demand and supply in economics

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Demand and supply rules in economics

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  • ENGINEERING ECONOMICSLecturer:Engr. Afshan NaseemLecture 05DEMAND DEPARTMENT OF ENGINEERING MANAGEMENT COLLEGE OF E&ME, NUST

  • DEMAND

  • Introduction to DemandThe forces of supply and demand work together to set prices. Demand is the desire, willingness, and ability to buy a good or service. Supply can refer to one individual consumer or to the total demand of all consumers in the market (market demand).Based on that definition, which of the following do you have a demand for?

  • Introduction to DemandA demand schedule is a table that lists the various quantities of a product or service that someone is willing to buy over a range of possible prices.

    Price per Widget (Rs.)Quantity Demanded of Widget per dayRs.5002Rs.4004Rs.3006Rs.2008Rs.10010

  • Introduction to DemandA demand schedule can be shown as points on a graph.

    The graph lists prices on the vertical axis and quantities demanded on the horizontal axis. Each point on the graph shows how many units of the product or service an individual will buy at a particular price. The demand curve is the line that connects these points.

  • Introduction to DemandThe demand curve slopes downward. This shows that people are normally willing to buy less of a product at a high price and more at a low price. According to the law of demand, quantity demanded and price move in opposite directions.

  • Introduction to DemandWe buy products for their utility- the pleasure, usefulness, or satisfaction they give us.What is your utility for the following products? (Measure your utility by the maximum amount you would be willing to pay for this product)

    Do we have the same utility for these goods?

  • Changes in DemandChange in the quantity demanded due to a price change occurs ALONG the demand curve

    An increase in the Price of Widgets from Rs.300 to Rs.400 will lead to a decrease in the Quantity Demanded of Widgets from 6 to 4.

  • Changes in DemandDemand Curves can also shift in response to the following factors:Buyers (# of): changes in the number of consumersIncome: changes in consumers incomeTastes: changes in preference or popularity of product/ serviceExpectations: changes in what consumers expect to happen in the futureRelated goods: compliments and substitutesBITER: factors that shift the demand curve

  • Changes in DemandPrices of related goods affect on demandSubstitute goods a substitute is a product that can be used in the place of another. The price of the substitute good and demand for the other good are directly relatedFor example, Coke PricePepsi DemandComplementary goods a compliment is a good that goes well with another good.When goods are complements, there is an inverse relationship between the price of one and the demand for the otherFor example, Peanut Butter Jam Demand

  • Changes in DemandSeveral factors will change the demand for the good (shift the entire demand curve)As an example, suppose consumer income increases. The demand for Widgets at all prices will increase.

  • Changes in DemandAs an example, suppose Widgets become less popular to own.Demand will also decrease due to changes in factors other than price.

  • Changes in DemandChanges in any of the factors other than price causes the demand curve to shift either:

    Decrease in Demand shifts to the Left (Less demanded at each price) ORIncrease in Demand shifts to the Right (More demanded at each price)

  • The Demand Curve Factors influencing demandD = f (Pn,PnPn-1, Y, T, P, A, E)Where:Pn = PricePnPn-1 = Prices of other goods substitutes and complementsY = Incomes the level and distribution of incomeT = Tastes and fashionsP = The level and structure of the populationA = AdvertisingE = Expectations of consumers

  • Demand in Output MarketsA demand schedule is a table showing how much of a given product a household would be willing to buy at different prices.Demand curves are usually derived from demand schedules.

    Sheet1

    AYESHA'S DEMAND SCHEDULE FOR TELEPHONE CALLS

    PRICE (PER CALL)QUANTITY DEMANDED (CALLS PER MONTH)

    Rs.030

    0.5025

    3.507

    7.003

    10.001

    15.000

    Sheet1

    Sheet2

    Sheet3

  • The Demand CurveThe demand curve is a graph illustrating how much of a given product a household would be willing to buy at different prices.

    Sheet1

    AYESHA'S DEMAND SCHEDULE FOR TELEPHONE CALLS

    PRICE (PER CALL)QUANTITY DEMANDED (CALLS PER MONTH)

    Rs.030

    0.5025

    3.507

    7.003

    10.001

    15.000

    Sheet1

    Sheet2

    Sheet3

  • The Law of DemandThe law of demand states that there is a negative, or inverse, relationship between price and the quantity of a good demanded and its price.This means that demand curves slope downward.

  • Income and WealthIncome is the sum of all households wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. It is a flow measure.Wealth, or net worth, is the total value of what a household owns minus what it owes. It is a stock measure.

  • Related Goods and ServicesNormal Goods are goods for which demand goes up when income is higher and for which demand goes down when income is lower.Inferior Goods are goods for which demand falls when income rises.

  • Shift of Demand Versus Movement Along a Demand CurveA change in demand is not the same as a change in quantity demanded.In this example, a higher price causes lower quantity demanded.Changes in determinants of demand, other than price, cause a change in demand, or a shift of the entire demand curve, from DA to DB.

  • When demand shifts to the right, demand increases. This causes quantity demanded to be greater than it was prior to the shift, for each and every price level.A Change in Demand Versus a Change in Quantity Demanded

  • A Change in Demand Versus a Change in Quantity DemandedTo summarize:

  • The Law of DemandExplanations There are two ways to explain the Law of DemandSubstitution effectIncome effect*

  • Substitution EffectWhen the price of a good decreases, consumers substitute that good instead of other competing (substitute) goods

    1. When the price of Coke decreases2. Consumption of Pepsi decreases3. Consumption of Coke increases

  • Income EffectConsumers respond to a decrease in the price of a commodity as they would to an increase in incomeThey increase their consumption of a wide range of goods, including the good that had a price decrease1. When the price of Coke decreases2. Consumers feel richer3. Consumption of Coke and other goods increases

  • The Impact of a Change in IncomeHigher income decreases the demand for an inferior goodHigher income increases the demand for a normal good

  • From Household to Market DemandDemand for a good or service can be defined for an individual household, or for a group of households that make up a market.Market demand is the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.

  • From Household Demand to Market DemandAssuming there are only two households in the market, market demand is derived as follows:

  • DISCUSSION

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