2 Agenda The relationship between demand and price Demand curve Other determinants of demandThe relationship between supply and priceThe supply curveOther determinants of supplyThe determination of price: equilibrium price and outputElasticities and their types
3 Demand Buyers demand goods from the market, whereas sellers supply goods to the market.Demand is the quantity of a good buyers wish andare able to purchase at ANY given price over acertain period of time.Note: demand is always backed up by purchasingpower! Merely wanting to buy is not yet demand,one should be able to afford it.Quantity demanded is the quantity of a goodbuyers wish and able to purchase at a given priceover a certain period of time.
4 Demand curve for chocolate Price($/bar)Tracey’sdemand(quantity of bars)Darren’sMarket demand(thousands of bars)A0.005090200B0.104070160C0.2030120D0.302080E0.4010F0.50
5 Demand curve for chocolate BAThe demand curve is the graph that shows the quantitythat is demanded at any given price.
6 Other determinants of demand Tastes and Preferences.The number and the price of substitute goods.The number and the price of complementary goods.Income level.Advertisement.Expectations of future price changes.Social and Economic conditions.
7 Movement along the demand curve Change in the quantity demanded –a movement along the demand curve to a newpoint. It occurs when there is a change in price.APQDB
8 Shifts in demand curve Change in demand – a shift in the demand curve. It occurs when a non-price determinant of demandchanges.PQDD’D’’IncreaseDecrease
11 Substitutes vs. Complements Substitute goodsComplement goodsGoods which could replace each other in consumption.Goods which are usually consumed together.Eg. Coca & PepsiCoffee & TeaEg. Car & petrolBread & Butter
12 Question 1The price of cinema tickets rises and yet it is observed that cinema attendance increases.Does this mean that the demand curve for cinema tickets is upward sloping?
13 SupplySupply is the quantity of a good sellers wish and are able to sell at ANY given price over a certain period of time.Quantity supplied is the quantity of a good sellers wish and are able to sell at a given price over a certain period of time.When the price of a good rises the quantity supplied will also rise – law of supply.
14 Supply curve Price Firm 1 supply Market supply a 0.00 b 0.10 c 0.20 10 ($/bar)Firm 1 supply(quantity of bars)Market supply(thousands of bars)a0.00b0.10c0.201040d0.302080e0.40120f0.5050160The supply curve is the graph that shows thequantity that is supplied at any given price.
16 Other determinants of supply The costs of production. The higher the costs ofproduction, the less profit will be made at anyprice.The costs may change because of:Change in input price.Change in technology.Organisational changes.Government policy.
17 Other determinants of supply (cont’) The profitability of alternative products (substitutes in supply).Nature, “random shocks” and other unpredictable events.The aims of producers.Expectations of future price changes.Number of suppliers.
18 Movement along the supply curve Change in the quantity supplied – a movementalong the supply curve to a new point. It occurswhen there is a change in price.PQSBA
19 Shifts in supply curveChange in supply – a shift in the supply curve. Itoccurs when a non-price determinant changes.S’PQSS’’DecreaseIncrease
22 Question 3 Consider the case of supply curve of organically grown wheat. What effect would the followinghave?A reduction in the cost of organic fertilizersAn increase in the demand for organic breadAn increase in the price of organic oats and barleyThe belief that the price of organic wheat will rise substantially in the futureA droughtA government subsidy granted to farmers using organic methods
23 Determination of price ($/bar)Demand(number of bars, thousands)Supply0.00200 (A)0 (a)0.10160 (B)0 (b)0.20120 (C)40 (c)0.3080 (D)80 (d)0.4040 (E)120 (e)0.500 (F)160 (f)
24 Equilibrium Equilibrium is the price and quantity at which the quantity supplied and thequantity demanded are equal.A market is said to be in disequilibrium at all points at which the quantities demanded and supplied are not equal.A surplus occurs whenever S>D.A shortage occurs whenever D>S.Surpluses and shortages can be resolved with price changes.
25 Equilibrium price and output 0,10,20,30,40,50,650100150200250Quantity demanded (number of bars)Price ($/bar)AfcCEeDSurplus(80)ShortageFBbd
26 Movement to a new equilibrium Increase in demandD2QPD1SQe1Pe2Pe1ShortageQe2
27 Movement to a new equilibrium Decrease in supplyQe1S1DQPS2Pe2Pe1ShortageQe2
28 Price Floors and Ceilings Price Floor: price is not allowed to decrease below a certain level. Examples: minimum wage, agricultural price supports.If the floor is above the equilibrium price, then it results in a surplus.Price Ceiling: price is not allowed to increase above a certain level. Example: rent controls.If the ceiling is below the equilibrium price, then it results in a shortage.
31 Review Questions: Question 1 a) Draw and Describe the shape of the demand curve.b) Explain the reasons for the shape of the demand curve.Question 2a) Explain how equilibrium comes about in a market for a good such as hotel rooms.b) Sometimes a government fixes or controls prices. Explain what is meant by price ceiling or floor and consider the advantages and disadvantages of each action.
32 Review Questions Question 3: a) Explain the principles of economic demand and supply.b) Sometimes a government fixes or controls prices. Explain what is meant by price control and consider the advantages and disadvantages of such actionQuestion 4:a) What is meant by ‘equilibrium in the market’? Explain how equilibrium comes about.b) Discuss how changes in taste, income and cost of production affect market equilibrium.c) Under what circumstances would the demand curve be upward sloping? Give 3 reasons.d) Describe and explain any 3 factors that will affect the demand for cars.