Demand Supply

• Demand


  A relationship between price and quantity demanded in a given time period, ceteris paribus
• Quantity demanded


  The quantity that a buyer is ready, willing and able to buy
• Demand schedule


  • Demand curve
• An inverse relationship exists between the price of a good and the quantity demanded in a given time period, ceteris paribus
• Reasons for inverse relationship

  • We want to buy goods as cheap as possible
  • We have limited amount of money
• Change in quantity demanded

  Demand shocks
• Market demand curve


  Horizontal summation of individual consumer demand curves
• Determinants of demand


  • Tastes and preferences
  • Prices of related goods and services
  • Income
  • Number of consumers
  • Expectations of future prices and income
• Fads


  Positive demand shock
• Substitute goods


  An increase in the price of one results in an increase in the demand for the other
• Substitute goods


  • Tea and coffee
  • Car and bicycle
• Complementary goods


  An increase in the price of one results in a decrease in the demand for the other
• Complementary goods


  • Car and fuel
  • Ink and printer
• Price of coffee rises

  Positive demand shock
• Price of DVDs rises

  Negative demand shock
• Normal good


  An increase in income results in an increase in the demand for the good
• Inferior good


  An increase in income results in a reduction in the demand for the good
• Increase in the number of buyers

  Positive demand shock
• Higher expected future price of good

  Increases current demand
• Lower expected future price of good

  Decreases current demand
• Higher expected future income

  Increases the demand for all normal goods
• Lower expected future income

  Reduces the demand for all normal goods
• Supply


  The relationship that exists between the price of a good and the quantity supplied in a given time period, ceteris paribus
• A direct relationship exists between the price of a good and the quantity supplied in a given time period, ceteris paribus
• Change in supply


  Supply shock (positive)
• Market supply curve


  Horizontal summation of the supply curves of individual firms
• Determinants of supply


  • The prices of resources
  • Technology and productivity
  • The expectations of producers
  • The number of producers
  • The prices of related goods and services
• As the price of a resource rises

  Profitability declines, leading to a reduction in the quantity supplied at any level of price
• Technological improvements


  Lower production costs and increase profitability
• Increase in the expected future price of a good

  Results in a reduction in current supply
• Increase in the number of sellers

  Positive demand shock
• Firms produce and sell more than one commodity
• The supply decision for a given good is affected not only by the good's own price but also by the prices of other goods and services the firm may produce
• When the exchange value of PLN rises


  The domestic price of imported inputs will fall and the domestic supply of the final good will increase
• A decline in the exchange value of the PLN

  Raises the price of imported inputs and reduces the supply of domestic products that rely on these inputs
• If the price exceeds the equilibrium price


  A surplus occurs
• If the price is below the equilibrium


  A shortage occurs (demand exceeds supply)
• Changes in market equilibrium

  • Demand rises
  • Demand falls
  • Supply rises
  • Supply falls
• Price ceiling


  Legally mandated maximum price
• Purpose of price ceiling

  • To keep price below the market equilibrium price
  • To protect the poor consumers – they can buy products at lower prices than at the free market