the commodity
(e.g:
taxation
and
subsidy). Increase in
taxation tends to reduce
supply.
Furthermore,
subsidies
tend
to
increase supply of the
commodity.
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Law of Supply
An economic law
stating that as the
price of a good or
service increases,
the quantity supplied
increases but other
factors remain
constant (ceteris
paribus) and vice
versa. There is a
direct relationship
between price and
supply .
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Law of Supply: Assumptions
1.
2.
3.
4.
5.
There is no change in the
technique of production.
There is no change in the
goal of firm.
There is no change in the
prices of related goods.
There is no change in the
prices of the factors of
production.
Producers don’t expect
change in the price of the
commodity in the near
future.
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Increase in Supply
27
Decrease in Supply
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Example
Price (per gallon)
Quantity Supplied
(millions of
gallons)
$1.00
500
$1.20
550
$1.40
600
$1.60
640
$1.80
680
$2.00
700
$2.20
720
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EQUILIBRIUM OF DEMAND & SUPPLY
 Where
the
quantity
demanded
and quantity
supplied are
equal.
 Qd = Qs
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Effect of shift in Supply or Demand on Equilibrium
1. Surplus
A Surplus in the Market for Coffee"
shows the same demand and supply
curves we have just examined, but
this time the initial price is $8 per
pound of coffee. At a price of $8, we
read over to the demand curve to
determine the quantity of coffee
consumers will be willing to buy—15
million pounds per month. The supply
curve tells us what sellers will offer for
sale—35 million pounds per month.
The difference, 20 million pounds of
coffee per month, is called a surplus.
More generally, a surplus is the
amount by which the quantity
supplied exceeds the quantity
demanded at the current price.
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Effect of shift in Supply or Demand on Equilibrium
2. Shortages
A shortage is the amount
by which the quantity
demanded exceeds the
quantity supplied at the
current price. "A Shortage
in the Market for Coffee"
shows a shortage in the
market for coffee. Suppose
the price is $4 per pound.
At that price, 15 million
pounds of coffee would be
supplied per month, and
35 million pounds would
be demanded per month.
When more coffee is
demanded than supplied,
there is a shortage.
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Equilibrium by Algebra?
We can also identify the equilibrium with a little
algebra if we have equations for the supply and
demand curves. Let’s practice solving a few
equations. Suppose that the demand for X is given
by the following equation:
Qd=16–2P
where Qd is the amount of X that consumers want
to buy (i.e., quantity demanded), and P is the price
of X. Suppose the supply of X is
Qs=2+5P
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where Qs is the amount of X that producers will
supply (i.e., quantity supplied). (Remember, these
are simple equations for lines). Finally, recall that
the X market converges to the point where supply
equals demand, or
Qd=Qs
We now have a system of three equations and
three unknowns (Qd, Qs, and P), which we can
solve with algebra. Since
Qd=Qs
we can set the demand and supply equations
equal to each other:
Qd=Qs
16−2P=2+5P
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16−2P=2+5P
16-2=5P+2P
14=7P
2=P or P = 2 units
The equilibrium price of X, that is, the price
where
Qs = Qd will be $2.
Now we want to determine the
quantity amount of X.
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We can do this by plugging the equilibrium price
into either the equation showing the demand for
X or the equation showing the supply of X. Let’s
use demand. Remember, the formula for quantity
demanded is the following:
Qd=16−2P
 Taking the price of $2, and plugging it into the
demand equation, we get
Qd=16–2(2)
Qd=16–4
Qd=12
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So, if the price is $2 each, consumers will purchase 12.
How much will producers supply, or what is the quantity
supplied? Taking the price of $2, and plugging it into the
equation for quantity supplied, we get the following:
Qs=2+5P
Qs=2+5(2)
Qs=2+10
Qs=12
Now, if the price is $2 each, producers will supply 12 Xs.
This means that we did our math correctly, since
Qd=Qs
and both Qd and Qs are equal to 12. That confirms that
we’ve found the equilibrium quantity.
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