fundementals of economics
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FUNDEMENTALS OF
ECONOMICS
BY
A A D THILINI SAPARAMADU
A A D Thilini Saparamadu 2
IS 1007: Fundamentals of EconomicsBachelor of in Information and Communication
Technology BICT Degree Programme
Year 1University of Colombo School of Computing - UCSC
Lecturer :Mrs. Saparamadu A A D TDepartment of Business Economics
Faculty of Management Studies and CommerceUniversity of Sri Jayewardenepura
SESSION 02
DEMAND, SUPPLY & EQUILIBRIUM
DEMAND
Demand is a relationship indicating the quantity of a well-defined commodity that consumers are both willing and able to buy at each possible price during a given period of time, while other things remain constant (ceteris paribus)
A A D Thilini Saparamadu 4
THEORY OF DEMAND
THE DETERMINANTS OF QUANTITY DEMANDED
• The price of the product
• The price of other products
• The consumer's income and wealth
• Various “sociological” factors
DEMAND FUNCTIONThe list of determinants of demand can be
summarized in functional notation as;
Qdx = f (Px, P1…….Pn-1, Y, S…..)A A D Thilini Saparamadu 5
THE INDIVIDUAL’S DEMAND FOR A COMMODITY
The relationship between the quantity of a commodity, that a consumer wishes to purchase
per period of time and the price of that commodity, when other
things being equal, is called individual demand.
A A D Thilini Saparamadu 6
THE DEMAND SCHEDULE
Demand schedule is one way of showing the relationship between quantity demanded and the price.
A A D Thilini Saparamadu 7
Price Quantity Demanded
18 20
19 19
20 18
21 17
22 16
DEMAND CURVE
A graphical representation of the relationship between the product price and the quantity demanded is called the demand curve.
A A D Thilini Saparamadu 8
DEMAND AND PRICE
• There is a negative relationship between the quantity demanded and the price of the commodity
• Rationale :
‐ Income effect
‐ Substitute effect
A A D Thilini Saparamadu 9
THE MARKET DEMAND FOR A COMMODITY
The market demand for a given commodity is the horizontal summation of the demands of
the individual consumers in the market.
A A D Thilini Saparamadu 10
Price Demand A Demand B Market Demand
A B
18 20 22 42
19 19 21 40
20 18 20 38
21 17 19 36
22 16 18 34
23 15 17 32
MARKET DEMAND CURVE
A graphical representation of the relationship between the price and the
market demand is called Market Demand Curve.
A A D Thilini Saparamadu 11
MARKET DEMAND FUNCTION
Market Demand can be written in mathematical form:
Qdx = f (Px, Py, N, Y, T,…..)
Qdx = Quantity demanded
Px = Price of X
Py = Prices of other goods
Y = Consumer income
T = Consumer preference or taste
N = Number of consumers in the marketA A D Thilini Saparamadu 12
MOVEMENTS ALONG DEMAND CURVE• A movement downwards along a demand curve -
Increase in the quantity demanded
• A movement upwards along a demand curve - Decrease in the quantity demanded
A A D Thilini Saparamadu 13
20
18
0 18 20 Quantity Demanded
SHIFTS IN THE DEMAND CURVE
A Demand curve shifts , in response to a change in any of the determinants of demand.
A rightward shift - Increase in demand A leftward shift -Decrease in demand
A A D Thilini Saparamadu 14
THEORY OF SUPPLY
Supply indicates how much of the goods producers are, both willing
and able to offer, for sale in a given time period at each possible price, while other
conditions of supply are held constant.
A A D Thilini Saparamadu 15
THE DETERMINANTS OF SUPPLY
The Price of the product and factors of production
The goals of producing firms
The state of technology
Price expectations
Changes resulting from nature
Government policy
SUPPLY FUNCTION
The Supply function is a short-hand way of saying that quantity supplied depends on the variables listed on the right – hand side , while the form of the function determines the sign and magnitude of that dependence.
Qsx = F (Px, Py,F1…..Fm..)
A A D Thilini Saparamadu 17
There is a positive relationship between the price of a commodity and its supply.
Reasons :
- willingness - Ability
A A D Thilini Saparamadu 18
SUPPLY SCHEDULE
Supply can be expressed as a supply schedule. It shows the relationship between quantity supplied and the price .
A A D Thilini Saparamadu 19
Price Quantity Supplied
19 18
20 19
21 20
22 21
23 22
24 23
SUPPLY CURVE
Each market has a supply side as well as a demand
side .
The supply can be represented by a supply
curve, which is the plot of the supply schedule on a
graph.
A A D Thilini Saparamadu 20
MARKET SUPPLY Market supply is the sum of the amount supplied at each
price by all the individual suppliers.
A A D Thilini Saparamadu 21
Price Supply – A Supply –B Market Supply
18 13 11
19 15 13
20 17 15
21 19 17
22 21 19
23 23 21
MOVEMENTS ALONG SUPPLY CURVE
The result of a change in the price of the commodity .
A movement down a supply curve - Decrease in the quantity supplied
A movement up the supply curve - Increase in the quantity supplied
A A D Thilini Saparamadu 22
SHIFTS IN THE SUPPLY CURVE
A Supply curve shifts to a new position in response to a change in any of the variables , that were held constant when original curve was drawn.
These variables (factors) are called Shift Factors.(Price of production factors, level of technology …) .
A rightward shift - Increase in SupplyA leftward shift - Decrease in Supply
A A D Thilini Saparamadu 23
EQUILIBRIUM PRICE AND OUTPUT
The quantity that consumers and producers are willing and able to sell is called equilibrium.
A A D Thilini Saparamadu 24
Price Demand Supply
18 42 24
19 40 28
20 38 32
21 36 36
22 34 40
23 32 44
Equilibrium : Graphical Analysis
A A D Thilini Saparamadu 25
EQUILIBRIUM: Using Equations
CHANGES IN THE EQUILIBRIUM
Changes in the conditions of Demand and Supply
Demand Shifts
If the conditions of demand change, the demand curve shift either to the right or left side.
A A D Thilini Saparamadu 27
SUPPLY SHIFTS
The equilibrium price and quantity may be altered by a change in supply .
If the price of relevant resources (cost of production), technology and the number of producers or the price of related products change , supply changes.
A A D Thilini Saparamadu 28
END OF SESSION 02
A A D Thilini Saparamadu 29
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