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Demand and Supply
Trudie Murray ©
Demand and Supply Game
Place a value of
each token
Black = 50 cent
Red = 20 cent
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Price rises when quantity supplied
is scarce and demand increases
Price decreases when quantity
supplied increases and as a result
demand increases
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Demand

The amount consumers desire to purchase at
various prices at any given time

Demand does not necessarily mean a
consumer WILL buy, but refers to a good or
service they WOULD LIKE to buy
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Effective Demand
•
Consumers must be willing to buy AND be
capable of paying the price set by the
supplier
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Law of Demand
If Price rises – Quantity demanded falls
P
Q
If Price falls – Quantity demanded rises
P
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Q
Individual Demand

Individual Demand Schedule
Lists the different quantities of a good that an
individual consumer is prepared to buy at each
price
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Market Demand

Market Demand Schedule
Lists the different quantities of a good that all
consumers in the market are prepared to buy
at each price. It is derived by adding together
all the individual demand schedules for the
good
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Demand Schedule
(Demand for coffee monthly)
(1)
Price
(cent per g)
(2)
Chris’s
demand
(3)
David’s
demand
(4)
Total market
demand
(g)
(g)
(kg’s: 000s)
A
20
28
16
700
B
40
15
11
500
C
60
5
9
350
D
80
1
7
200
E
100
0
6
100
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Demand Curve

At higher prices, consumers are generally
willing to purchase less than at lower prices

Demand curve is said to have a negative
slope - downward sloping from left to right
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Point
Price per g
A
20 cent
Market Demand
100
700 kilogrammes
Price (cent per g)
80
60
40
Demand
A
20
0
0
100
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200
300
400
500
Quantity (kilogrammes: 000s)
600
700
800
100
Point
Price per g
Market Demand
A
20 cent
700 kilogrammes
B
40 cent
500 kilogrammes
Price (cent per g)
80
60
B
40
A
20
0
0
100
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200
300
400
500
Quantity (kilogrammes: 000s)
600
700
800
100
Point
Price per g
Market Demand
A
20 cent
700 kilogrammes
B
40 cent
500 kilogrammes
C
60 cent
350 kilogrammes
Price (cent per g)
80
C
60
B
40
A
20
0
0
100
Trudie Murray ©
200
300
400
500
Quantity (kilogrammes: 000s)
600
700
800
100
D
Price (cent per g)
80
60
Point
Price per g
Market Demand
A
20 cent
700 kilogrammes
B
40 cent
500 kilogrammes
C
60 cent
350 kilogrammes
D
80 cent
200 kilogrammes
C
B
40
A
20
0
0
100
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200
300
400
500
Quantity (kilogrammes: 000s)
600
700
800
E
100
D
Price (cent per g)
80
60
Point
Price per g
Market Demand
A
20 cent
700 kilogrammes
B
40 cent
500 kilogrammes
C
60 cent
350 kilogrammes
D
80 cent
200 kilogrammes
E
100 cent
100 kilogrammes
C
B
40
A
20
0
0
100
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200
300
400
500
Quantity (kilogrammes: 000s)
600
700
800
An Increase in Demand
Price
P
D1
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Q1
Q2
Quantity
D2
A Decrease in Demand
Price
P
D2
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Q2
Q1
Quantity
D1
Factors affecting the
demand for a good
The Demand Function
Dx = f ( Px, Pog, Y, T, E, G, U)
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The Demand Function
Dx = f ( Px, Pog, Y, T, E, G, U)
Px = Goods which obey and do not obey the
Law of Demand
 Pog = Price of Complimentary Goods and
Cost of Substitute Goods
 Y = Income of consumer
 T = Consumer tastes and preferences
 E = Consumers expectations regarding
future prices
 G = Government regulations
 U = Unplanned factors

