basic elements of supply and demand

Basic Elements Of Supply And Demand

Chapter 3

Topics:

Demand Demand Schedule Law of demand Factors Affecting Demand curve Supply Supply Schedule Law of supply Factors Affecting Supply curve

Demand Curve

Price Quantity

5 9

4 10

3 12

2 15

1 20

Demand Curve

05

10152025

0 2 4 6

Quantityp

rice Series1

Factors effect the demand curve

1. Change in taste

2. Prices of other goods

• Substitute

• Complement

4. Income

5. Government rules and regulation

6. Other factors

Change in taste: Advertisement effect our taste

Quantity X

Pric

e

D2

D

Increase in demand

Change in Prices of other goods (substitute)

E.g.: Price of coke increases, demand of Pepsi increases

D2

D

Quantity (Pepsi)

Pric

e

Increase in demand

Change in Prices of other goods (Complement)

DD1

Quantity (sugar)

Pric

e

E.g.: Price of tea increases, demand of sugar decreases Decrease in demand

Change in Income

D2

D

Quantity X

Pric

e

Increase in demand

Change in Government Regulation (Sales tax)

D1

Quantity X

Pric

e

Decrease in demand

Supply:

The supply schedule for a commodity shows the relationship between market price and the amount of that commodity that producers are willing to produce and sell other held constant

Supply Curve

Price Quantity

5 18

4 16

3 12

2 7

1 0

0

1

2

3

4

5

6

0 5 10 15 20

Series1

Technology Input prices Prices of related goods Government policy Special influences

Factors effect the Supply curve

S’

S

Quantity

pric

e

Increase in supply

Quantity

pric

e S’

s

Decrease In Supply

Conti….

Market equilibrium

Shifts in equilibrium

Price Qty supply Qty demand

5 18 9

4 16 10

3 12 12

2 7 15

1 0 20

Equillibruim

0

1

2

3

4

5

6

0 5 10 15 20 25

QuantityPr

ice D

Equillibruim

0

1

2

3

4

5

6

0 5 10 15 20 25

Quantity

Pri

ce

D

Quantity

Pric

e

S

D

Excess Supply or Surplus

3

11

Excess Supply or Surplus

Quantity

Pric

e S

D

Excess Demand

Or shortage

Excess Demand Or shortage

3

11

Quantity

S

D

Price Ceiling

pric

e

Price Control: in which govt. restrict to suppliers and give them limits to charge

In price Ceiling maximum amount restriction

Price Ceiling

3

5

10 15

Quantity

S

D

Price Floor

In price Floor minimum amount restriction

8

5

10 20

pric

ePrice Floor

Demand and supply shift

Effect on price and quantity

If demand rise The demand curve shift to the right

P

Q

If demand Falls The demand curve shift to the left

P

Q

If supply rise The supply curve shift to the right

P

Q

If supply Falls The supply curve shift to the left

P

Q

Demand and supply curve shifts and there effects on price and quantity

Quantity

Pric

e

S

D

D’

Increase in Demand, Rightward shift

Shift in Equilibrium

Quantity

Pric

e

S

D

S’

Increase in supply, Rightward shift