Postgraduate Diploma in Business
and Finance 2015/16
Demand Supply and Price Theory
Dr. M. Ganeshamoorthy,
B.A (Hons) PDN, PgDED CMB, M.A CMB, Ph.D The Netherlands
DEMAND AND SUPPLY
What is demand?
The quantities that the consumer is willing, able and
to purchase at different prices of a good or service is
known as demand.
Three conditions must be fulfilled:
1. Desire to buy
2. Ability to buy (purchasing power)
3. Ready to buy
DEMAND AND SUPPLY
Determinants of demand:
1. Price of the product in question
2. Ability to buy (purchasing power)
3. Ready to buy
DEMAND AND SUPPLY
The Law of Demand: (explains the relationship
between the price and quantity demanded of a good
while keeping all other determinants of demand
constant)
“Ceteris paribus, higher the price lower the quantity
demanded and vice versa”
There exists a negative (inverse) relationship
between the price and quantity demanded of a
good
DEMAND AND SUPPLY
Why there is a negative relationship between price and
quantity demanded? (why the demand curve is
downward sloping? Why demand decreases when price
increases?)
1. Substitution effect - if substitutes are available
consumer will purchase cheap substitutes when the
price of a good is increased.
2. Income effect – given fixed income, a consumer has
to reduce consumption when there is an increase of
price of a good.
3. Diminishing marginal utility – people do not like to
pay high price for large quantities as the satisfaction
diminishes when consuming large quantities.
DEMAND AND SUPPLY
DEMAND AND SUPPLY
Demand cam be explained using a table or graph or
an equation.
Demand table:
A demand table shows how much of a given
product a consumer is would be willing to buy at
different prices
Demand curves are derived from demand tables.
DEMAND AND SUPPLY
DEMAND AND SUPPLY
DEMAND AND SUPPLY
DEMAND AND SUPPLY
DEMAND AND SUPPLY
DEMAND AND SUPPLY
DEMAND AND SUPPLY
DEMAND AND SUPPLY
DEMAND AND SUPPLY
DEMAND AND SUPPLY
DEMAND AND SUPPLY
DEMAND AND SUPPLY
DEMAND AND SUPPLY
DEMAND AND SUPPLY
DEMAND AND SUPPLY
DEMAND AND SUPPLY
DEMAND AND SUPPLY
Market Equilibrium
Excess Demand
At a price of $1.75 per
bushel, quantity demanded
exceeds quantity supplied.
When excess demand
exists, there is a tendency
for price to rise.
When quantity demanded
equals quantity supplied,
excess demand is
eliminated and the market is
in equilibrium. Here the
equilibrium price is $2.50
and the equilibrium quantity
is 35,000 bushels.
When quantity demanded exceeds quantity supplied, price tends
to rise. When the price in a market rises, quantity demanded falls
and quantity supplied rises until an equilibrium is reached at
which quantity demanded and quantity supplied are equal.
Market Equilibrium
Excess Supply
At a price of $3.00, quantity
supplied exceeds quantity
demanded by 20,000
bushels.
This excess supply will
cause the price to fall.
When quantity supplied exceeds quantity demanded at the
current price, the price tends to fall. When price falls, quantity
supplied is likely to decrease and quantity demanded is likely to
increase until an equilibrium price is reached where quantity
supplied and quantity demanded are equal.
Market Equilibrium
Changes In Equilibrium
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