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Demand for a good depends on its own price
If price rises quantity demanded falls
If price falls quantity demanded rises
P2
P1
Q2
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Q1
Quantity Demanded
Demand for a good depends on the price of
other goods
• Complimentary Goods
Goods which are used jointly. The use of one involves the
use of the other - E.g. bread and butter, cars and petrol
• Substitute Goods
Goods which satisfy the same needs and thus can be
considered as alternatives to each other – E.g. Coke and
Pepsi or Tea and Coffee
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Complimentary Goods
D1
D2
An increase in price of a
complementary good causes the
demand for good X to fall
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D2
D1
An fall in price of a complementary
good causes the demand for good X to
rise
Substitute Goods
(The Substitute Effect)
D2
D1
An increase in price of a substitute
good causes the demand for good X to
rise
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D1
D2
An fall in price of a substitute good
causes the demand for good X to fall
Demand for a good depends on level of income
(The Income Effect)
• Normal Goods
A normal good is a good with a positive income effect. A
rise in income causes more of it to be demanded, while a
fall in income causes less of it to be demanded
• Inferior Goods
An inferior good is a good with a negative income effect.
A rise in income causes less of it to be demanded, while a
fall in income causes more of it to be demanded
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Normal Goods
D2
D1
A rise in income causes the demand for
a normal good to increase from D1 to
D2
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D1
D2
An fall in income causes the demand
for a normal good to fall from D1 to
D2
Inferior Goods
D1
D2
An increase in income causes the
demand for an inferior good to fall
from D1 to D2
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D2
D1
A decrease in income causes the
demand for an inferior good to rise
from D1 to D2
Demand depends on Consumer Tastes

If the movement in taste or preferences is in
favour of the good it causes an increase in demand
which shifts the demand curve to the right

If the movement in taste or preferences is against
the good it causes a fall in demand which shifts
the demand curve to the left
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Movement in Taste
D2
D1
A movement in taste in favour of a good
causes demand to increase
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D1
D2
A movement in taste against a good
causes demand to fall
Demand for a good depends on the
expectations of consumers

Demand for a good will shift to the right if
consumers expect:
1.
2.
3.

The price of good X to be higher in the future e.g. property
A scarcity of good X in the future e.g. oil
Their incomes to be higher in the future e.g. promotion
Demand for a good will shift to the left if
consumers expect:
1.
2.
3.
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The price of good X to be lower in the future
A plentiful supply of good X in the future
Their incomes will be lower in the future
Consumer Expectations
D2
D1
Demand for Good X will rise if
consumers expect higher future prices,
scarcity or higher future incomes
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D1
D2
Demand for Good X will fall if
consumers expect lower future prices,
abundance or lower future incomes
Demand for a good depends on government
regulations

If the government implement a programme which
reduces consumption of a particular product than
demand for this good will be affected
 E.g. The smoking ban / educational campaign
to reduce alcohol consumption.
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Government Regulations
Example:
The Smoking Ban
D1
D2
If the government implement a
policy to restrict consumption
demand for Good X will fall
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Demand for a good depends on
unplanned factors

If there is a sudden heat wave – an unplanned
factor – this may result in an increase in demand
for sunscreen and a decrease in the demand of
home oil

If flash floods occur across the country – an
unplanned factor – this may result in an increase
in the demand for Wellingtons.
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Unplanned Factors
D2
D1
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Factors such as weather
can effect the demand
for goods – e.g. a sudden
heat wave would
increase the demand for
sunscreen
Exceptions to the Law of
Demand
P D
•
•
Giffen Goods
Goods of ostentatious consumption
(snob goods)
•
•
Goods affected by consumers’ expectations
Addictive Goods
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Supply

The quantity of a good that firms are willing
to make available over a particular period of
time

The supplier determines the level of output
it is willing to supply at the prevailing
market price
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Individual Supply

Individual Supply Schedule
Lists the different quantities of a good that an
individual firm is willing to make available at
each price
Trudie Murray ©
Market Supply

Market Supply Schedule
Lists the total quantities of a good that all
firms in the market are willing to make
available at each price. It is derived by adding
together all the individual supply schedules for
the good
Trudie Murray ©
Supply Schedule
(supply of coffee monthly)
Price of
Coffee
(cent per g)
Bean
Grower X's
supply (kg’s)
Total Market
supply
(kg’s: 000s)
A
20
50
100
B
40
70
200
C
60
100
350
D
80
120
530
E
100
130
700
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Supply Curve

