Demand and Supply Price Elasticity of Demand and Supply

2. What is demand?
• Demand is the want or the willingness of
consumers to buy goods and services.

3. Effective Demand
• When willingness to buy is backed/supported
with the purchasing power, it becomes an
effective demand.

4. Price mechanism
• Prices act as the signals for producers.
• It is based on the price signals that they
decide how to use their scarce resources.

5. Quantity demanded
• The amount of a good or service consumers
are willing and able to buy is known as the
quantity demanded.
• Eg: Number of oranges bought per week.

6. Individual demand and Market
demand
• Individual demand: The quantity of a
good/service that an individual is willing and
able to buy for different prices over a
particular period of time.

7. Individual demand and Market
demand
• Market Demand: The sum of all individual
demand or total demand for the product from
all consumers

8. Demand Schedule
• Demand schedule is the tabular presentation
of quantity demanded and price of a good or
service.
Price of Chocolate Bar(Pence) Your demand per month
200
150
50
30
10
5
1

9. Demand Curve
• A Demand Curve is the diagrammatical
representation of price and quantity
demanded for a good or service over a period
of time.

10. Extension and Contraction of Demand
• An extension of demand or increase in quantity
demanded refers to the way in which demand
changes with a fall in price, with no change in any
other factor that could affect demand.
• A contraction of demand or decrease in quantity
demanded refers to the way in which demand
changes when prices rises, with no change in any
other factor that could affect demand.

11. Extension and Contraction of Demand

12. The market demand curve
• The market demand curve for a particular
good or service will display the demand of all
the consumers of that commodity given a set
of possible prices.

13. Shifts in Demand
• When there is a change in the factors
influencing the demand other than price (like
income, advertising, changes in population
etc)changes, it leads to a shift in demand
curve.

14. Increase in demand
• An increase in demand means that consumers now demand more
of a product at each and every price than they did before.
• Eg: Market Demand for chocolate bars:
• Draw two demand curves for the data given.
Price of chocolate Original demand Increased demand
50 100 000 200 000
40 150 000 250 000
30 200 000 300 000
20 260 000 360 000
10 330 000 430 000
5 400 000 500 000

15. Fall in Demand
• A fall/ decrease in demand means that
consumers now demand less of a product at
each every price than they did before.
Possible price per Original demand Decreased demand
DVD disc(pence) per week per week
100 10 000 5 000
80 15 000 10 000
60 20 000 15 000
40 25 000 20 000
20 30 000 25 000

16. What causes a shift in demand?
• 1. Changes in consumers income:
• As income rise consumers will be able to buy
more, while a fall in incomes will cause
demand to fall.
• But it is depended on the type of product
concerned.

17. Normal Goods and Inferior Goods
• Normal Goods: If the demand for a product
tends to rise as income rise, the product is
called to be a normal good.
• Inferior Goods: If demand tends to fall as
income rise, the product is said to be an
inferior good.

18. What causes a shift in demand?
• 2. Changes in taxes on incomes
• Any change in the level of income tax rates
and allowances results in a change in the
quantity of goods and services demanded.
Disposable income:
• The income people have left to spend or save
after taxes on their incomes have been
deducted.

19. What causes a shift in demand?
• 3. The prices and availability of other goods and
services:
• Substitutes: A product is a substitute when its
purchase can replace the want for another good
or service. Eg: Butter and Margarine, Tea and
Coffee
• Complementary goods: A pair of goods
consumed together. Eg: Car and Petrol, DVDs and
DVD player.
• Joint Demand

20. What causes a shift in demand?
• 4. Changes in tastes, habits and fashion:
• Changing tastes, habits and fashion can play a
big change in demand.

21. What causes a shift in demand?
• 5. Population Change:
• An increase in population will tend to increase
the demand for many goods and services.
• Size and nature of population growth matters.

22. What causes a shift in demand?
• 6. Other factors:
• Weather
• Interest rates
• Changes in laws

23. What is supply?
• Supply refers to the amount of a good or
service firms or producers are willing and able
to sell at a number of possible prices.

24. Quantity supplied
• The amount of a good or service producers
are willing and able to make and sell to
consumers in a market is known as the
quantity supplied.

