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8/2/2019 BE Lecture 2 Demand & Supply
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BusinessEnvironment
Lecture 2
Demand & Supply
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Learning Objectives
Understand the meaning of demand Be able to distinguish between movements and shifts
of the demand curve, and the factors that cause shifts Understand the meaning of supply Be able to distinguish between movements along, and
shifts of the supply curve, and the factors that causeshifts
Understand the concept of equilibrium Know the meaning of excess demand and excess
supply Be able to apply demand and supply analysis to a
number of economic or market situations. Consider cases of intervention in a free market:
the housing market
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DEMAND
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Demand (D)
Effective demand is what is being considered
Factors affecting demand Price (P)
Income (Y) Relative prices of other goods
Taste, preference, & fashion Population
All these factors change over time, to identify theeffects of each individually we have to assume thatonly one factor is changing. Ceteris paribus: all otherthings being held constant.
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Demand (D) Price (P): For a normal good, a price increase = a
reduction in quantity demanded. For two reasons: Substitution effect: Price of this good rises and the
price of other goods unchanged, consumers will buy lessof this good and more of other goods, which havebecome relatively cheaper.
Income effect: Price of this good rises but consumersbuy the same amount, it will take a larger proportion oftheir income, they will have to buy less of other goods.So demand may decrease as price rises because
consumers cannot afford to buy as much. The Demand Curve shows the relationship
between the price of the good and the quantityconsumers want to purchase, ceteris paribus, other
factors remaining unchanged.
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fig
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Price
(pence
perkg)
Price(pence per kg)
20
Market demand
(tonnes 000s)
700A
Point
A
Market demand forpotatoes (monthly)
Demand
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fig
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Price
(pence
perkg)
Price(pence per kg)
2040
Market demand
(tonnes 000s)
700
500
AB
Point
A
B
Demand
Market demand forpotatoes (monthly)
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fig
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Price
(pence
perkg)
Price(pence per kg)
2040
60
Market demand
(tonnes 000s)
700
500
350
AB
C
Point
A
B
C
Demand
Market demand for
potatoes (monthly)
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fig
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Price
(pence
perkg)
Price(pence per kg)
2040
60
80
Market demand
(tonnes 000s)
700500
350
200
AB
C
D
Point
A
B
C
D
Demand
Market demand forpotatoes (monthly)
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fig
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Price
(pence
perkg)
Price(pence per kg)
2040
60
80
100
Market demand
(tonnes 000s)
700500
350
200
100
AB
C
D
E
Point
A
B
C
D
E
Demand
Market demand for
potatoes (monthly)
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Shifts in demand curves
If a factor other than the price of the goodchanges, then the demand curve will shift.Factors causing the demand curve to shift:
Income (Y) As income increases = usually demand increases
Relative prices of other goods Substitutes: alternatives: bus or tube, if tube fares went up
and bus fares did not the demand for bus travel increases. Complements: goods used together: cars and petrol, if the
price of petrol goes up the demand for cars decreases
Taste, preference, & fashion Population: demand usually increases as pop increases.
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fig 2.2
D1
Price
P
O Q0 Q1Quantity
An increase in demand
D0
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fig 2.2
D0
Price
P
O Q0 Q1Quantity
A decrease in demand
D1
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SUPPLY
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Supply (S)Factors affecting supply Price of the good Costs of production Price of other goods Nature: random shocks Producers objectives Regulation Taxes and subsidies
Expectations of future price changesAll these factors change over time, to identify theeffects of each individually we have to assumethat only one factor is changing. Ceterisparibus: all other things being held constant.
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The Supply Curve
It is normally assumed that as the price risesthe quantity supplied will increase. Thesupply curve slopes upward. Assuming price
is the only factor that is rising.
An upward sloping supply curve is likelybecause firms assumed to be maximising
profits. If the price risies it is likely to becomeprofitable to increase output, because theincrease in price more than offsets theincreases in costs.
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Price
(pence
perkg)
Quantity (tonnes: 000s)
Supply
a
P20
Q100a
Market supply of potatoes (monthly)
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Price
(pence
perkg)
Quantity (tonnes: 000s)
Supply
a
b
P20
40
Q100
200
a
b
Market supply of potatoes (monthly)
M k l f
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Price
(pence
perkg)
Quantity (tonnes: 000s)
Supply
a
b
c
P20
4060
Q100
200350
a
bc
Market supply of potatoes (monthly)
M k l f
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Price
(pence
perkg)
Quantity (tonnes: 000s)
Supply
a
b
c
dP20
406080
Q100
200350530
a
bcd
Market supply of potatoes (monthly)
M k t l f t t
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Price
(pence
perkg)
Quantity (tonnes: 000s)
Supply
a
b
c
d
e
P
20
406080
100
Q
100
200350530
700
a
bcd
e
Market supply of potatoes (monthly)
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Shifts in the supply curve
If any factor other than the price of theproduct changes then the supply curve isassumed to shift. For example:
Higher fertilizer prices would decrease inwheat supply, farmers would require higherprices to offset the cost increase.
