Demand and Supply....................................ppt

Demand and Supply

1. Chapter 2
Theory of Demand and Supply

2. Demand & Supply
•What is demand?
•Law of demand
•Exceptions to law of demand
•Demand function
•Individual and Market demand curves
•Types of demand
•Price, Income & Cross demand
•Elasticity of demand
•Demand forecasting techniques
•Law of Supply, Supply curve & Elasticity of Supply

3. Law of Demand
•A decrease in the price of a good, all other
things held constant, will cause an
increase in the quantity demanded of the
good.
•An increase in the price of a good, all
other things held constant, will cause a
decrease in the quantity demanded of the
good.

4. Law of Demand
There is an inverse relationship between
the price of a good and the quantity of the
good demanded per time period.
Substitution Effect
Income Effect

5. Demand function
Individual Consumer’s Demand
Dx = f(Px, Py, Pz, Y, T & µ)
Dx =
Px =
Py =
Pz =
Y=
T =
µ =
Quantity demanded of a commodity x by
an individual per time period
Price per unit of Commodity x
Prices of Substitute goods
Prices of Complementary goods
Consumer’s Income
Tastes, Habits, Culture & Traditions &
Fashions of the Consumer
Disturbing Factors

6. Dx = f(Px, Py, Pz, Y, T & µ)
•Dx/Px < 0
•Dx /Py > 0 if x and y are substitutes
•Dx /Pz < 0 if x and z are
complementary goods
•Dx/Y > 0 if a good is normal
•Dx/Y < 0 if a good is inferior
•T, H, C&T, & F

7. Change in Quantity Demanded
Quantity
Price
P
0
Q
0
P
1
Q
1
An increase in price
causes a decrease in
quantity demanded.

8. Change in Quantity Demanded
Quantity
Price
P
0
Q
0
P
1
Q
1
A decrease in price
causes an increase in
quantity demanded.

9. Market Demand Curve: Horizontal
summation of demand curves of
individual consumers

10. Changes in Market Demand
•Change in Buyers’ Tastes
•Change in Buyers’ Incomes
–Normal Goods
–Inferior Goods
•Change in the Number of Buyers
•Change in the Price of Related Goods
–Substitute Goods
–Complementary Goods

11. Change in Demand
Quantity
Price
P
0
Q
0Q
1
An increase in demand
refers to a rightward shift
in the market demand
curve.

12. Change in Demand
Quantity
Price
P
0
Q
1Q
0
A decrease in demand
refers to a leftward shift
in the market demand
curve.

13. Demand Faced by a Firm
•Market Structure
–Monopoly
–Oligopoly
–Monopolistic Competition
–Perfect Competition
•Type of Good
–Durable Goods
–Nondurable Goods
–Producers’ Goods -Derived Demand

14. Elasticity of Demand
By Factors or Variables influencing Demand:-
Price Elasticity of Demand
Income Elasticity of Demand
Cross Elasticity of Demand
By Degree or Extent of Change:-
Perfectly Elastic Demand
RelativelyElastic Demand
Unitary Elastic Demand
RelativelyInelastic Demand
Perfectly Inelastic Demand

15. Price Elasticity of Demand/
/
P
Q Q Q P
E
P P P Q

  

Point Definition2 1 2 1
2 1 2 1
P
Q Q P P
E
P P Q Q




16. Marginal Revenue and Price
Elasticity of Demand
P
X
Q
X1
P
E 1
P
E 1
P
E

17. 1
P
E

18. Law of Supply
•A decrease in the price of a good, all other
things held constant, will cause a
decrease in the quantity supplied of the
good.
•An increase in the price of a good, all
other things held constant, will cause an
increase in the quantity supplied of the
good.

19. Change in Quantity Supplied
Quantity
Price
P
1
Q
1
P
0
Q
0
A decrease in price
causes a decrease in
quantity supplied.

20. Change in Quantity Supplied
Quantity
Price
P
0
Q
0
P
1
Q
1
An increase in price
causes an increase in
quantity supplied.

21. Changes in Supply
•Change in Production Technology
•Change in Input Prices
•Change in the Number of Sellers

22. Change in Supply
Quantity
Price
P
0
Q
1Q
0
An increase in supply
refers to a rightward shift
in the market supply curve.

23. Change in Supply
Quantity
Price
P
0
Q
1 Q
0
A decrease in supplyrefers
to a leftward shift in the
market supply curve.

24. Market Equilibrium
•Market equilibriumis determined at the
intersection of the market demand curve
and the market supply curve.
•The equilibrium pricecauses quantity
demanded to be equal to quantity
supplied.

25. Market Equilibrium
Quantity
Price
P
Q
D
S

26. Market Equilibrium
Quantity
Price
P
0
Q
0
D
0 S
0
Q
1
P
1
D
1
An increase in demand
will cause the market
equilibrium price and
quantity to increase.

27. Market Equilibrium
Quantity
Price
P
1
Q
1
S
0
Q
0
P
0
D
0D
1
A decrease in demand
will cause the market
equilibrium price and
quantity to decrease.

28. Market Equilibrium
Quantity
Price
P
0
Q
0
D
0 S
0
Q
1
P
1
An increase
in supply
will cause
the market
equilibrium
price to
decrease and
quantity to
increase.
S
1

29. Market Equilibrium
Quantity
Price
P
1
Q
1
D
0
Q
0
P
0
A decrease in
supplywill
cause the
market
equilibrium
price to
increase and
quantity to
decrease.
S
1 S
0