EIBFS

1. Title
Date
Lifetime Learning… Building Success… Towards Globalization
Economics -Chapter 2
Demand, Supply and Market Equilibrium
Lifetime Learning… Building Success… Towards Globalization

2. • The Market:
• The market for a product is a situation in which the buyer and
seller communicate with each other for the purpose of
exchange.
• The market may be local, regional, national or international.
• The market may have no exact location, as with exchange via
the internet.
EIBFS/Economics

3. • What is Demand?
• Demand for a product is the amount of the product
that consumers are willing and able to purchase at a
particular price over a given period of time.
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4. • Factors influencing/ affecting the demand
– Price of the product
– Price of other products
– Household income
– Tastes
– Advertising.
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5. The Demand Curve
• The demand curve
shows the relationship
between the quantity
demanded of a good or
service over a particular
period of time and its
price, assuming ceteris
paribus.
EIBFS/Economics

6. Demand Curve Explained
• Price on vertical axis and quantity demanded on horizontal axis.
• Demand is a flow concept - measured over a period of time.
• Curve slopes downward from left to right, a negative
relationship.
• A change in price of the product shall lead to a movement along
the demand curve.
• Assumption of ceteris paribus meaning ‘ all other factors
remaining unchanged.
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7. Movement along the Demand Curve
• Movement along the demand curve is the result of a rise or
fall in the price of the product itself.
• A change in price of a product leads to a Movement Along
the Demand Curve.
– Quantity demanded decrease— contraction of demand
– Quantity demanded increase— expansion of demand
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8. Shift in Demand Curve
• Factors other than the price of the product shall shift the
position of the demand curve.
– Increase in demand — shift to the right
– Decrease in demand — shift to the left
• Shift factors’ (known as conditions of demand) include:
– Price of other related products
– Level of household income.
– Tastes of consumers
– Number of consumers
– Advertising
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9. Shift factors Explained
 A change in the prices of related product affects the
demand in two ways:
• An increase in the price of a substitute for a good, increases the
demand for the good. (right shift)
• A fall in the price of a substitute for a good, decreases the demand
for the good. (left shift)
• Substitute goods can be used in place of one another (Pepsi
cola-Coca cola)
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10. • Complementary goods are used jointly or purchased
together. (car and petrol)
• A fall in the price of a complement to a good increases the
demand for the good. (right shift)
• An increase in the price of a complement to a good decreases
the demand for the good. (shift to left)
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11.  Change in household income:
 Normal goods-With an increase in income demand for the
normal commodity increases. (right shift)
 Inferior goods-With an increase in income demand for the
inferior goods decreases. (left shift)
• Changes in taste:
– in favour of a product can increase demand, (right shift)
– against a product can decrease demand. (left shift)
• Advertising:
– Successful advertising can increase demand, (right shift)
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12. EIBFS/Economics

13. Shift in Demand Curve
• Thequantitydemandedofaproductdecreases(shifttotheleft)ifthereis:
– Fall in price of substitute
– Rise in price of complement
– Fall in real income (normal product)
– Rise in real income (inferior product)
– Change of tastes against product
– Fall in advertising expenditure.
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14. • Thequantitydemandedofaproduct
increases(shifttotheright)ifthereis
– Rise in price of substitute
– Rise in number of consumers
– Rise in income
– Rise in advertising cost
– Tastes in favour of product
• Thequantitydemandedofaproduct
decreases(shifttotheleft)ifthereis
– Fall in price of substitute
– Fall in number of consumers
– Fall in income
– Fall in advertising Cost
– Tastes against product
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15. Shift in Demand Curve
• Thequantitydemandedofaproductincreases(shifttotheright)ifthereis:
– Rise in price of substitute
– Fall in price of complement
– Rise in real income (normal product)
– Fall in real income (inferior product)
– Change of tastes in favour of product
– Rise in advertising expenditure.
•
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16. Market Demand Curve
• Market demand curve is the total amount that
consumers demand at a particular price over a given
period of time.
• The market demand curve is derived from summing
the individual demand curves horizontally.
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17. Supply
• What is Supply?
• Supply of a product is the quantity of the product
that firms are willing and able to offer for sale at a
particular price over a particular period of time.
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18. • Factors influencing supply are:
– Price of the product
– Price of all the other products
– Price of the factors of production
– Technology
– All other factors (taxes, weather)
– Note: Assumption of ceteris paribus
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19. • A change in the price of the product:
– An increase in the price of a product will increase the
quantity supplied in market (more profitable for the
producers) assuming ceteris paribus.
– The relation ship between price and quantity supplied can
be presented in the form of supply schedule ( in table) or in
the form of supply curve (graph)
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20. Supply Curve
• The supply curve slope
upwards (positive
relationship) since as the
price rises, the quantity
supplied expands
(increases), assuming
ceteris paribus.
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21. Movement along the Supply Curve
• A change in the price of the product will lead to a
movement along the supply curve (same line).
• Movement along the supply curve is the result of a
rise or fall in the price of the product itself.
• The Quantity supplied of a products contracts (falls) if:
– the price falls
• The Quantity supplied of a products expands(increases) if:
– The prices rises
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22. Shift in Supply Curve
• The other factors which influence the supply will
shift the position of the supply curve (new line).
• Shift factors are:
– A change in the price of other products.
– A change in the price of the factors of production.
– A change in technology
– Other factors (weather, taxes, subsidy)
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24. Shift in Supply Curve
• Thequantitysuppliedofaproductdecreases(shifttotheleft)ifthereis:
– Rise in price of substitute product
– Fall in price of complement product
– Rise in costs of production
– Decline in the level of technology
– A new tax on the product
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25. Shift in Supply Curve
• Thequantity suppliedofaproductincreases(shifttotheright)ifthereis:
– Fall in price of substitute product
– Rise in price of complement product
– Fall in costs of production
– Improvement in the level of technology
– Introduction of subsidy on the product
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26. • Thequantity suppliedofaproduct
increases(shifttotheright)ifthereis:
– Fall in costs of production
– Increase in the number of
producers
– Good technology
– subsidy on the product
• Thequantitysuppliedofaproduct
decreases(shifttotheleft)ifthereis:
– Rise in costs of production
– Decline in the number of
producers
– Decline in the level of
technology
– Tax on the product
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27. • Market Supply is the total amount of the product
that all the firms are willing and able to supply at a
particular price over a given period of time.
• The market supply curve is derived from summing
the individual firm supply curves horizontally.
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29. Market equilibrium
• Equilibrium price relates to the price at which the
quantity demanded equals the quantity supplied.
• Disequilibrium refers to a situation in which demand
does not equal supply.
• This can lead to a situation of either excess demand
or excess supply.
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30. Market equilibrium (Continued)
•At price 35 pence, → equilibrium
price and quantity. (quantity
demanded 5 million bars =
quantity supplied 5 million bars.
•At price 20 pence →
disequilibrium situation; excess
demand of 6 million bars; cause
the price to rise.
• At price 50 pence →
disequilibrium excess supply of 6
million bars; cause the price to
fall
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31. Changes in equilibrium
• The equilibrium price and output may change as a
result of any one (or more) of the following:
• Increase in demand (Figure 2.9a)
• Decrease in demand
• Increase in supply (Figure 2.9b)
• Decrease in supply.
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32. EIBFS/Economics

33. • What is demand curve?
• A. The demand curve shows the relationship
between the quantity demanded of a product
and its price, over a period of time.
EIBFS/Economics