Lecture 2-3: Demand, Supply Analysis and Applications A’lam Asadov aasadov@mdis.uz Office hrs: Friday, 15.00-16.00, Room 103

Agenda The relationship between demand and price Demand curve Other determinants of demand The relationship between supply and price The supply curve Other determinants of supply The determination of price: equilibrium price and output Elasticities and their types

Demand Buyers demand goods from the market, whereas sellers supply goods to the market. Demand is the quantity of a good buyers wish and are able to purchase at ANY given price over a certain period of time. Note: demand is always backed up by purchasing power! Merely wanting to buy is not yet demand, one should be able to afford it. Quantity demanded is the quantity of a good buyers wish and able to purchase at a given price over a certain period of time.

Demand curve for chocolate Price ($/bar) Tracey’s demand (quantity of bars) Darren’s Market demand (thousands of bars) A 0.00 50 90 200 B 0.10 40 70 160 C 0.20 30 120 D 0.30 20 80 E 0.40 10 F 0.50

Demand curve for chocolate B A The demand curve is the graph that shows the quantity that is demanded at any given price.

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.

Movement along the demand curve Change in the quantity demanded – a movement along the demand curve to a new point. It occurs when there is a change in price. A P Q D B

Shifts in demand curve Change in demand – a shift in the demand curve. It occurs when a non-price determinant of demand changes. P Q D D’ D’’ Increase Decrease

Aggregation of Demand (I)

Aggregation of Demand (II)

Substitutes vs. Complements Substitute goods Complement goods Goods which could replace each other in consumption. Goods which are usually consumed together. Eg. Coca & Pepsi Coffee & Tea Eg. Car & petrol Bread & Butter

Question 1 The 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?

Supply Supply 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.

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) a 0.00 b 0.10 c 0.20 10 40 d 0.30 20 80 e 0.40 120 f 0.50 50 160 The supply curve is the graph that shows the quantity that is supplied at any given price.

Supply curve b c e f d

Other determinants of supply The costs of production. The higher the costs of production, the less profit will be made at any price. The costs may change because of: Change in input price. Change in technology. Organisational changes. Government policy.

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.

Movement along the supply curve Change in the quantity supplied – a movement along the supply curve to a new point. It occurs when there is a change in price. P Q S B A

Shifts in supply curve Change in supply – a shift in the supply curve. It occurs when a non-price determinant changes. S’ P Q S S’’ Decrease Increase

Aggregation of Supply (I)

Aggregation of Supply (II)

Question 3 Consider the case of supply curve of organically grown wheat. What effect would the following have? A reduction in the cost of organic fertilizers An increase in the demand for organic bread An increase in the price of organic oats and barley The belief that the price of organic wheat will rise substantially in the future A drought A government subsidy granted to farmers using organic methods

Determination of price ($/bar) Demand (number of bars, thousands) Supply 0.00 200 (A) 0 (a) 0.10 160 (B) 0 (b) 0.20 120 (C) 40 (c) 0.30 80 (D) 80 (d) 0.40 40 (E) 120 (e) 0.50 0 (F) 160 (f)

Equilibrium Equilibrium is the price and quantity at which the quantity supplied and the quantity 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.

Equilibrium price and output 0,1 0,2 0,3 0,4 0,5 0,6 50 100 150 200 250 Quantity demanded (number of bars) Price ($/bar) A f c C E e D Surplus (80) Shortage F B b d

Movement to a new equilibrium Increase in demand D2 Q P D1 S Qe1 Pe2 Pe1 Shortage Qe2

Movement to a new equilibrium Decrease in supply Qe1 S1 D Q P S2 Pe2 Pe1 Shortage Qe2

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.

A Price Floor

A Price Ceiling

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 2 a) 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.

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 action Question 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.