25. Movement along the supply curve
• Any price change to the product causes a
movement along the supply curve.

26. Extension of supply
• As the price increase, the quantity supplied
also rises along with it. This is called an
extension of supply.

27. Contraction of supply
• As the price of the product decreases, the
supply also decreases with it. This is called a
contraction of supply.

28. Exercise 1
Construction of Supply Curve
Possible price of ice cream Market supply per month
20 1600
16 1100
12 700
8 300
4 100

29. Exercise 2
• What will cause an extension of supply?
• What will cause a contraction of supply?
• Use your graph to work out how many ice
cream will be supplied at a price of
a. 6 dollars
b. 10 dollars

30. Exercise 3
• Using the market supply schedule, (given in Ex
No:1)complete the table and explain why the
market supply curve slopes upward from left to
right.
Output per Total cost Total Profit ($)
Possible price Market supply
month ($) Revenue($
of ice cream per month
) (PxQ)
20 1600
100 100 400 300
16 1100
300 280
12 700 700 420
8 300 1100 580
4 100 1600 760

31. Shifts in Supply
• Changes in things other than price of a good
can cause its market supply curve to move.
This is called a shift in supply curve.

32. An increase in supply
• An increase in supply means that the
producers are now more willing and able to
supply a product than they were before at all
possible prices.
• Draw supply curves for the schedule given below:
Possible price of Original supply Increased supply
razors (pence) per month per month
50 10 000 12 000
40 8 000 10 000
30 6 000 8 000
20 4 000 6 000
10 2 000 4 000

33. A fall in supply
• A fall in supply means that producers are now
less willing and able to supply a product at
each and every price than they were before at
all possible prices.

34. What causes a shift in supply?
• 1. Changes in the cost of factors of
production.
• Payments for:
• Raw materials
• Land
• Labour
• Interest
• Tax…….

35. What causes a shift in supply?
• 2. Changes in price
of other goods and
services:
• Price acts as the
signals.
• Resources are
allocated to those
goods and services
that will yield the
most profit.

36. What causes a shift in supply?
• 3. Technological advance
• Technological improvement
improves the performance of
machines, employees,
production methods,
management control, product
quality etc.

37. What causes a shift in supply?
• 4. Business optimism and
expectations
• Fears of economic
downturn may cause some
firms to move their
resources to more safer
products.(Left ward shift)
• Expectation of economic
recovery may result in
reallocation of
resources.(Right ward
shift)

38. What causes a shift in supply?
• 5. Global factors
• These factors can not
be controlled by
producers.
 Sudden climatic change
 Trade sanctions
 Wars
 Natural disasters
 Political factors

39. Market Price
• When quantity demanded and quantity
supplied becomes equal then the market price
is fixed for the product.

40. Finding the market price
Price Qty Qty
Demande Supplied
d Find the market price.
50 100 000 420 000
Price at which there is an excess demand.
40 150 000 300 000 Prices at which there is an excess supply.
30 200 000 200 000 If there is excess demand what will happen to price?
If there is excess supply what will happen to price?
20 260 000 120 000
10 330 000 60 000
5 400 000 40 000

41. Equillibrium
• The price at which the quantity demanded
and quantity supplied gets equal is called the
equilibrium price or market price.

42. How do market prices change?
• A shift in demand:
• An increase in
demand for a
commodity (increase
in income /rise in
price of substitutes..)
will shift the demand
curve to outwards.

43. How do market prices change?
• A shift in supply:
• An increase in supply
of product (due to
low wages/technical
progress..) supply
curve shifts outwards.

44. What is price mechanism?
• The forces of demand
and supply establish
the market price of a
product automatically.
This is called price
mechanism.
• A free market economy
allows the freedom of
demand and supply in
the market.

45. Elasticity…..how much do
consumer’s react?

46. Elasticity – the concept
• Elasticity is the responsiveness of quantity
demanded to a price change
• E.g. When price rises what happens to
demand?
BUT….
Demand falls By how much
does demand
fall?

