Lecture 3:

Demand and Supply – Elasticity

of Demand
Teacher: MEHNAZ KHAN
Demand
Demand is a schedule or a curve that shows the various amounts of a product
that consumers will purchase at each of several possible prices during a
specified period of time.
Law of Demand
Other things equal, as price falls, the quantity demanded rises, and as price
rises, the quantity demanded falls. In short, there is an inverse relationship
between price and quantity demanded.
Demand Schedule:
•Definition: A demand schedule is a table that lists the quantity demanded
of a good at different price levels. It provides a numerical representation of
the data that can be plotted to form a demand curve.
Inverse Relationship Between Price and Quantity Demanded:

•Definition: This concept states that there is an inverse

relationship between the price of a good and the quantity
demanded. When the price of a good rises, the quantity
demanded typically falls. Conversely, when the price decreases,
the quantity demanded usually increases.

•Reason: This relationship is due to the law of demand, which

indicates that consumers will generally buy more of a good when
it is cheaper and less when it is more expensive.
MOVEMENT ALONGTHE DEMAND CURVE

When there is a price change. there is a

movement along the demand curve.

In Figure when the price falls from US$1 to

US$0.50, we move along the
demand curve from A to B to identify the new
level of demand. The movement along the
demand curve in this case shows that the
quantity demanded rises by 30 million units,
from 40 million to 70 million units, when the
price falls.
This is important because other factors that
influence demand, such as income,
have a different effect on the demand curve.
This is discussed below.
Market Demand

Determinants of demand are sometimes referred to as demand shifters.

The basic determinants of demand are
• Advertising
• Cosumers’ tastes (preferences),
• The number of consumers in the market
• Consumers’ incomes (superior vs inferior goods)
• Prices of related goods (substitutes and compliments)
• Expected prices
• Change in fashion
1. Advertising and Its Impact on Demand
•Role of Advertising: Advertising aims to influence
consumer preferences and increase the demand for
products. It informs, persuades, and reminds potential
buyers about the product's benefits.
•Effect on Demand:
• Heavy advertising typically shifts the demand
curve to the right, indicating that consumers are
willing to buy more of the product at the same
price.
• Diagram: The demand curve moves from D₁ to D₂
in Figure 4.2, showing an increase in quantity
demanded.
• Example: When Coca-Cola runs an extensive
marketing campaign, the demand for Coca-Cola
increases, as seen by more purchases of its
products.
2. Income and Its Effect on Demand
•Disposable Income: As disposable income rises (due to higher
wages, salaries, or lower taxes), people generally increase their
spending on goods and services.
• Normal Goods: For most goods (normal goods), demand
rises as income increases. Examples include new cars, dining
out at restaurants, and vacations.
• Inferior Goods: Some goods, known as inferior goods, see
demand fall when incomes rise. Examples include public
transportation or supermarket "own-label" brands, which
consumers may replace with more expensive alternatives.
•Effect on Demand:For normal goods, an increase in income shifts
the demand curve to the right, from D₁ to D₂.
•For inferior goods, an increase in income shifts the demand curve
to the left, from D₁ to D₃.
•Example: When people earn more, they may switch from buying
a generic brand of baked beans to a more expensive branded
option, reducing demand for the generic brand.
3. Fashion, Tastes, and Their Impact on Demand
•Changing Preferences: Consumer preferences evolve over
time due to changing tastes, trends, and social influences.
• Example: The growing popularity of T20 cricket in
countries like India and Australia has increased demand
for tickets to T20 matches, while test match attendance
has declined.
•Effect on Demand:When a product becomes more
fashionable or preferred, the demand curve shifts to the
right. Conversely, when it falls out of favor, the demand curve
shifts to the left.
•Example: Fashion trends in clothing see demand for certain
items surge in one season, only for it to decline the next as
trends change.
4. The Price of Substitutes and Its Impact on Demand
•Substitute Goods: Goods that serve as alternatives to one
another are known as substitutes. The price of a substitute can
have a significant impact on demand for a product.
• Example: A consumer choosing between Coca-Cola, Pepsi,
and Virgin Cola is deciding between substitutes. If the
price of Pepsi falls, the demand for Coca-Cola may
decrease.
•Effect on Demand:
• When the price of a substitute falls, the demand for the
original product shifts to the left (from D₁ to D₃).
Conversely, if the price of a substitute rises, demand for
the original product increases (demand shifts to the right).
• Diagram: In Figure 4.2, the demand curve shifts left as
demand falls due to a lower price for a substitute.
• Example: If Pepsi lowers its price significantly, Coca-Cola
may experience a decrease in demand as consumers opt
for the cheaper alternative.
5. The Price of Complements and Its Impact on Demand
•Complementary Goods: Complements are goods that are
often consumed together, like coffee and sugar, or cars and
car insurance.
• Example: Consumers who buy cornflakes also need
milk. If the price of milk rises, the demand for
cornflakes may decrease as the overall cost of enjoying
the product rises.
•Effect on Demand:
• A rise in the price of a complementary good causes the
demand curve for the related good to shift to the left
(from D₁ to D₃). Conversely, a fall in the price of a
complement increases demand.
• Example: If the price of smartphones drops, demand
for complementary products like phone cases and
accessories may increase
6. Demographic Changes and Their Impact on Demand
•Population Growth: As the population increases, overall demand for
goods and services rises. However, demand is also shaped by
demographic factors such as age distribution, gender distribution,
geographical location, and ethnic composition.
•Effect on Demand:
• Age Distribution: Countries with growing elderly populations see
rising demand for retirement homes, healthcare services, and
specialized holidays.
• Gender Distribution: Countries with more women than men,
particularly in older age groups, may experience higher demand
for women's clothing and related products.
• Geographical Distribution: Urbanization leads to increased
demand for services like schools, hospitals, and infrastructure in
cities, as more people move to urban areas.
• Ethnic Groups: The growth of specific ethnic groups can increase
demand for cultural products, such as cuisine, clothing, or music.
For example, the spread of Southeast Asian restaurants in
Australia reflects the growth of the Southeast Asian population
CLASS ACTIVITY

