1. Principals of Economics for Law class 1
By Edward Gatwaza
12/03/2018
Lesson three

2. DEMAND, SUPPLY AND THE PRICE MECHANISM
3.1. MARKET
Market is a place where buyers and sellers meet. Some examples of markets, Nyarugeng market in Kigali. There is a famous Nyagasambu market. Market A market is the number of people. When a person says I have got a market for my photocopying business on campus, he may be referring to the fact that since there is many people willing and able to photocopy then he will get profit. But the amount of money they have and are willing to use in the market is also important

3. Markets and competition
A market is a group of buyers and sellers of a particular good or service.
The terms supply and demand refer to the behavior of people as they interact with one another in markets. 4

4. Markets and competition
Buyers determine demand.
Sellers determine supply 4

5. 3.2. DEMAND
Meaning
Desire refers to people’s willingness to own a good. Demand is the amount of good that consumers are willing and able to buy at a given price.
Law of demand
The law of demand states that as price rises quantity that is demanded falls and as prices fall more goods are demanded. The result is a downward sloping curve from the left to the right. A demand curve is has a negative slope

6. Demand schedule ntity demanded
The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded. 17

7. 3.2.3.Demand schedule Price in RWF Quantity of goods demanded 3000 10
2500 20
2000 30
1500 40
1000 50
500 60

8. Demand Curve
The demand curve is a graph of the relationship between the price of a good and the quantity demanded.

9. Demand Schedule and Demand Curve
Price of good
Frw 3.00
2.50
1. A decrease
in price
...
2.00
1.50
1.00
0.50 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of good 2.
...
increases quantity
demanded.

10. More generally the demand curve is depicted as a smooth curve

11. 3.2.3. Determination of demand
The amount of good demanded depends on:
The price of the good;
The income of consumers;
The demand for alternative goods which could be used (substitutes);
The demand for goods used at the same time (complements);
Whether people like the good (consumer taste).

12. 3.2.4. Shift in the demand curve
A change in price never shifts the demand curve for that good. In the figure below an increase in price results in a movement up the demand curve.
Change in Quantity Demanded
Movement along the demand curve.
Caused by a change in the price of the product.
The fall in the quantity demanded from 8 to 4 is sometimes called a contraction in demand.

13. Changes in Quantity Demanded
Price of good
A tax that raises the price of a good results in a movement along the demand curve. B
Frw2.00 A
1.00 D 4 8
Quantity of a good

14. Shift in the demand curve

15. Changes in Quantity Demanded
A demand curve shifts only if there is a change in income, in taste or in the demand for substitutes or complements. In the diagram below a decrease in demand has shifted the demand curve to the left. The new demand curve shifts upwards or downwards

16. Shifts in the Demand Curve
Price of good
Increase
in demand
Decrease
in demand
Demand
curve, D 2
Demand
curve, D 1
Demand curve, D 3
Quantity of good
Copyright©2003 Southwestern/Thomson Learning

17. 3.2.5. Types of demand Composite demand
The demand of good incorporates the total demand for all users. A demand curve for sugar includes demand for sugar to us in tea and coffee, to use in factories producing alcohol and medicine. Demand is composite because many commodities have many uses.
Joint demand
There are many types of commodities whose demands are tied together. Tyres of cars are demanded together. Shoes and body stockings have joint demand and so is bread and margarine.

18. Types of demand Derived demand
Demand is derived if it would not arise had not the other commodities existed. It is not the same as joint because derived demand is a consequence of the demand of another commodity. The demand for teachers may be a consequence of building more schools or a new policy in the Country. Demand for economists may be derived from the Vision policy.

19. 3.3. SUPPLY
Meaning
Supply is the quantity sellers are willing to offer in the market at a given price.
Law of supply
As prices rise quantity supplied also rises and as prices in the market fall the quantity sellers are ready to offer decreases. A table showing the relationship is a supply schedule and the curve sloes upwards from the left to the right. The slope of a supply curve is positive.
The supply curve labeled SS in the figure below shows the amount of a good one or more producers are prepared to sell at different prices.

20. Supply schedule Supply Schedule
The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied.

21. Supply Schedule 29

22. Supply Curve Price of goods Frw 3.00 2.50 1. An increase in price ...
2.00
1.50
1.00
0.50 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of goods 2.
...
increases quantity of goods supplied.

