DEMAND AND SUPPLY

Question.
 How much is a superstar in the NBA (such as Kobe Bryant,
LeBron James) paid compared to an average player?

 How many superstars are there in a team, and how many

average players are there?

 Rocks: Which costs more, diamonds or gravel?

 Why some items are more expensive than others.

What Is the Law of Supply and
Demand?
 The law of supply and demand is a theory
that explains the interaction between the
sellers of a resource and the buyers for that
resource. The theory defines what effect the
relationship between the availability of a
particular product and the desire (or
demand) for that product has on its price.
Generally, low supply and high
demand increase price and vice versa.
Demand
- is the amount of a commodity that a consumer is
willing to purchase or is ready to purchase from
market at a given price during a given period of
time. In other words, demand refers to the quantity
of a commodity which a consumer or household is
willing to buy from the market at a particular price
during a particular period of time.
MARKET DEMAND

Refers to the total quantity of a

commodity that all the consumers or
households are willing to buy at a given
price within a given period of time.
Quantity Demanded

 Amount of a good that the consumer is

willing to buy and able to buy at a given
price over a period of time.
Types of goods
Complementary goods

 area pair of goods consumed together. As the

price of one goes up the demand for the other falls.

Example- car and petro

Substitute goods

 Arealternatives to each other. As the price of one

goes up the demand for the other also goes up.

Example – pepsi and coke

Essential or Basic Consumer Goods:

 Refer to goods that are consumed by all the

people in the society. For example, food grains,
soaps, oil, cooking fuel, and clothes. The quantity
demanded for basic consumer goods increases
with increase in the income of a consumer, but up
to a fixed limit, while other factors are constant.
Normal Goods:

 Refer to goods whose demand increases with

increase in the consumer’s income. For example,
goods, such as clothing, vehicles, and food items,
are demanded in relatively increasing quantity
with increase in consumer’s income. The demand
for normal goods varies due to .different rate of
increase in consumers’ income.
Luxury Goods:

 Refer to goods whose demand increases with

increase in consumer’s income. Luxury goods are
used for the pleasure and esteem of consumers.

For example, expensive jewellery items, luxury cars,

antique paintings and wines, and air travelling.
Law of Demand
 All other things remaining unchanged, the quantity demanded of a
good increases when its price decreases and vice versa
 This relationship can be shown by a
demand schedule, or a demand
curve/demand function.
demand schedule
 Is a table that shows the quantity demanded of a good
or service at different price levels. A demand schedule can
be graphed as a continuous demand curve on a chart
where the Y-axis represents price and the X-axis represents
quantity.

Example: A demand Schedule for a

Choco2x
Demand Curve
 Isa representation of the correlation between the
price of a good or service and the amount
demanded for a period of time.
What are the factors affecting the
demand?
Determinants of Demand
 Arefactors that cause fluctuations in the
economic demand for a product or a
service.
Factors which Determine the
Demand
 Tastes and Preferences of the Consumers.
 Incomes of the People.
 Changes in the Prices of the Related Goods.
 The Number of Consumers in the Market.
 Advertisement Expenditure
 Consumers' Expectations with regard to Future Prices.
 Income Distribution.
 Climatic Conditions
1. Tastes and Preferences of the
Consumers.
 Demand for a commodity depends upon
the taste and preferences of a consumer.
A change in taste and preferences
affects the level of demand for various
goods. Consumer's preferences may
change because of changes in fashion,
habits, and so on.
2. Incomes of the People.

