Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Lecture Two:
Demand &
Supply
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Demand
 The market we are going to examine is highly
competitive with many competing firms and
many consumers.
 This means that firms and consumers are price
takers
THE CIRCULAR FLOW
Market Equilibrium
INPUT MARKETS AND OUTPUT MARKETS:
THE CIRCULAR FLOW
FIGURE 3.1 The Circular Flow of Economic Activity
© 2007 Prentice Hall Business Publishing
Principles of Economics 8e by Case and Fair
5 of 46
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Demand
 Demand is the quantity of a good or service that
consumers are willing and able to buy at various
prices in a given period of time.
 Though there are several factors that determine a
consumer’s decision to buy a commodity, we
define demand as a relationship between quantity
and price. Price determines the relative value of a
commodity and thus the most important
determinant of demand
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
The Law of Demand
The law of demand states that:
 There is a an inverse relationship between
quantity demanded of a commodity and its price.
Thus:
 “Other things unchanged, as price rises, the
quantity demanded decreases, and as price falls,
the quantity demanded increases”
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Exceptions to the law of
demand
Generally, the amount demanded of good increases
with a decrease in price of the good and vice versa.
In some cases, however, this may not be true. Such
situations are:
 Giffen Goods
 Commodities which are used as status symbols
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Income and Substitution
Effects
Relationship between demand and price can
be explained by:
 The Income Effect
 The Substitution Effect
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Income and Substitution Effects
Income Effect:
When the price of a commodity rises, the
consumer would feel poorer as real income
falls and thus would buy less and vice versa.
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Income and Substitution Effects
Substitution Effect:
When the price of a commodity rises, the good
would now cost more than its alternatives or
substitutes and thus consumers would switch
to the alternatives. The opposite is true for a
fall in price
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Demand Schedule, Demand Curve
and Demand Function
The negative relationship between price
and quantity demanded can be presented
by a
 demand schedule,
 demand curve and
 demand function.
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Demand Schedule
A demand schedule is a table showing how
much of a given product a household or an
individual would be willing and able to buy at
different prices.
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Demand Schedule
Price Per Unit
Quantity of Potatoes
20
700
40
500
60
350
80
200
100
100
120
50
140
10
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Demand Curve
The demand curve is a graph showing the
relationship between price of a good and
quantity of the good demanded over a given
time period.
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Demand Curve
 According to convention, the demand curve
is drawn with price on the vertical axis and
quantity on the horizontal axis.
 A demand curve shows the relationship
between price and quantity demanded only;
all (other) factors affecting demand are
assumed to remain unchanged along a
demand curve.
Demand Curve for potatoes (monthly)
100
Price (pence per kg)
Market demand
Point
Price
(pence per kg) (tonnes 000s)
E
D
80
C
60
A
20
700
B
C
D
E
40
60
80
100
500
350
200
100
B
40
A
20
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Three Properties of the Demand Curve
 First, the demand curve is negatively
sloped which reflects the law of demand.
An increase in price is likely to lead to a
decrease in quantity demanded, and a
decrease in price is likely to lead to an
increase in quantity demanded.
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Three Properties of the Demand Curve
 They intersect the price (Y) axis, a result of
limited incomes and wealth. That is as long as
households have limited incomes and wealth, all
demand curves will intersect the price axis.
 For any commodity, there is always a price
above which a household will not or cannot pay.
Even if the good or service is very important, all
households are ultimately constrained, or limited,
by income and wealth.
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Three Properties of the Demand Curve
 The third property is that demand curves intersect
the quantity axis is a matter of common sense.
Demand in a given period of time is limited, if
only by time, even at a zero price. In other words
they intersect the quantity (X-) axis, a result of
time limitations and diminishing marginal utility.
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
The Demand Function
 Demand function is a mathematical expression of
the relationship between quantity demanded of a
commodity and and its price.
 simple demand functions
Qd = a – bP
 more complex demand functions
Qd = a – bP + cY + dPs – ePc
could be linear or non-linear functions
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Other determinants of demand
 Tastes and preferences
 number and price of related goods (substitutes
and complements)
 Income of the consumer
 distribution of income
 Expectations for future changes in price
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Individual Demand versus Market
Demand
 An individual’s demand for a commodity is the
quantities of a commodity that the individual is willing
and able to buy at various prices during a given period of
time.
 The market demand for a commodity gives the various
amounts of the commodity demanded per time period, at
various prices, by all individuals in the market.
 Geometrically, the market demand curve for a
commodity is the horizontal summation of all the
individual’s demand curves for the commodity.
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Individual Demand versus Market
Demand
 Example:
Price per unit of Individual A
commodity
Individual B
Market Demand
GH¢1, 000
50
100
150
GH¢2, 000
40
80
120
GH¢3, 000
30
60
90
GH¢4, 000
20
40
60
GH¢5, 000
10
20
30
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Changes in Demand versus Changes in
Quantity Demanded
A change in price, ceteris paribus, results in a
change in quantity demanded; that is a movement
along the curve.
A change in demand (curve) results from changes
in factors other than price. Such changes cause
shifts in the demand curve.
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Factors causing changes (shifts) in demand
(curve):
 Changes in income
 Taste and preferences
 prices of related goods (substitutes or complementary
goods)
 expectations about future prices,
 number of buyers
Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
Change in Quantity Demanded
P
A
20
B
10
100
200
Q
Possible causes of a rise in demand
• Tastes shift towards this product
• Rise in price of substitute goods
• Fall in price of complementary goods
• Rise in income
• Expectations of a rise in price
Price
P
D0
O
Q0
Q1
Quantity
D1
A Decrease in demand
Possible causes of a fall in demand
• Tastes shift against this product
• Fall in price of substitute goods
• Rise in price of complementary goods
• Fall in income
• Expectations of a fall in price
Price
P
D1
O
Q0
Q1
Quantity
D0
Q Which way will the market demand
for petrol shift if the price of cars rises?
A. Right
B. Left
C. No shift (movement
along the curve)
Q Which way will the market demand for
petrol shift if petrol becomes more expensive
A. Right
B. Left
C. No shift (movement
along the curve)
Q
The effect on the margarine market of a
reduction in butter prices would be to:
A. increase the price of
margarine by an identical
amount.
B. leave the demand for
margarine unaffected.
C. decrease the demand for
margarine at all prices.
D. increase the demand for
margarine at all prices.
E. shift the supply of
margarine to the left.
Demand curve for equation: Qd = 10 000 – 200P
50
40
P
30
20
10
D
0
0
2
4
6
Q (000s)
8
10
Demand curve for equation: Qd = 10 000 – 200P
50
40
P
P
Qd (000s)
5
9
30
20
10
D
0
0
2
4
6
Q (000s)
8
10
Demand curve for equation: Qd = 10 000 – 200P
50
40
P
P
Qd (000s)
5
10
9
8
30
20
10
D
0
0
2
4
6
Q (000s)
8
10
Demand curve for equation: Qd = 10 000 – 200P
50
40
P
P
Qd (000s)
5
10
15
9
8
7
30
20
10
D
0
0
2
4
6
Q (000s)
8
10
Demand curve for equation: Qd = 10 000 – 200P
50
40
P
30
P
Qd (000s)
5
10
15
20
9
8
7
6
20
10
D
0
0
2
4
6
Q (000s)
8
10