47. Elasticity – the concept
• If price rises by 10% - what happens to demand?
We know demand will fall Elastic
• By more than 10%?
• By less than 10%? Inelastic
• Elasticity measures the extent to which demand
will change

48. Price Elastic
If a small change in price causes a
big change in quantity demanded,
then the product is said to be
price elastic.
The demand curve is flat.
%change in price is less than
%change in demand.

49. • If a big change in price
Price Inelastic
causes a small change in
quantity demanded,
then the product is said
to be price inelastic.
The demand curve is steep.
%change in price is more than
%change in demand.

50. A ‘stretching’ exercise
product Small/large change Price why
in quantity elastic/inelastic
demanded
Oil
DVD recorders
Bread
Cars
Newspapers
Situation: rise in price about 10%

51. Conclusion
An increase in price have very small impact on
demand
• Price inelastic
An increase in price have very big impact on
demand
• Price elastic
An increase in price have very small impact on demand
Price inelastic

52. How to measure PED?

53. How to calculate percentage changes?
• % change in quantity demanded=
Change in quantity 100
---------------------------- X -------
Original quantity 1
 % change in price=
Change in price 100
---------------------------- X -------
Original price 1

54. Using the formula
Price of beans (per Market Calculate the
tin) demand(per week) PED(use 40
40 pence 1 000 pence as your
original price)
30 pence 1 500
Draw a demand
curve for the
If PED is 1, demand is data.
price elastic .
If PED is 1 demand
is price inelastic
Comment on the
PED value.

55. • It is very important for a
firm to know whether
an increase or decrease
in price will cause their
total revenue to rise or
fall.

56. Look at these two scenarios and
answer for the following questions
Price per loaf of Quantity Price per DVD Quantity
bread demanded per recorder demanded per
month month
*25 pence 10 000 *$500 1 000
20 pence 10 500 $400 1 800

57. Questions
Would you
advise bread
maker to
Calculate PED and reduce the
comment on the price from 25
to 20 pence?
value. Why?
Calculate the total Would you
revenue for Bread advice the DVD
and DVD recorder
recorders at each manufacturers
to cut price
price.(PxQ)
from 500 to
400 dollars?
Why?

58. Decisions
If demand is If demand is
price price elastic,
inelastic, a a cut in price
cut in price increases the
reduces total total
revenue. revenue.
If demand is If demand is
price price elastic,
inelastic, a a rise in price
rise in price decreases
increases the the total
total revenue revenue.

59. Factors affecting Price Elasticity of
Demand
• The number of substitutes:
• When consumers can choose
between a large number of
substitutes for s particular
product, demand is likely to
be price elastic. (soft drinks,
cosmetics etc)
• When there are few
substitutes, demand
becomes price inelastic.
( milk, medicines etc)

63. • Infinitely price elastic:
• Product is demanded at
one particular price
only.
• A small change in price
will cause quantity
demanded to fall to
zero.
• PED=∞

64. • Unitary elastic:
• A percentage change in
price will cause an
equal percentage
change in quantity
demanded.
• PED=1

67. Formula
PES

68. Calculate
Price Quantity supplied per month
100 cents 10 000
200 cents 12 000

69. Factors affecting PES
• Time
• Momentary period
• Supply will be fixed at any one
moment.(Perfectly inelastic)
• Short run
• Only some changes.(Inelastic)
• Long run
• Can increase in large
quantity.(Elastic)

70. Factors affecting PES
• Availability of resources.
• If resources are not available,
output cannot be increased in
response to price.(Price
inelastic)
• If resources are available,
output can be increased in
response to price.(Price
elastic)

71. Calculate
Price per KG Quantity
supplied of
natural rubber
per month
Calculate the PES for natural
Rs.80 1000
rubber and man-made rubber.
Rs.100 1100 Comment on their values and
suggest reasons why they differ.
Price per KG Quantity
supplied of
man-made
rubber per
month
Rs.80 2000
Rs.100 2800

72. • Perfectly price inelastic:
 Quantity supplied remains
the same whatever its price.
 PES=0
• Perfectly price elastic:
 At one particular price,
producers are willing to
supply as much as they can.
 PES=∞

75. Tax
Indirect
Direct Tax
Tax

76. Indirect Tax
Ad valorem Tax Specific Tax
(VAT)

82. -