CHAPTER 2
DEMAND AND SUPPLY
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This chapter we have 2 parts:
1. DEMAND 2. SUPPLY
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LEARNING
OUTCOMES:-
At the end of this chapter, students should be able to:-
1. Define the theory of demand.
2. Differentiate between change in demand and change
in quantity demanded.
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DEFINITION
∆’s IN Qd
VS LAW OF DD
∆’s IN DD
DETERMINANTS
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DEFINITION OF DEMAND
Demand is a schedule or a curve that shows the various
amounts of a product that consumers are willing and able to
purchase at a series of possible prices during a specified period
of time, other things equal.
The term demand signifies the ability and the willingness to buy
a particular commodity at a given point of time.
Example:
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DEMAND CURVE
Demand curve shows the total quantity that being demanded
at various price level, ceteris peribus (other things held
constant)
Example: An individual buyer’s demand for corn.
Price
Quantity
Price per
Demanded 5
Bushel Demand Curve
per Week
A $5 10
4
B 4 20
C 3 35 3
D 2 55 2
E 1 80
1
6
10 20 35 55 80 Quantity
LAW OF DEMAND
Other things equal, as price increases, the Qd decreases (P↑,Qd↓)
and vice versa, as the price decreases, the Qd increases (P↓,Qd↑).
Negative or inverse relationship between price and quantity
demanded. Economists call this inverse relationship the law of
demand.
When the price
..the Quantity
goes down..
goes down
demanded
The
When the price
..the quantity
relationship
demanded
goes up..
goes up
between price
and quantity is
inverse.
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CHANGES IN DD/ DETERMINANTS OF DD
1. TASTE
2. NUMBER OF BUYERS
3. INCOME
4. THE PRICE OF RELATED GOODS
5. CONSUMER EXPECTATION
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1. TASTE
• Favorable change in consumer taste (preference) leads to
an increase in demand, DD curve will shift to the right.
• Unfavorable change lead to a decrease.
• As preference change, demand will change
• EXAMPLE: The introduction of digital cameras greatly
decreased the demand for film cameras.
Price of film camera
Po
D0
D1
Q1 Quantity of film camera
Q0
2. NUMBER OF BUYERS
• An increase in the number of buyers in a market is likely
to increase demand; a decrease in the number of buyers
will probably decrease demand.
• For example, the rising number of older persons in the
United States has increased the demand for medical
care, and retirement communities.
Price of medical care
Po
D0 D1
Q0 Quantity of medical care
Q1
2. INCOME
• A rise in income causes an increase in demand.
Consumers typically buy more steaks, furniture, and
electronic equipment as their incomes increase.
Conversely, the demand for such products declines as
their incomes fall.
• Products whose demand varies directly with money
income are called superior goods, or normal goods.
1. Normal Goods: + relationship.
Example: DRESS AND SHOES.
Price of dress
Po
D0 D1
Quantity of dress
Q0 Q1
2. Inferior Goods: - relationship. example: maggi and salted fish
Price of maggi
D0
D1
Q1 Q0 Quantity of maggi
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3. Necessity Goods: 0 relationship
Price of sugar
Po
D0
Q0 Quantity of sugar
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4. PRICE OF RELATED GOODS
A change in the price of a related good may either increase or decrease the demand for
a product, depending on whether the related good is a substitute or a complement:
1. Substitute Goods
• Those goods that can be used in place of another good. They have similar function.
Price of substitute and demand for the other good are positively related.
• When the price of one increases, demand for the others goes up
• Example: Häagen-Dazs ice cream and Ben & Jerry’s ice cream are substitute
P Häagen-Dazs ice cream ↑, Qd Häagen-Dazs ice cream ↓, D Jerry’s ice cream ↑
Price of Jerry’s ice cream
D1
Do
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Quantity of Jerry’s ice
Qo Q1
cream
2. Complement goods
• Those goods that are used together with another good. Price of
complement and demand for the other good are inversely related.
• Example: computers and software are complements, so the demand for
computer decreases when the price of software rises
Pcomputer↑, Qd computer↓, D software↓
Price of software
D0
D1
Q1 Q0 Quantity of software
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3. Independent goods
• The vast majority of goods are not related to one another and are
called independent goods. A change in the price of one has little or no effect
on the demand for the other.
• Example: butter and golf balls, potatoes and automobiles, and bananas and
wristwatches.
Pcar ↑, Qd car↓, D potato doesn’t change
Price of potato
Po
D0
Q0 Quantity of potato
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5. EXPECTATION OF FUTURE
• FUTURE PRICE:
• Current demand will increase if they
expect future price increase
Pe↑, current Qd ↑, D ↑
• FUTURE INCOME:
• Current demand will increase if they
expect future income increase
Ye↑, current Qd ↑, D ↑
Determinants of Demand: Factors
That Shift the Demand Curve
Determinant Examples
Change in buyer Physical fitness rises in popularity, increasing the demand for jogging
tastes shoes and bicycles; smartphone usages rises, reducing the demand
for desktop and laptop computers.
Change in number A decline in the birthrate reduces the demand for children’s toys.
of buyers
Change in income A rise in incomes increases the demand for normal goods such as
restaurant meals, sports tickets, and necklaces while reducing the
demand for inferior goods such as turnips, bus passes, and
inexpensive wine.
Change in the A reduction in airfares reduces the demand for train transportation
prices of related (substitute goods); a decline in the price of printers increases the
goods demand for ink cartridges (complementary goods).
Change in Inclement weather in South America creates an expectation of higher
consumer future coffee bean prices, thereby increasing today’s demand for
expectations coffee beans.
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CHANGES IN QD VS CHANGES IN DEMAND
Changes in Qd Changes in Demand
P
P
B
P1
P
A
Po D1
D2 Do
P2 C
Q2 Qo Q1
Q1
Q
Qo Q2 Q
• Refers to a movement along a • Refers to a shift in the
demand curve. demand curve.
• The only factor that can directly • Price will remains constant
cause a change in the quantity • Factor influence is non-price
demanded of a good is a change determinants
in the price of the good-that is, its
own price. Example: If income increase, the
• Factor influence is price demand for apple will increase,
the demand curve for apple will
Example: P↑, Qd↓ shift rightward.
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