At higher prices, suppliers are willing to
produce more of a good or service and
supply it to the market

Supply curve is said to have a positive slope
– upwards from left to right indicating a
positive relationship between supply and
price
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100
A
P
Q
20
100
80
Price (cents per g)
60
40
20
A
Supply
0
0
100
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200
300
400
500
Quantity (kg’s: 000s)
600
700
800
P
Q
A
20
100
B
40
200
100
Price (cents per g)
80
60
40
B
A
20
0
0
100
Trudie Murray ©
200
300
400
500
Quantity (kg’s: 000s)
600
700
800
P
Q
A
20
100
B
40
200
C
60
350
100
Price (cents per g)
80
60
C
40
B
A
20
0
0
100
Trudie Murray ©
200
300
400
500
Quantity (kg’s: 000s)
600
700
800
P
Q
A
20
100
B
40
200
C
60
350
D
80
530
100
Price (cents per g)
80
D
60
C
40
B
A
20
0
0
100
Trudie Murray ©
200
300
400
500
Quantity (kg’s: 000s)
600
700
800
80
Price (cents per g)
P
Q
A
20
100
B
40
200
C
60
350
D
80
530
E
100
700
E
100
D
60
C
40
B
A
20
0
0
100
Trudie Murray ©
200
300
400
500
Quantity (kg’s: 000s)
600
700
800
Increase in Supply
P
Sx
S1
Increase
Q
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Increase/Decrease in Supply
P
S2
Decrease
SX
S1
Increase
Q
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Factors effecting the supply
of a good
The Supply Function
Sy = f ( Py, Pr, C, Tch, Tx, N, U)
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The Supply Function
Sy = f ( Py, Pr, C, Tch, Tx, N, U)
Py = Price of Good Y
 Pr = Price of related goods
 C = Cost of Production
 Tch = State of Technology
 Tx – Taxation / Subsidy
 N – number of sellers in the industry
 U = Factors outside the control of the firm

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Supply of a good depends on its own price
If price rises quantity supplied rises
If price falls quantity supplied falls
P2
P1
Q1
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Q2
Quantity Supplied
Supply of a good depends on prices of related goods
S1
S2
S1
An increase in price of a related good
will cause a fall in the supply of Good
Y
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S2
An fall in price of a related good will
cause an increase in the supply of
Good Y
Supply of a good depends on the cost of
production

Causes of an increase in the cost of production:





A rise in labour costs
A rise in the cost of raw materials
An increase in taxes
A reduction in subsidies
Causes of a decrease in the cost of production:




A fall in labour costs
A fall in the cost of raw materials
A reduction in taxes
An increase in subsidies
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Supply of a good depends on cost of production
S1
S2
S1
An increase in the cost of production
will cause a fall in the supply of Good
Y
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S2
An fall in the cost of production will
cause an increase in the supply of
Good Y
Supply of a good depends on the state of technology
S1
S2
We do not generally discuss
a ‘fall’ in technology – we
assume any new method of
production is an option for a
firm
An improvement in the state of
technology will cause an increase in
the supply of Good Y
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Supply of a good depends on the rates
of taxation / granting of subsidies

A reduction in taxes will result in a reduction in
the cost of raw materials / production and supply
will increase.

An increase in subsidies granted to a firm for raw
materials / labour employed will result in a
reduction in costs and supply will increase
Trudie Murray ©
Supply of a good depends on the rates
of taxation / granting of subsidies
S1
S2
S1
S2
An fall in the level of taxation /
An increase in the level of taxation /
decrease in subsidies will cause a fall in increase in subsidies will cause an
increase in the supply of Good Y
the supply of Good Y
Trudie Murray ©
Supply of a good depends on the
number of sellers in the industry

If the number of sellers in the industry decrease
(due to rationalisation) than overall quantity
supplied will also decrease

If the number of sellers in the industry increase
than overall quantity supplied will also increase
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Supply of a good depends on the
number of sellers in the industry
S1
S2
S1
A decrease in the number of sellers in
industry will cause a fall in the supply
of Good Y
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S2
An increase in the number of sellers in
industry will cause a rise in the supply
of Good Y
Supply of a good depends on factors outside
the control of a firm / unforseen circumstances