A improvement in technology, higher yieldingwheat varieties, would lead to an increase insupply, improved productivity would offset
lower prices.
Shift i th l
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fig
P
QO
S0
Shifts in the supply curve
Shifts in the supply curve
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fig
P
QO
S0
Increase
S1
Shifts in the supply curve
Shifts in the supply curve
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fig
P
QO
S2 S0 S1
IncreaseDecrease
Shifts in the supply curve
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Market equilbrium
Equilibrium a point of balance, from whichthere is no inherent tendency to move.
Markets are in equilibrium when at thecurrent price the amount consumers want tobuy is equal to the amount producers want tosell. So there are no unsatisfied buyers and
no unplanned change in stocks. If any significant factor affecting supply or
demand changes the equilibrium will change.
E ilib i i d t t
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Equilibrium price and output:The Market Demand and Supply of Potatoes
(Monthly)
Price of Potatoes(pence per kilo)
Total Market Demand(Tonnes: 000s)
Total Market Supply(Tonnes: 000s)
20 700 (A) 100 (a)
40 500 (B) 200 (b)
60 350 (C) 350 (c)
80 200 (D) 530 (d)
100 100 (E) 700 (e)
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fig
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
The determination of market equilibrium(potatoes: monthly)
Quantity (tonnes: 000s)
E
D
C
B
Aa
b
c
d
e
Supply
Demand
Price
(penc
e
perkg)
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fig
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
E
C
B
Aa
b
c
e
Supply
Demand
Price
(penc
e
perkg)
D dSURPLUS
(330 000)
The determination of market equilibrium(potatoes: monthly)
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fig
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
E
D
C
B
Aa
b
c
d
e
Supply
Demand
Price
(penc
e
perkg)
SHORTAGE
(300 000)
The determination of market equilibrium(potatoes: monthly)
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fig
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
D d
Qe
Quantity (tonnes: 000s)
E
B
Aa
b
e
Supply
Demand
Price
(penc
e
perkg)
The determination of market equilibrium(potatoes: monthly)
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fig
P
QO
Pe1
Qe1
S
D1
g
Effect of a shift in the demand curve
An increasein demand
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fig
P
QO
Pe1
Qe1
S
D1
g
Effect of a shift in the demand curve
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fig
P
QO
Pe1
Qe1
S
D1
D2
g
Effect of a shift in the demand curve
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fig
P
QO
Pe1
Qe1
S
g h
D1
D2
Pe2
Qe2
i
Effect of a shift in the demand curve
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fig
P
QO
Pe1
Qe1
S
D1D2
g
A decreasein demand
Effect of a shift in the demand curve
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fig
P
QO
Pe1
Qe1
S
D1D2
g
Pe2
Qe2
n
m
Effect of a shift in the demand curve
Eff f hif i h l
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fig
P
QO
Pe1
Qe1
D
S1
g
Effect of a shift in the supply curve
A decrease
in supply
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fig
P
QO
Pe1
Qe1
D
S1
g
Effect of a shift in the supply curve
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fig
P
QO
Pe1
Qe1
D
S1
S2
g
Effect of a shift in the supply curve
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fig
P
QO
Pe1
Pe3
Qe3Qe1
D
S1
S2
j g
k
Effect of a shift in the supply curve
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fig
P
QO
Pe1
Qe1
D
S1
g
An increase
in supply
S2
Effect of a shift in the supply curve
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fig
P
QO
Pe1
Qe1
D
S1
g
S2
p
Pe2
Qe2
q
Effect of a shift in the supply curve
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Markets that are not Free
Normally governments work with, and favourfree markets
In some cases, governments may not wish tohave a free market
Rented Housing
Rented Housing: an example of a maximum priceili
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ceiling
P(H)rent
QO
P (rentin a freemarket)
S
D
Qs Qd
controlledrent
price excess demand= shortage of rented housing
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Summary
Q demanded decreases as P increases
Other factor affecting D changes D curve shifts
Quantity S increases as P increases Other factor affecting S changes S curve shifts
Market equilibrium where S = D
Changing S or D factors will shift equilibrium Intervening in markets can cause problems
Competition is needed for markets to operate