23. 3.3.3. Determinants of supply
Supply depends on:
The price of the good;
The cost of making the good;
The supply of alternative goods the producer could make with the same resources (competitive supply);
The supply of goods actually produced at the same time (joint supply);
Unexpected events that affect supply

24. Shifts in the Supply Curve
Input prices
Technology
Expectations
Number of sellers

25. Shifts in the Supply Curve
Change in Quantity Supplied
Movement along the supply curve.
Caused by a change in anything that alters the quantity supplied at each price. 30

26. Change in Quantity Supplied
Price of good S C
3.00
A rise in the price of ice cream cones results in a movement along the supply curve. A
1.00
Quantity of goods 1 5 30

27. Shifts in the Supply Curve
Change in Supply
A shift in the supply curve, either to the left or right.
Caused by a change in a determinant other than price. 30

28. Shifts in the Supply Curve
Price of good
Supply curve, S 3
curve,
Supply S 1
Supply
curve, S 2
Decrease
in supply
Increase
in supply
Quantity of goods

29. Types of supply
Composite supply
Joint supply

30. SUPPLY AND DEMAND TOGETHER
Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded. 36

31. Supply and Demand Together
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. 36

32. Supply and Demand together
Demand Schedule
Supply Schedule
At $2.00, the quantity demanded is equal to the quantity supplied! 36

33. The Equilibrium of Supply and Demand
Price of
Ice-Cream
Cone
Supply
Demand
Equilibrium
Equilibrium price
$2.00
Equilibrium
quantity 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of Ice-Cream Cones

34. Markets Not in Equilibrium
(a) Excess Supply
Price of
Ice-Cream
Supply
Cone
Surplus
Demand
$2.50 10 4
2.00 7
Quantity of
Quantity
demanded
Quantity
supplied
Ice-Cream
Cones
Copyright©2003 Southwestern/Thomson Learning

35. Equilibrium
Surplus
When price > equilibrium price, then quantity supplied > quantity demanded.
There is excess supply or a surplus.
Suppliers will lower the price to increase sales, thereby moving toward equilibrium.

36. Equilibrium
Shortage
When price < equilibrium price, then quantity demanded > the quantity supplied.
There is excess demand or a shortage.
Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.

37. Markets Not in Equilibrium
(b) Excess Demand
Price of
Ice-Cream
Supply
Cone
Demand
$2.00 7
1.50 10 4
Shortage
Quantity of
Quantity
supplied
Quantity
demanded
Ice-Cream
Cones
Copyright©2003 Southwestern/Thomson Learning

38. Equilibrium Law of supply and demand
The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.

39. Three Steps to Analyzing Changes in Equilibrium
Decide whether the event shifts the supply or demand curve (or both).
Decide whether the curve(s) shift(s) to the left or to the right.
Use the supply-and-demand diagram to see how the shift affects equilibrium price and quantity. 45

40. How an Increase in Demand Affects Equilibrium
Price of
Ice-Cream
1. Hot weather increases
the demand for ice cream . . .
Cone D D
Supply
New equilibrium
$2.50 10
resulting
in a higher
price . . .
2.00 7
Initial
equilibrium
Quantity of 3.
. . .
and a higher
quantity sold.
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning

41. Three Steps to Analyzing Changes in Equilibrium
Shifts in Curves versus Movements along Curves
A shift in the supply curve is called a change in supply.
A movement along a fixed supply curve is called a change in quantity supplied.
A shift in the demand curve is called a change in demand.
A movement along a fixed demand curve is called a change in quantity demanded.

42. How a Decrease in Supply Affects Equilibrium
Price of
1. An increase in the
price of sugar reduces
the supply of ice cream. . .
Ice-Cream
Cone S2 S1
Demand
New
equilibrium
$2.50 4
resulting
in a higher
price of ice
cream . . .
Initial equilibrium
2.00 7
Quantity of 3.
. . .
and a lower
quantity sold.
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning

43. 3.4.2. Law of demand and supply
This can be stated as follows. If demand is held constant a forward shift of the supply curve will lower the equilibrium price. Likewise if supply is held as a constant a forward shift of the demand curve will result in a rise in equilibrium price. The reverse should be true. A backward shift of the supply curve when demand is held as a constant raise equilibrium price and a backward shift in the demand curve with supply held as constant should lower equilibrium price.

44. ELASTICITY . . .
… allows us to analyze supply and demand with greater precision.
… is a measure of how much buyers and sellers respond to changes in market conditions

45. The elasticity of demand
Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good.
Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price.

