16.terms used in_economics_viz_demand_and_supply_

1. BY
NOSHAD AHMED 15CRP46
City and Regional Planning department MUET Jamshoro.
TERMS USED IN ECONOMICS
DEMAND AND SUPPLY

2. • Quantity demanded is the amount of a good that buyers
are willing and able to purchase
• Demand is a full description of how the quantity demanded
changes as the price of the good changes.
INTRODUCTION TO DEMAND

3. • In the United States, the 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?

4. • A 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 ($) Quantity Demanded of Widget
per day
$5 2
$4 4
$3 6
$2 8
$1 10
DEMAND SCHEDULE

5. • We 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?
EXAMPLES :

6. CHANGES IN DEMAND
– Buyers : changes in the number of consumers
– Income: changes in consumers’ income
– Tastes: changes in preference or popularity of product/ service
– Expectations: changes in what consumers expect to happen in
the future
– Related goods: compliments and substitutes

7. Prices of related goods affect on demand
– Substitute 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 related
• For example, Coke Price Pepsi Demand
– Complementary 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
other
• For example, Peanut Butter Jam Demand

8. Law of Demand
• The law of demand states that
– the quantity demanded of a good falls when the price of
the good rises, and vice versa, provided all other factors that
affect buyers’ decisions are unchanged

9. “provided all other factors … are
unchanged”
• That’s an important phrase in the wording of the Law of Demand
• The quantity demanded of a consumer good such as ice cream
depends on
– The price of ice cream
– The prices of related goods
– Consumers’ incomes
– Consumers’ tastes
– Consumers’ expectations about future prices and incomes
– Number of buyers, etc
• The Law of Demand says that the quantity demanded of a good is
inversely related to its price, provided all other factors are
unchanged

10. The Law of Demand—Explanations
• There are two ways to explain the Law of Demand
– Substitution effect
– Income effect

11. Substitution Effect
• When the price of a good decreases, consumers substitute that
good instead of other competing (substitute) goods
Coke Books MoviesClothes
1. When the price of
Coke decreases…
Pepsi
2. Consumption
of Pepsi
decreases…
3. Consumption
of Coke
increases

12. LOWER PRICES = HIGHER INCOME
Situation A
Price of an Apple $1.00
Price of an Orange $2.00
Income $10.00
Situation B
Price of an Apple $1.00
Price of an Orange $2.00
Income $20.00
Situation C
Price of an Apple $0.50
Price of an Orange $1.00
Income $10.00
If prices fall, Situation A
becomes Situation C.
If income rises,
Situation A becomes
Situation B.
Q: Which change is
better?
A: They are both equally
desirable. A fall in prices
is equivalent to an
increase in income.

13. INCOME EFFECT
• Consumers respond to a decrease in the price of a commodity
as they would to an increase in income
• They increase their consumption of a wide range of goods,
including the good that had a price decrease
Coke Books MoviesClothes
1. When the price of
Coke decreases…
2.
Consumers
feel richer…
3. Consumption of
Coke and other goods
increases
Pepsi

14. SUPPLY
• Quantity supplied is the amount of a good that sellers are
willing and able to sell
• Supply is a full description of how the quantity supplied of a
commodity responds to changes in its price

15. The Law of Supply
• The law of supply holds that other things equal, as the price
of a good rises, its quantity supplied will rise, and vice
versa.
• Why do producers produce more output when prices rise?
– They seek higher profits
– They can cover higher marginal costs of production

16. • … are caused by changes in
• Input prices
• Technology
• Number of sellers (short run)
• The market supply will increase if
• Raw materials or labor becomes cheaper
• The technology becomes more efficient
• Number of sellers increases
Changes in Supply

17. Market Equilibrium
• The operation of the market depends on the
interaction between buyers and sellers.
• An equilibrium is the condition that exists when
quantity supplied and quantity demanded are
equal.
• At equilibrium, there is no tendency for the
market price to change.

18. At $2.00, the quantity demanded is
equal to the quantity supplied!
SUPPLY AND DEMAND TOGETHER
Demand Schedule Supply Schedule

19. A Change in Supply Versus
a Change in Quantity Supplied
To summarize:
Change in price of a good or service
leads to
Change in quantity supplied
(Movement along the curve).
Change in costs, input prices, technology, or prices of
related goods and services
leads to
Change in supply
(Shift of curve).