Favourable or unfavourable unplanned
factors:




Weather conditions e.g. floods or sunshine
Strikes
Shortage of raw materials
Transport failure
Trudie Murray ©
Supply of a good depends on factors outside the
control of a firm
S2
S1
S2
Favourable unplanned factors will
cause an increase in supply and a shift
to the right
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S1
Unfavourable unplanned factors will
cause a decrease in supply and a shift
to the left
Methodology

Students will be asked to think of three
items on their desks and to secretly set a
price for each one of them on the index card
that will be handed out.

They will then fold their index cards so it
can stand upright on their desks
Trudie Murray ©

Students will then be instructed to place
their items by their price list

Students will then be invited to go
‘shopping’ and check out all the prices in
the ‘shop’
Trudie Murray ©

Lead the students into discussion asking
questions such as the following:
 Now that you can see how other
merchants priced their items, how will
it effect your pricing of the same item?
 Were there some items that would be
in high demand because of their low
supply?
 How might that effect pricing?
Trudie Murray ©
• Students may want to stock their ‘shelves’
differently after doing some comparisonshopping and seeing the availability of
certain items.
• Give the students the opportunity to price
another 3 items of their choice and discuss
their changes and why they were made.
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Market Equilibrium

If no interference in the market occurs (by
government or other agency) price will
eventually settle at the level where quantity
demanded equals quantity supplied. This
position is called the market equilibrium
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Market Equilibrium
Price
100
80
60
40
20
D1
S2
0
quantity
0
100
Trudie Murray ©
200
300
400
500
600
700
800
Market Equilibrium and Price

If the price on the market is above the
equilibrium price, there will be a downward
pressure on the price
 Quantity supplied will exceed quantity
demanded and producers will lower the
price to get rid of surplus stock
P
Trudie Murray ©
Market Equilibrium and Price

If the price on the market is below the
equilibrium price, there will be a upward
pressure on the price
 Quantity demanded will exceed quantity
supplied. Scarcity would exist and price
would increase
P
Trudie Murray ©
An Increase in Demand
Causes:







A decrease in the price of the good itself
An increase in the price of a substitute good
A fall in the price of a complimentary good
An increase in income (if the good is normal)
A change in taste in favour of the good
Expectations of higher prices in future or scarcity
Favourable unplanned factors
Trudie Murray ©
Q2 > Q1 and P2 > P1
Price
S1
P2
P1
D2
D1
Q1
Trudie Murray ©
Q2
Quantity
A Decrease in Demand
Causes:







An increase in the price of the good itself
An fall in the price of a substitute good
A increase in the price of a complimentary good
An fall in income (if the good is normal)
A change in taste away from the good
Expectations of lower prices in future or greater
supplies
Implementation of government regulations
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Q2 < Q1 and P2 < P1
Price
S1
P1
P2
D1
D2
Q2
Trudie Murray ©
Q1
Quantity
An Increase in Supply
Causes:






A fall in the price of a related good
A fall in the cost of production
An improvement in technology
Favourable unplanned factors
A reduction in taxation / granting of subsidy
Increase in the number of sellers in the industry
Trudie Murray ©
Q2 > Q1 and P2 < P1
Price
S1
S2
P1
P2
D1
Q1 Q2
Trudie Murray ©
Quantity
A Fall in Supply
Causes:





A rise in the price of a related good
A rise in the cost of production
Unfavourable unplanned factors
An increase in taxation / decrease in subsidies
A decrease in the number of sellers in the industry
Trudie Murray ©
Q2 < Q1 and P2 > P1
Price
S2
S1
P2
P1
D1
Q2 Q1
Trudie Murray ©
Quantity
Watch the following clip
http://www.learner.org/resources/series79.html?pop=yes
&vodid=561786&pid=353#
Demand and Supply video
Trudie Murray ©
Look at the following website
and complete the Economics
Challenge
http://www.business2000.ie/resources/Revision_Quizzes.html#
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Contact Me
[email protected]
Trudie Murray ©