2.theory of Demand and Supply

Chapter 2
Demand & Supply

ECO 415
LEARNING OUTCOMES
At the of the topic student should be able to
explain th e following:-
1.The law of demand and the law of supply
2.The change in demand and the change in quantity
demanded
3.The change in supply and the change in quantity
supply
4.The reasons for the demand and the suplly curves
to shift
5. The cause for a movement along a demand curve

and along a supply curve.
• What is Demand???
Definition
• Demand – ability and willingness to buy

specific quantities of goods in a given
period of time at a particular price.
• Ceteris Paribus – Latin phrase that means

holding other factors constant while some
other factors change
Law Of Demand
• Higher the price of product, the lower the

quantity demanded of that product and the
lower the price of a product, the higher is
the quantity demand
Price
Quantity
Demand
Law Of Demand con’t
Price
Quantity
Demand
Determinants of Demand
Policies of services/ terms of
payment
-Better customer service and terms of payment by
credit instead of cash will increase sales.
Price of goods Profit margin

-Price of the product depends on the -Higher profit margin lead to
cost of production increase in price of the product and
-higher the price, lower the demand reduce its demand and vice versa.
Internal
Factors
Consumers Income
External -When income increases, consumers
demand for more goods and services
Factors will increase
Advertisment
-Advertised goods normally have higher
Population or demand
number of buyers -Advertisements attract people to the

goods and services
-Larger population with a
high rate of growth creates
demand for goods and
services.
Price of
External
related
Factors con’t
goods
Substitute Goods Complementary Goods

- Goods or services that can be used in -Goods that can be used in complement
place of another product/ services with another product.
-Example : tea versus coffee Example : pen and ink
Change in Quantity Demanded
VS
Change in Demand Graph
Change in Quantity Demand
PRICE
30
20
10 DD
QUANTITY
0
5 10 15
Change in Demand
PRICE
30
20
D1
10 D0
QUANTITY
0
5 10 15
Curve Changes in Quantity Demand Curve Changes in Demand
-Movement along the demand curves Demand curve shifts to right if :
-Occurs when price of product changes 1. Price of substitues goods increases
2. Price of complement goods decreases.
3. Number of buyers increases.
-Upward movement  Decrease in quantity

demanded (contraction)
Demand curve shifts to left if :

1. Price of subtitutes goods decreases
2. Price of complement goods increases
-Downard movement  Increase in quantity 3. Number of buyers decreases.
demanded (expansion)
Exceptional Demand
Exceptional Demand ???
- Price of the product increase, the
demand for it will also increase.
PRICE
DEMAND
Exceptional
Demands
Giffen Goods
Status Symbol Goods
Giffen goods/ inferior goods
-Products which are purchased are normally consumed by
by people in the higher income those in the lower group
groups, not for satisfaction but income.
ostentation (high
quality/standard goods)
Emergencies
During emergency times, people
will buy more goods even though
the prices of these goods are high.
Example : Basic Neccessities
Inter-related Demand
Inter-Related
Demand
Joint Demand Competetive Demand

Price Elasticity of Demand
• Measures the sensitivity/responsiveness of the quantity
demanded due to change in its price.
Price Elasticity % in quantity demanded

Of Demand = % in price
= Q/Q x 100
P/P x 100
= Q x P
Q P
Differences between Determinants of
Demand &
Determinants of Price Elasticity of Demand
Differences between Determinants of
Demand &
Determinants of Price Elasticity of Demand
Determinants of Demand Determinants of Price Elasticity of

Demand
1. Price of related goods Existence of subtitutes
2. Consumer’s income Proportion of expenditure on a good
3. Consumer’s fashion & tastes Nature of the goods
4. Population Income Level
5. Expectation about future prices Time dimensions
SUPPLY
&
LAW OF SUPPLY
What is Supply???
Supply is the ability and willingness

to sell or produce a particular
product and sevices in given period
of time at particular price, ceteris
paribus
Law of Supply...
-States that the higher the

price of product, the greater
is the quantity supplied of
that product and the lower
the price, the lower is the
quantity supplied, ceteris
paribus
Supply Curve
PRICE
SS
5
1
QUANTITY
0
2 4 6 8 10
Individual Supply
&
Market Supply
• Individual Supply
- Relationship between the total quantity of a
product supplied by a single seller and its
price
• Market Supply
- Relationship between the total quantity of a
product supplied by adding all the quantities
supplied by all sellers in market and its price
Individual Supply Individual
Market Supply
1 Supply 2
Market Supply = Ʃ Individual Supply

Determinants of Supply
Cost of Production
-When the cost of production
increase, the quantity applied
will decrease and vice versa
Price of related
Number of sellers Goods
-The larger the a) Substitute goods
number of firms Determinants Supply of a product will
supplying a product, of Supply increases if there is an
the larger the
increase in the price of
quantity supplied of
substitute
the product.
Example : Coke & Pepsi
b) Complementary Goods
An increase in the price of a
product will increase the supply
of a complementary product.
Example : Pen & Ink
Change in Quantity Supplied
VS
Change in Supply Graph
Change in
Change in Supply
Quantity Supplied
The movement along supply If price of product is constant

curve illustrates changes in the and other factors change, there
quantity demand. will be a shift of the supply curve
-An upward movement along the - An increase in supply  supply

supply curve  Increase in increase and supply curves shifts
quantity supplied to the right
-A downard  Decrease in -A decrease  supply decrease
quantity supplied and supply curve shifts to left.
PRICE
SS
30
20
10
QUANTITY
0
5 10 15
PRICE
SS
c
30
20
b
10 a
QUANTITY
0
5 10 15
Explaination
-Movement along the supply curve

-Occurs when price of product changes
-Upward movement : Price of product rises, the quantity

supplied increases
-Downard movement : price of product falls, the quantity

supplied decreases
Change in Supply
PRICE S3
S2
30 S3
20
b c
10
QUANTITY
0
5 10 15
Explaination
-Supply curves shifts to right if

1. Price of substitutes goods increase
2. Price of complementary goods increases
3. Price of input decreases
4. Increase in number of sellers
5. Government provides subsidy to sellers
-Supply curves shifts to left if :

1. Price of substitutes goods increases.
2. Price of complementary goods decreases.
3. Decrease in number of sellers
4. Government imposes tax on sellers.
Exceptional
Supply
The exception occurs when the
price of product increases and the
supply decreases
PRICE
SUPPLY
• Income Effect
– A higher income induces an increase in demand for leisure.
So, less time in spent on work and there is decrease in the
quantity of labour supplied.
• Substitution Effect :-
– The higher the wage rate, more people will economize on
their non-market activities and increase their work hours.
The End
Thank you...
Assalamualaikum 
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2.theory of Demand and Supply

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Chapter 2

Demand & Supply

5. The cause for a movement along a demand curve

• Demand – ability and willingness to buy

• Ceteris Paribus – Latin phrase that means

• Higher the price of product, the lower the

Price of goods Profit margin

number of buyers -Advertisements attract people to the

Substitute Goods Complementary Goods

-Upward movement  Decrease in quantity

Demand curve shifts to left if :

Joint Demand Competetive Demand

Price Elasticity % in quantity demanded

Determinants of Demand Determinants of Price Elasticity of

Supply is the ability and willingness

-States that the higher the

Market Supply = Ʃ Individual Supply

The movement along supply If price of product is constant

-An upward movement along the - An increase in supply  supply

-Movement along the supply curve

-Upward movement : Price of product rises, the quantity

-Downard movement : price of product falls, the quantity

-Supply curves shifts to right if

-Supply curves shifts to left if :

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