UGBS 003

ECONOMICS

Session 3: Demand and Supply Analysis

DR ABEL FUMEY
• The main objective of this study is to:
– Understand what demand is
– Identify the factors that influence consumers to purchase
products
– Understand how these factors influence demand
Objectives – Understand what supply is
– Identify the factors that influence producers decision to
put goods on the market for sale
– Understand market equilibrium and how price and quantity
change
•Demand: Quantities of goods and services
that consumers are willing and able to buy at
various prices at a given period of time.
•Demand refers to a specific period of time.
For example, the amount per day or per
month.
Demand
•This means that price is a factor that influences
demand for a product.

• We discuss the other factors that influence demand

later
The Law of Demand

• All other things equal,

• The higher the price of a product,
Demand the fewer the quantity that people
buy
• The lower the price of a product,
the greater the quantity that
people buy.
1. Price
• There is a negative relationship between price and
quantity
• Law of demand: All things equal, the quantity demand
What of a good increases when the price of the good falls, and
vice versa.
determines
the quantity • 2. Consumer incomes
• Linked to your purchasing power
demanded? • May have a positive or negative relationship with
quantity demand
• Positive relationship – normal goods
• E.g., milk, bread, etc.
• Negative relation – inferior goods
• E.g., used/2nd-hand clothing, “trotro”
3. Price of related goods
• Substitutes – goods that serve same/similar purpose
• Ideal milk vs. Peak milk
• Coke vs. Pepsi
• Adidas footwear vs. Nike footwear
• Complements – goods that are jointly consumed
• Shoe & socks
What • Computers & software
determines 4. Tastes
• Typically shaped by consumers convenience, custom, and
social attitudes.
the quantity • When consumers’ tastes are in favour of the good, quantity
demand increases, and vice versa.
demanded?
5. Expectations
• i.e., expectations about the future may affect your demand for
a good today
• If you expect your income to increase, you will increase the
quantity demand of e.g., bread/milk. The reverse holds
• If you expect the price of a good to increase, the quantity
demand for that good now will increase.
•Demand schedule is a tabular relationship
between the different prices and their respective
quantities holding all other factors constant.
Demand
Schedule, •Demand curve is a graphical representation
Demand showing the
relationship between the prices and their respective
Curve and quantities holding all other factors constant.
Demand
Function •Demand function is a mathematical
relationship between
prices and their respective quantities holding all other
factors constant.
Demand
Schedule,
Demand
Curve and
Demand
Function
Market Demand versus Individual Demand.
The quantity
demanded in the
market is the
sum
(horizontally) of
the quantities
demanded by all
buyers at each
price.
• Recall that the law of demand used the
phrase “all things being equal”.

Changes in • That means everything that may affect

Quantity Demand
quantity demand (except the price of
the good in question) was held
constant.

• Therefore, changes in these “other

things” will shift the demand curve
• Change in demand is the resultant change in
quantity arising from the factors that affect
demand other than the price of the good.
Change in
Demand
• A change in demand shifts the demand curve
either to the left
• or right.
• Change in demand is the resultant change in
quantity arising from the factors that affect
demand other than the price of the good.
Change in
Demand
• A change in demand shifts the demand curve
either to the left
• or right.
Change in Demand
• Figure shows
changes in demand.
1. The demand curve
shifts to the left from
D0 to D1when any of
the factors apart from
price causes demand
to decrease,
2. The demand curve
• shifts to the right
from D0 to D2 when
any of the factors
other than
• Supply is the quantities of a good or service that producers are
willing and able to put on the market for sale at various prices
per period of time.

• Price – a major factor that influences supply.

Supply  The Law of Supply

• All other things equal,
• The higher the price of a product, the greater the amount that is
put on the market for sale.

• The lower the price of a product, the smaller the quantity that is
put on the market for sale.

• .
• A supply schedule shows a list of different quantities
supplied at their respective prices when all other
influences on selling plans remain the same.
• A supply curve illustrates the relationship between the
Supply quantities supplied and their respective prices on a graph
holding all other factors constant.
• A supply function depicts the relationship between the
quantities supplied and their respective prices in the form of
an equation holding all other factors constant
Supply
Individual Supply
and Market Supply:

Market supply is the

horizontal
summation of
individual supply
curves.
• 1. Price
• Positive relationship between price and quantity
supplied
• Law of supply: All things being equal, the quantity
What supplied of a good rises when the price of the good
rises; and vice versa.
determines the 2. Prices of inputs
quantity 3. Technology
supplied? 4. Extent of government regulation
• e.g., suppose an increase in the stringency of safety
legislation which increases production costs
5. Expectations
6. Weather condition
• Recall that the law of supply used the phrase “all
things being equal”.

• That means everything that may affect quantity

Shifts in the supply (except the price of the good in question)
supply curve was held constant.

• Therefore, changes in these “other things” will shift

the supply curve
• Input prices
• Price of labour (wages)
Shifts in the • A rise in wage – increase in cost of production – it is
not profitable to produce/supply at each output
supply curve price
• Therefore, firms supply a lower quantity at each price
– supply curve shifts to the left
• The opposite is true.
Shifts in the
•
supply curve
2 Technology
• The supply curve is drawn for a given technology
• An improvement in technology will shift the supply
curve to the right
Shifts in the • i.e., at each price, the quantity supplied will decrease.

supply curve 3. Number of sellers

• An increase in the number of sellers will increase the
quantity supplied at each price
• Supply curve shifts to the left
• The opposite is true
4. Expectations
• Sellers will adjust supply today when they expect future
prices (output price or input price) to change.
• If the expectation will raise cost of production, supply
will shift to the left
• Note that sellers’ response to expectations of the future
Shifts in the will also depend on the nature of the good they
produce/sell
supply curve • i.e., for perishable goods, the magnitude of their response may
be small

5. Government regulation
• Can be viewed as imposing a technological change that
can be adverse for producers.
• Stringent regulation will shift the supply curve to the left
Change in • A change in quantity supplied is caused by a change
in the own price of the product. It causes a movement
Quantity along the same supply.

Supplied Versus
• A change in supply is caused by other factors apart
Change in from the price of the product. It causes a bodily shift of
the supply curve.
Supply
• Mankiw, G. (2012). Principles of
Economics (6th Edition), South Western.

Reference • Begg. D., Vernasca, G., Fischer, S. &

Dornbusch, R. (2011), Economics, 10th
Edition, McGraw-Hill.