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DEMAND AND SUPPLY

Demand

It is used to refer to the amount of the

commodity that consumers wish topurchase at any given price at a time

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DEMAND

The law of demand states that ceteris

paribus, the lower the price at which a

commodity is offered,

the greater of itthat is demanded and the higher the

price, the smaller the quantity that a

consumer would be willing to buy.

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3

DEMAND CURVE

0

0.2

0.4

0.6

0.8

1

1.2

16014012010080604020

Quantity Demanded (Thousand)

Price

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DETERMINANTS OF DEMAND

1. Taste Consumers' tastes or preferences

2. Income Their incomes

3. Size of Market The population or the number of

consumers in the market for a given product.4. Prices of related goods The prices of other

goods consumers may choose to buy instead ofthis product-substitutes and or complements.

5. Expectation What consumers expect to happento the economy or to the part of it that concernsthem.

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CHANGE IN QUANTITY

DEMANDED

q3q2

D

D

P1

q1

Quantity

Price

P2

P3

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CHANGE IN DEMAND

q3 q2

D2

D2

D1

D1

D3

D3

PX

q1

E F

Quantity

Price

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CAUSES OF RISE IN DEMAND

1.A rise in income

2.A rise in the price of a substitute

3.A fall in the price of a complement

4.A change in taste in favour of the commodity

5.Expectation of future rise or shortage.

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SUPPLY

Supply refers to the various quantities

of the good that sellers or suppliers

will willingly offer for sale at all

alternative prices per unit time.

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SUPPLY CURVE

Price

Quantity

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CHANGE IN SUPPLY

1. Changes in the cost of production

2. Changes in the prices of other goods

3. Changes in the suppliers expectations

about prices4. Changes in the number of other suppliers

5. Technical knowledge

6. Government policy

7. Acts of nature

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CHANGES IN QUANTITY

SUPPLIEDS1

S1

Quantity

Price

0

A

B

PA

PB

QA QB

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CHANGES IN SUPPLY

1.A decrease in the prices of all other

commodities

2.A decrease in the prices of inputs

used in the production of thecommodity

3.A cost-reducing improvement in

technology in the industry

4.A reduction in taxes or an increasein subsidies to the industry

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CHANGE IN SUPPLYS1

S2

S1 S2

PX

Quantity

Price

EF

0Q1 Q2

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EQUILIBRIUM PRICE

D

DS

S

Shortage

Surplus

Po

Qo Quantity

Price

0

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SHIFT IN DEMAND AND SUPPLY

Q1Q2 Q0

P1

P0

P2

Q

S0

D2D0

D1

A

B

C

S1

Q

S0

B

A

Q0 Q1

D0

P

P1

P0

(b)(a)

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EXCEPTIONAL DEMAND AND

SUPPLYDemand:

Perception of positive correlation between

Quality and price (shares, ostentatiousgoods)

Supply:

Services of human being with targetincome for uninteresting job.

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ELASTICITY OF DEMAND AND

SUPPLY ELASTICITY OF DEMAND

priceinChange%demandedquantityinChange%Demandof !Elasticity

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ELASTICITY OF DEMAND

A

B

D

120

80

1600 22000

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20

2

505045

100100120

!

!(

(

! pp

qq

Ep

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TYPES OF DEMAND ELASTICITY

For:1. Unitary Elasticity Elasticity of demand is

exactly 1

2. Inelastic Demand Elasticity is less than 1(eg

salt, water, matches)

3. Elastic Demand Elasticity is greater than 1 (eg.

luxury goods)

4. Perfectly inelastic Demand Demand is such that

consumers buy exactly the same quantity

regardless of the price charged.5. Perfectly Elastic Demand Demand such that

customers will buy an unlimited quantity at a

particular price but will buy none whatsoever if they

had to pay more that that price.PRINCIPLES OF ECONOMICSUMaT, TARKWA, GHANA

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TYPES OF ELASTICITY OF

DEMAND

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ELASTICITY OF SUPPLY

TYPES OF ELASTICITY

Price

Quantity

S1

S1

S2

S2

S3

S3

S5 S5

S4

S4

AB

C DE

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Demand and Supply -

Relationship and Applications

1. Joint Demand (Complements, eg car and petrol)

2. Competitive Demand (Substitutes eg. margarine

and butter)3. Composite Demand (Commodity that has several

different uses e.g. wool)

4. Joint Supply (Where two products are jointly

produced (e.g.. beef and hide; Au and Ag.)

PRINCIPLES OF ECONOMICSUMaT, TARKWA, GHANA