 The demand for goods also depends upon

incomes of the people. The greater the
incomes of the people the greater will be
their demand for goods.
Changes in the Prices of the
Related Goods.
 Classified as either substitutes or complements
 Anincrease in the price of a good will increase
demand for its substitute, while a decrease in
the price of a good will decrease demand for its
substitute.
Changes in the Prices of the
Related Goods.
For example:
for many people tea and coffee
are substitute goods and so are different brands
of cars, scoters, cigarettes, soaps, toothpastes,
etc.
Changes in the Prices of the
Related Goods.
For example:
Pen and ink, car and petrol, and tea and
sugar are used together. Therefore, the demand
for complementary goods changes
simultaneously. The complementary goods are
inversely related to each other. For example,
increase in the prices of petrol would decrease
the demand of cars.
Changes in the Prices of the
Related Goods.
Another example…
The Number of Consumers in the
Market.
The greater the number of consumers
of a good, the greater the market
demand for it.
Advertisement Expenditure

 Advertisement expenditure made by a firm to

promote the sales of its product is an important
factor determining demand for a product,
especially of the product of the firm which gives
advertisements. The purpose of advertisement is to
influence the consumers in favour of a product.
Advertisements are given in various media such as
newspapers, radio, and television.
Consumers’ Expectations with
regard to Future Prices
 Another factor which influences the demand for
goods is consumers’ expectations with regard to
future prices of the goods. If due to some reason,
consumers expect that in the near future prices of
the goods would rise, then in the present they
would demand greater quantities of the goods so
that in the future they should not have to pay
higher prices
Consumers’ Expectations with
regard to Future Prices
 For example, if consumers expect that the
prices of petrol would rise in the next week, then
the demand of petrol would increase in the
present
Income Distribution

 Influences the demand for a product in the market

to a large extent. If income is equally distributed
among people in the society, the demand for
products would be higher than in case of unequal
distribution of income. However, the distribution of
income in the society varies widely.
Income Distribution

For example:
the high income segment of the society would
prefer luxury goods, while the low income
segment would prefer necessary goods.
Government Policy
 Refers
to one of the major factors that affect the
demand for a product.

 Forexample, if a product has high tax rate, this

would increase the price of the product. This would
result in the decrease in demand for a product.
Similarly, the credit policies of a country also induce
the demand for a product.
Climatic Conditions

 Affect the demand of a product to a greater

extent.

For example, the demand of ice-creams and cold

drinks increases in summer, while tea and coffee are
preferred in winter. Some products have a stronger
demand in hilly areas than in plains. Therefore,
individuals demand different products in different
climatic conditions.
WHAT IS SUPPLY?
Supply

 The quantity supplied is the number of units that sellers want to sell
over a specified period of time at a particular price.
Law of Supply
Law of Supply

 States that all other factors remaining unchanged the supply of a

good increases as its price increases. This can be shown by a supply
schedule, a supply curve or a supply function.
Determinants of supply

 (alsoknown as factors affecting supply) are the

factors which influence the quantity of a product
or service supplied. The price of a product is a
major factor affecting the willingness and ability to
supply.
Determinants of Supply

 Price
 Cost of production
 Technological progress
 Suppliers' Expectations
 Goverment policy
Natural Conditions

 Impliesthat climatic conditions directly affect

the supply of certain products.
Technological progress

 enables more efficient production of goods and

services. Thus reducing the production costs and
increasing the profits. As a result supply is increased
and supply curve is shifted rightwards.
Suppliers' Expectations

 Change in expectations of suppliers about future

price of a product or service may affect their
current supply. However, unlike other determinants
of supply, the effect of suppliers' expectations on
supply is difficult to generalize. For example when
farmers suspect the future price of a crop to
increase, they will withhold their agricultural
produce to benefit from higher price thus reducing
the supply. In case of manufacturers, when they
expect the future price to increase, they will employ
more resources to increase their output and this may
increase current supply as well.
Government’s Policies

 Implies
that the different policies of government,
such as fiscal policy and industrial policy, has a
greater impact on the supply of a product.

For example, increase in tax on excise duties would

decrease the supply of a product. On the other
hand, if the tax rate is low, then the supply of a
product would increase
Let us recall!

 What is demand?

 What is Supply?

 What are the determinants of Demand?

 What are the determinants of Supply?

Activity:
Direction:
1. The teacher will group the students into 2 or 3 groups
2. Each group will classify each cards provided by the teacher
and they need to identify if it is belong to Demand (left
column) or Supply (Right Column) then attach them to the correct
column.
3. Each group have 5 minutes to finish the activity.
4. The leader of the group will present their output in front of the class.