Business

Economics
Demand and Supply
 Demand and Supply
Demand means the quantity of goods and
services that a person is willing and able to
buy at various prices during a given period
of time.

Supply means the quantity of goods and

services that a person is willing and able to
sell at various prices during a given period
of time.
 Law of demand
law of demand: shows The negative
relationship between price and quantity
demanded: As price rises, quantity demanded
decreases; as price falls, quantity demanded
increases.

It is reasonable to expect quantity demanded

to fall when price rises, ceteris paribus, and to
expect quantity demanded to rise when price
falls, Ceteris paribus. Demand curves have a
negative slope.
Demand schedule and demand
curve
Demand schedule is a list of the
quantities
demanded at each different price when all
the
other influences on demand remain the
same.

Demand curve is a graph of the

relationship
between the quantity demanded of a good
and its price when all other influences on
demand remain the same.
Demand schedule and demand
curve
Demand equation
Example for demand Function.
Q=180-2P
P =90-0.5Q (inverse demand function)

Y y y
Slope of the demand curve: X
2 1

X X
2 1

In the inverse demand function, the slope is

the coefficient of Q.
Individual Demand and Market
Demand
Market demand is the sum of the demands
of all the buyers in a market.

The market demand curve is the horizontal

sum of the demand curves of all buyers in
the market.
Individual Demand & Market Demand
Change in demand and change
in quantity demanded
Changes in price result in changes in the
quantity demanded. This is shown as
movement along the demand curve

Changes in non-price factors result in

changes in demand. This is shown as a shift
in the demand curve
Change in demand and change
in quantity demanded
Non-price determinants of demand

Tastes and preferences and

fashion
Income
Prices of related products
Future expectations
Number of buyers
Change in demand and change
in quantity demanded
Non-price determinants of
demand
Income
Normal goods: goods for which demand
goes up when income is higher and for which
demand goes down when income is lower.
Inferior goods: Goods for which demand
tends to fall when income rises.

Number of Buyers
The greater the number of buyers in a market,
the larger is the demand for any good.
Non-price determinants of
demand
Price of other goods and services
Substitutes: Goods that can serve as
replacements for one another; when the price of
one increases, demand for the other increases.
Complements, complementary goods:
Goods that go together; a decrease in the price
of
one results in an increase in demand for the
other
and vice versa.
Non-price determinants of
demand
Expectation
What you decide to buy today certainly
depends on todays prices and your current
income and wealth.

Tastes and preferences

Accounts for the personal likes and dislikes of
consumers for various goods and services.
These tastes and preferences may them selves
affected by other factors.
 Law of supply
law of supply: The positive relationship
between price and quantity of a good
supplied: An increase in market price will
lead to an increase in quantity supplied,
and a decrease in market price will lead to
a decrease in quantity supplied.

The supply curve has a positive slope.

Supply Schedule and Supply
Curve
A supply schedule is a list of the
quantities supplied at each different
price when all other influences on
supply remain the same.
A supply curve is a graph of the
relationship between the quantity
supplied and the price of the good
when all other influences on supply
remain the same.
Supply Schedule and Supply
Curve
Individual Supply and Market Supply

Market supply is the sum of the supplies of

all sellers in a market.

The market supply curve is the horizontal

sum of the supply curves of all the sellers in
the market.
Individual Supply and Market
Supply
Changes in supply and changes
in quantity supplied
Changes in price result in changes in the
quantity supplied
shown as movement along the supply
curve

Changes in non-price determinants result in

changes in supply
shown as a shift in the supply curve
Non-price determinants of
supply
Costs and technology
Prices of other goods or services offered
by the seller
Future expectations
Number of sellers
Weather conditions
Taxes and Subsidies.
Non-price determinants of
supply
Non-price determinants of
supply
Prices of Related Goods
A change in the price of one good can bring a change in the supply of
another good.

A substitute in production is a good that can be produced in place of

another good.
The supply of a good increases if the price of one of its substitutes in
production falls.
The supply a good decreases if the price of one of its substitutes in
production rises.

A complement in production is a good that is produced along with

another good.
The supply of a good increases if the price of one of its complements in
production rises.
The supply a good decreases if the price of one of its complements in
production falls.
Non-price determinants of
supply
Costs and technology
Resource and input prices influence the cost of
production. And the more it costs to produce a
good, the smaller is the quantity supplied of that
good.

Expected Future Prices

Expectations about future prices influence supply.
Expectations of future prices of resources also
influence supply.
Non-price determinants of
supply
Number of Sellers
The greater the number of sellers in a market, the
larger is supply.

Weather conditions
Bad weather conditions (e.g. floods,
droughts)
will reduce the supply of agricultural
products.
Good weather will have the opposite impact.
Interactive graphs
 Market equilibrium
Equilibrium: The condition that exists when
quantity supplied and quantity demanded are
equal. At equilibrium, there is no tendency for
price to change.

Equilibrium price: the price that equates the

quantity demanded with the quantity supplied.

Equilibrium quantity: the amount that people

are willing to buy and sellers are willing to offer
at the equilibrium price level.
 Market equilibrium
Shortage: a market situation in which the
quantity demanded exceeds the quantity
supplied
shortage occurs at a price below the
equilibrium level

Surplus: a market situation in which the

quantity supplied exceeds the quantity
demanded
surplus occurs at a price above the
equilibrium level
 Market equilibrium
Supply and demand
P Qd Qs
7 0 600
6 100 500
5 200 400
4 300 300
3 400 200
2 500 100
1 600 0
0 700 0
 Market equilibrium
In the equilibrium, quantity supplied and
quantity demanded are equal.
Qs=Qd
No shortage or surplus
For example if:
Qd= 10-2P
Qs = 2+2P
Find the equilibrium price and equilibrium
quantity.
 Market equilibrium
Qs = Qd
10-2P = 2+2P
8 =4P
e
P 2
e
Q 2 2( 2) 6
 Computational questions
1.the demand for good x is given by
d 1 1 1
Q x
200
2 P x

4 P y
5 P z

5
M

Research shows that the prices of related goods are

given by: Py= $5,900 and Pz =$90, while income
M=$55000
a. Indicate whether goods Y and Z are substitute or
complement
b. Is X is an inferior or a normal good
c. How many units of good X will be purchased when Px
=$4,910?
d. Determine the demand function and inverse demand
function for good X. graph the demand curve for good X.
 Computational questions
2. Suppose demand and supply are given by
d 1
Q 7
2
P
s 1 1
Q P
4 2
a. Determine the equilibrium price and
quantity. Show the equilibrium graphically
 Computational questions

3- Assuming that the X Corporation produces a

good (called X) that is a normal good. Its
competitor Y Corporation produces substitute a
good that it makes under the name (Y). Good Y is
an inferior good. Answer the following
a- How will the demand for good X change if consumers
income increases?
 Computational questions
b- How will the demand for good Y change if consumers
income decreases?
c- How will the demand for good Y change if price of good X
decreases?
d- How will the demand for good Y change if price of good X
increases?
e-What do we mean by inferior good? And what do we mean
by normal good?
f- What do we mean by substitute goods and complementary
goods?