46. Price Elasticity of Demand
Price elasticity of demand equation:
PED= Percentage change in quantity demanded/Percentage change in price Or
PED=∆Q /Q÷∆P/P or
Where P= the original price
Q= the original quantity
∆Q= “the change in quantity demanded”
And ∆P= "the change in Price

47. The Price Elasticity of Demand and Its Determinants
Availability of Close Substitutes
Necessities versus Luxuries
Definition of the Market
Time Horizon

48. The Price Elasticity of Demand and Its Determinants
Demand tends to be more elastic :
the larger the number of close substitutes.
if the good is a luxury.
the more narrowly defined the market.
the longer the time period.

49. Computing the Price Elasticity of Demand
The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price.

50. Computing the Price Elasticity of Demand
Example: If the price of an ice cream cones increases from Frw2.00 to Frw2.20 and the amount you buy falls from 10 to 8 cones, then your elasticity of demand would be calculated as:

51. 3.5.2. Features of price elasticity of demand
Elastic goods
Inelastic goods
PED value
Greater than 1
Less than 1
A rise in price means
A larger fall in demand
A smaller fall in demand
Slope of demand curve
Flat
Steep
Number of substitutes
Many
Few
Type of good
Luxury
Necessary
Price of good
Expensive
Cheap
Example
Maestro car
Petrol

52. Income Elasticity of Demand
Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers’ income.
It is computed as the percentage change in the quantity demanded divided by the percentage change in income.

53. Computing Income Elasticity

54. Income Elasticity Types of Goods
Normal Goods
Inferior Goods
Higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods.

55. THE ELASTICITY OF SUPPLY
Price elasticity of supply is a measure of how much the quantity supplied of a good responds to a change in the price of that good.
Price elasticity of supply is the percentage change in quantity supplied resulting from a percent change in price.
PES = % change in quantity supplied/% change in price
Or PES = Or PES = P/Q x ∆Q/∆P

56. The Price Elasticity of Supply
(a) Perfectly Inelastic Supply: Elasticity Equals 0
Price
Supply $5
1. An
increase
in price . . . 4
100
Quantity
leaves the quantity supplied unchanged.

57. The Price Elasticity of Supply
(b) Inelastic Supply: Elasticity Is Less Than 1
Price
Supply
110 $5
1. A 22%
increase
in price . . .
100 4
Quantity
leads to a 10% increase in quantity supplied.

58. The Price Elasticity of Supply
(c) Unit Elastic Supply: Elasticity Equals 1
Price
Supply
125 $5
1. A 22%
increase
in price . . .
100 4
Quantity
leads to a 22% increase in quantity supplied.
Copyright©2003 Southwestern/Thomson Learning

59. The Price Elasticity of Supply
(d) Elastic Supply: Elasticity Is Greater Than 1
Price
Supply $5
200
1. A 22%
increase
in price . . . 4
100
Quantity
leads to a 67% increase in quantity supplied.
Copyright©2003 Southwestern/Thomson Learning

60. The Price Elasticity of Supply
(e) Perfectly Elastic Supply: Elasticity Equals Infinity
Price
1. At any price
above $4, quantity
supplied is infinite. $4
Supply
2. At exactly $4,
producers will
supply any quantity.
3. At a price below $4,
quantity supplied is zero.
Quantity
Copyright©2003 Southwestern/Thomson Learning

61. Determinants of Elasticity of Supply
Ability of sellers to change the amount of the good they produce.
Beach-front land is inelastic.
Books, cars, or manufactured goods are elastic.
Time period.
Supply is more elastic in the long run.

62. Computing the Price Elasticity of Supply
The price elasticity of supply is computed as the percentage change in the quantity supplied divided by the percentage change in price.

63. 3.5.4.Features of elasticity of supply
Elastic goods
Inelastic goods
PED value
Greater than 1
Less than 1
A rise in price means
A larger rise in supply
A smaller rise in supply
Slope of supply curve
Flat
Steep
The good is produced
Rapidly
Slowly
The time period is
Months
Days
The firm has
Large stocks
Limited stocks
Example
Screws
Beef

64. Cross Elasticity of Demand
Cross elasticity of demand (XED) measures the responsiveness of demand for one good (z) to a given change in the price of a second good (w):
XED = Percentage in quantity demanded of good z/Percentage change in the price of good w
If XED is positive then the two goods are substitutes. If XED is negative then the two goods are complements.