Demand, supply and equilibrium

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1. Form Four Business Class Demand, Supply and Equilibrium By. Daud Dahir Hassan Twitter: Dauddhassan Facebook: Amirdadahfrta

2. Introduction and Overview Supply and demand are the two words that economists use most often. Supply and demand are the forces that make market economies work. Modern microeconomics is about supply, demand, and market equilibrium.

3. Demand The amount of a good, service, or resource that people are willing and able to buy during a specified period at a specified price. Quantity demanded is the amount of a good that buyers are willing and able to purchase. Law of Demand The law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises.

4. Demand Schedule The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.

5. Demand Curve The demand curve is a graph of the relationship between the price of a good and the quantity demanded. Market demand refers to the sum of all individual demands for a particular good or service. Change in Quantity Demanded “Movement of demand curve” Movement along the demand curve. Caused by a change in the price of the product.

6. Market demand

7. D Price of Ice-Cream Cones Quantity of Ice-Cream Cones A B 8 1.00 $2.00 4

8. Factors determining the quantity demanded Consumer income Prices of related goods Tastes Expectations Number of buyers. And so on

9. Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone Quantity of Ice-Cream Cones Increase in demand Decrease in demand Demand curve, D 3 Demand curve, D 1 Demand curve, D 2 Shifting demand curve

10. Elasticity Types of Elasticity: Price elasticity Income elasticity Cross elasticity

11. 1. Types of price elasticity of demand Inelastic Demand Percentage change in price is greater than percentage change in quantity demand. Price elasticity of demand is less than one. Elastic Demand Percentage change in quantity demand is greater than percentage change in price. Price elasticity of demand is greater than one.

12. Unit Elastic When percentage change in price equal to the percentage change in quantity demanded. Unit elastic equal one. Perfect inelastic Situation where a change in price doesn’t lead to change in quantity demanded Perfect elastic Situation where a price is constant at any variation in quantity demanded

13. Perfectly Inelastic Demand - Elasticity equals 0 Quantity Price 4 $5 Demand 100 2. ...leaves the quantity demanded unchanged. 1. An increase in price...

14. Inelastic Demand - Elasticity is less than 1 Quantity Price 4 $5 1. A 25% increase in price... Demand 100 90 2. ...leads to a 10% decrease in quantity.

15. Unit Elastic Demand - Elasticity equals 1 Quantity Price 4 $5 1. A 25% increase in price... Demand 100 75 2. ...leads to a 25% decrease in quantity.

16. Elastic Demand - Elasticity is greater than 1 Quantity Price 4 $5 1. A 25% increase in price... Demand 100 50 2. ...leads to a 50% decrease in quantity.

17. Perfectly Elastic Demand - Elasticity equals infinity Quantity Price Demand $4 1. At any price above $4, quantity demanded is zero. 2. At exactly $4, consumers will buy any quantity. 3. At a price below $4, quantity demanded is infinite.

18. Income Elasticity of demand Inferior goods : an increase in income leads to decrease the demand for inferior goods. Normal goods : an increase in income leads to increase the quantity demanded of normal goods

19. Cross Elasticity of Demand Complementary goods : increase in price of petroleum will decrease the demand of cars. 2. Substitute goods : increase in price of coca cola will increase the quantity demanded of Pepsi.

20. Supply The amount of a good, service, or resource that people are willing and able to sell during a specified period at a specified price. The Law of Supply Other things remaining the same, If the price of a good rises, the quantity supplied of that good increases. If the price of a good falls, the quantity supplied of that good decreases.

21. Supply schedule A list of the quantities supplied at each different price when all other influences on selling plans remain the same. Supply curve A graph of the relationship between the quantity supplied and the price of the good when all other influences on selling plans remain the same. Market supply The sum of the supplies of all sellers in a market. The market supply curve is the sum of the supply curves of all the sellers in the market .

22. Factors determining change in QS Availability of factors of production Price of commodity Price of related goods Number of supplier And many others

23. Movement of Supply curve 1 5 Price of Ice-Cream Cone Quantity of Ice-Cream Cones S 1.00 A C $3.00 A rise in the price of ice cream cones results in a movement along the supply curve.

24. Shifting Of supply curve Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone Quantity of Ice-Cream Cones Increase in supply Decrease in supply Supply curve, S 3 curve, Supply S 1 Supply curve, S 2

25. EQUILIBRIUM An equilibrium is the condition that exists when quantity supplied and quantity demanded are equal. Only in equilibrium is quantity supplied equal to quantity demanded.

26. Equilibrium Price The price that balances quantity supplied and quantity demanded. On a graph, it is the price at which the supply and demand curves intersect. Equilibrium Quantity The quantity supplied and the quantity demanded at the equilibrium price. On a graph it is the quantity at which the supply and demand curves intersect.

27. Excess demand , or shortage of Supply is the condition that exists when quantity demanded exceeds quantity supplied at the current price. Excess supply , or shortage of Demand, is the condition that exists when quantity supplied exceeds quantity demanded at the current price.

28. EQUILIBRIUM POINT A Price per DVD $5.00 4.00 3.50 3.00 2.50 2.00 1.50 1.00 S D Quantity of DVDs supplied and demanded C Excess demand 1 2 3 4 5 6 7 8 9 10 11 12 Excess supply E

29. At $2.00, the quantity demanded is equal to the quantity supplied! Demand Schedule Supply Schedule

30. The End Daud Dahir Hassan See the Next Chapter https://dauddahir.wordpress.com