Demand & Supply. What Is Demand? Demand is a relationship between a product’s price and quantity demanded. Demand is shown using a schedule or curve.

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Presentation transcript:

Demand & Supply

What Is Demand? Demand is a relationship between a product’s price and quantity demanded. Demand is shown using a schedule or curve. The law of demand states that price and quantity demanded are inversely related. Market demand is the sum of quantities demanded by all consumers in a market.

Demand depends on 2 factors: 1.One is located in your head (heart) 2.The other is in your wallet Demand exists only for goods that you both want and can afford to buy. Demand exists only for goods that you both want and can afford to buy.

So why do we do this? 2 reasons: 1.Substitution effect – prices rise, we substitute similar goods for it 2.Income – if prices fall, buyers able to buy same amount for lower price; resulting in extra income

Demand Schedule A numerical tabulation of the quantities demanded at selected prices Price ($ per kg) QuantityDemanded (mill of kg) Pointongraph3.005A 2.507B 2.009C D Individual Demand Schedule for Strawberries

Explanation of Demand Schedule: Quantity demanded – refers to a relationship that is determined by price Ex. When strawberries are $2.50 quantity demanded is 7 mill. Kg. but when they are $3.00 Q.D. is 5 mill. Kg Quantity demanded has fallen by 2 Quantity demanded has fallen by 2

On the graph: Price is measured on vertical axis (Y axis) Quantity demanded on horizontal axis (X axis) THIS HAS BECOME STANDARD PRACTICE IN ECONOMICS Points then plotted on graph & joined together The line is called the Demand curve even though it is a straight line It runs downward from top left to bottom right Inverse relation between $ & QD holds for majority of goods we buy

Market Demand Buying habits of thousands that decide demand for most goods Market Demand Schedule – sum total of all the consumer demands for a product

Deriving Market Demand Price ($ per kg) ) Friend’s Quantity Demanded (kg) Your Quantity Demanded (kg) Market Demand (kg)

Changes in Demand " are shown by shifts in the demand curve " are caused by changes in demand determinants

Demand Determinants Include the following factors: The number of buyers (an increase causes a rightward demand shift) 2. 2.Income For normal products, an increase causes a rightward demand shift. For inferior products, an increase causes a leftward demand shift.

Changes in Quantity Demanded (cont’d): Are shown by movements along demand curve Are caused by price changes

What Is Supply? Supply: is a relationship between a product’s price and quantity supplied Is shown using a schedule or curve The law of supply states there is a direct relationship between price and quantity supplied.

The Supply Curve Price ($ per kg) QuantitySupplied (mill of kg) Pointongraph D E 2.009F 1.005G Market Supply Schedule for Strawberries

Changes in Supply are shown by shifts in the supply curve are caused by changes in supply determinants

Supply Determinants Supply determinants include the following factors: Number of producers (an increase causes a rightward supply shift) Resource prices (an increase causes a leftward supply shift) State of technology (an improvement causes a rightward supply shift) Prices of related products (an increase causes a leftward supply shift)

Determinants – (cont’d) changes in nature (an improvement causes a rightward shift for some products) producer expectations (an expectation of lower prices in the future causes an immediate rightward supply shift)