• Has there then a change in

the demand schedule for
fidget spinners from 2015-
2024

• List at least 3 products where

the demand curve has shifted
outwards in the last few
years
SHIFT IN DEMAND CURVE
• A change in one or more of the determinants of demand causes a change in demand. An
increase in demand is shown as a shift of the demand curve to the right, as from D1 to D2

• A decrease in demand is shown as a shift of the demand curve to the left, as from D1 to D3.
These changes in demand are to be distinguished from a change in quantity demanded,
which is caused by a change in the price of the product, as shown by a movement from, say,
point a to point b on fixed demand curve D1.
Supply
Supply is a schedule or curve showing the amounts of a product that producers will make
available for sale at each of a series of possible prices during a specific period.

Other things equal, producers will offer more of a product for sale as its
price rises and less of the product for sale as its price falls
SHIFTS IN THE SUPPLY CURVE
1. Costs of Production and Supply
•The expenses a firm incurs in the process of producing goods or services. These include:
• Wages: Payment to labor.
• Raw Materials: Inputs like steel, oil, or fish feed in the case of fish farming.
• Energy: Fuel, electricity, etc.
• Rent: Costs for land or buildings.
• Machinery: Depreciation and maintenance costs of equipment.
•Impact of Rising Costs on Supply:
• When production costs rise, profits decrease, leading to a reduction in the quantity supplied at a given price.
• Supply Curve Shifts to the Left: A rise in production costs will cause the supply curve to shift from S₁ to S₂ (Figure
6.2). At the original price (P), the quantity supplied decreases from Q₁ to Q₂.
• Real-world Example: Rising costs of fish feed led to some fish farmers leaving the industry, reducing the quantity of
fish supplied.
•Impact of Falling Costs on Supply:
• When production costs fall, producing goods becomes more profitable, increasing the quantity supplied.
• Supply Curve Shifts to the Right: The supply curve moves from S₁ to S₃, increasing the quantity supplied at the same
price level from Q₁ to Q₃.
•Availability of Resources:
• Shortages of factors of production, such as labor, land, or capital, can increase costs, reducing the ability of
producers to supply the market.
• Example: If there’s a labor shortage, wages will rise, leading to higher production costs and a leftward shift in the
supply curve.
2. Indirect Taxesand Their Effect on Supply
• Indirect taxes are taxes levied on goods and services rather than on income or profits.
They include:
• Value-Added Tax (VAT): Applied to goods and services at each stage of production.
• Duties: Taxes on specific goods, such as petrol and cigarettes.
•Impact of Indirect Taxes on Supply:
• When indirect taxes are imposed or increased, they raise the cost of production.
• Supply Curve Shifts to the Left: As indirect taxes add to the production cost, the
supply curve shifts leftward, indicating a reduction in the quantity supplied at every
price.
• Example: A new tax on cigarettes will increase costs for producers, decreasing the
quantity of cigarettes supplied.
Indirect Taxes and Their Effect on Supply
•Effect on Supply:
• Imposition of Taxes: When indirect taxes are imposed or increased,
they raise the production costs for firms.
• Supply Curve Shifts Leftward: As production costs increase, the
supply curve shifts from S₁ to S₂, resulting in a decrease in the
quantity supplied (from Q₁ to Q₂) at the same price (P) (as shown
in Figure 6.2).
• Example: A new tax on cigarettes leads to higher production
costs, causing a reduction in the quantity of cigarettes available
in the market.
• Reduction of Taxes: When indirect taxes are reduced, production
costs fall, making it more profitable for firms to supply goods.
• Supply Curve Shifts Rightward: The supply curve shifts from S₁ to
S₃, and the quantity supplied increases from Q₁ to Q₃.
• Example: If a government reduces taxes on eco-friendly cars,
manufacturers can produce and supply more, increasing the
quantity available at the same price.
•.
•Government Objectives:

• Governments use indirect taxes to raise revenue for public

expenditures.
• Taxes can also be used to discourage consumption of harmful
products (e.g., cigarettes, alcohol) or protect the environment
by taxing polluting production processes
3. Subsidies and Their Effect on Supply
•Definition: A subsidy is financial aid provided by the government to businesses
to reduce their production costs and encourage the supply of particular goods or
services.
•Effect on Supply:
• Supply Curve Shifts Rightward: A subsidy lowers production costs, making
it more profitable for firms to increase output. This causes the supply curve
to shift from S₁ to S₃, increasing the quantity supplied from Q₁ to Q₃.
• Example: In the EU, subsidies are often provided to farmers to promote the
production of specific agricultural products such as wheat or dairy. This
leads to an increase in the supply of these goods at every price level.
•Purpose of Subsidies:

• Subsidies are typically used to promote essential goods, such as food or renewable
energy, or to support industries facing competition from foreign markets.
• They also help maintain employment by supporting industries that are vital for a
country’s economy.
4. The Role of Technology in Supply
•Advancements in Technology:
• Over time, technological innovation makes production
processes more efficient, lowering production costs for
firms.
• Effect on Supply:
• The introduction of new technology shifts the supply
curve to the right from S₁ to S₃, allowing firms to
produce more at the same price (P).
• Example: In the oil industry, new technology like lasers
and high-tech data analysis tools have helped
companies increase the yield from oil wells. This
reduced costs, allowing firms to supply more oil, as seen
after the drop in oil prices in 2014.
•Impact of Technology:

• Increased Efficiency: New technology allows for the production of more goods
with fewer inputs, improving productivity.

• Market Competitiveness: Firms using advanced technology can reduce costs,

gain a competitive edge, and increase market supply.
5. Natural Factors and Their Influence on Supply
•Definition: Natural factors such as weather, natural disasters, and pest infestations can
significantly impact the production of goods, especially in agriculture and natural
resource industries.
•Effect on Supply:
• Favorable Natural Conditions:
• When growing conditions are favorable (e.g., ideal weather for crops), supply
increases.
• Supply Curve Shifts Rightward: Good growing conditions result in higher
yields, shifting the supply curve from S₁ to S₃, increasing the quantity supplied.
• Example: A year with ideal rainfall and temperature can lead to a bumper
harvest, boosting crop supply in the market.
• Unfavorable Natural Conditions:
• Poor conditions (e.g., droughts, pests, or diseases) reduce supply.
• Supply Curve Shifts Leftward: In cases like droughts or pest infestations, supply
decreases, causing the supply curve to shift from S₁ to S₂, reducing the quantity
supplied from Q₁ to Q₂.
Equilibrium Price and Quantity

The Equilibrium price (or market-

clearing price) is the price at which
the intentions of buyers and
sellers match. It is the price at
which quantity demanded equals
quantity supplied.

Equilibrium quantity: the quantity

at which the intentions of buyers
and sellers match so that the
quantity demanded and the
quantity supplied are equal
 Changes in Demand, Supply, and Equilibrium

The increase in demand from D1 to D2 in (a) increases both equilibrium price and
equilibrium quantity. The decrease in demand from D3 to D4 in (b) decreases both
equilibrium price and equilibrium quantity
 Changes in Demand, Supply, and Equilibrium

The increase in supply from S1 to S2 in (c) decreases equilibrium price and increases
equilibrium quantity. The decrease in supply from S3 to S4 in (d) increases equilibrium price
and decreases equilibrium quantity.