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Business Environment 1
Week 5
‘Business Environment 1
TOPIC5
Market Demand & Supply
Introduction
This topic introduces students to
the various factors than influence
the level of demand for product,
and the level of supply of a
product
Key words & concepts
 Dependent
variable
 Independent variable
 Ceteris paribus
 Complementary products
 Substitute products
 Inferior Products
 Superior products
Objectives



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To understand the factors that can influence the
level of demand for product, and be able to draw
a typical demand curve
To understand that factors that can influence the
level of supply for a product, and be able to draw
a typical supply curve
To understand the concept and significance of
‘ceteris paribus’ when analyzing these factors
To
appreciate
the distinction
between
extensions/contractions in demand and supply
and increases/decreases in demand and supply
Definitions
Law of Demand: The quantity of a good
demanded per period of time will fall as price
rises and will rise as price falls, other things
being equal (ceteris paribus).
 Income effect: The effect of a change in price on
quantity demanded arising from the consumer
becoming better or worse off as a result of the
price change.
 Substitution effect: The effect of a change in price
on quantity demanded arising from the
consumer switching to or from alternative
(substitute) products.

Ceteris paribus
The factors (independent variables) that can affect the
level of demand (dependent variable) for a product will
be considered under conditions of ceteris paribus.
This means that the impact of each factor on
demand will be considered separately from the
other factors (which will be assumed to remain
unchanged during our analysis).
 Ceteris paribus means ‘other things being equal’.
Price determines the point on the demand curve
showing the quantity demanded, and increases or
decreases in price will move behavior along the
static curve resulting in contractions or extensions
in demand.
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Demand curve
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Table 5.1 The demand for potatoes (monthly)
Price
(pence per kg)
Tracey’s
demand (kg)
(2)
( 1)
Darren’s
demand (kg)
Total market
demand
(tonnes:000s)
(3)
(4)
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
Demand curve
Consider the hypothetical data in Table 5.1,
which shows how many kilograms of
potatoes per month would be purchased at
various prices.
 The demand schedule can be represented
graphically as a demand curve. Figure 5.1
shows the market demand curve for potatoes
corresponding to the schedule in Table 5.1.
 This price of potatoes is plotted on the
vertical axis. The quantity demanded is
plotted on the horizontal axis.

Demand curve

Figure 5.1 Market demand curve for potatoes (monthly)
Demand curve
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Point E shows that at a price of 100p per kilo, 100
000 tonnes of potatoes are demanded each month.
When the price falls to 80p we move down the
curve to point D. this shows that the quantity
demanded has now risen to 200 000 tones per
month.
The five points on the graph (A-E) correspond to
the figures in columns (1) and (4) of Table 5.1.
The graph also enables us to read off the likely
quantities demanded at prices other than those in
the table.
Other determinants of demand

Price is not the only factor that determines how
much of a good people will buy. Demand is also
affected by the following:
 Tastes
 The number and price of substitute goods
 The number and price of complementary
goods
 Income
 Distribution of income
 Expectations of future price changes
Other determinants of demand
It is changes in the other independent variables that
can cause the demand curve to shift to the right (an
increase in demand) or to the left (a decrease in
demand).
Of significance here is the price of other products
(complementary and substitute cases), income
(inferior, and normal/superior cases), tastes
(including fashion, impact of marketing and
advertising, speculation, the weather), population
size
and
structure
(including
immigration/emigration),
and
government
influences (including legislation, persuasion,
information)

Shifts in the demand curve
Shifts in the demand curve
 If
a change in one of the other
determinants causes demand to rise
– say, income rises – the whole
curve will shift to the right.
 If
a change in a determinant other
than price causes demand to fall, the
whole curve will shift to the left.
Definitions
Substitute goods: A pair of goods which are
considered by consumers to be alternatives
to each other. As the price of one goes up,
the demand for other rises.
 Complementary goods: A pair of goods
consumed together. As the price of one
goes up, the demand for both goods will
fall.
 Normal good: A good whose demand rises as
people’s incomes rise.
 Inferior good: A good whose demand falls as
people’s incomes rise.

Definitions
 Change
in demand:
The term used for a shift in the
demand curve. It occurs when a
determinant of demand other than
price changes.
 Change in the quantity demanded:
The term used for a movement along
the demand curve to a new point. It
occurs when there is a change in price.
Supply

The factors (independent variables) that
can affect the level of supply (dependent
variable) of a product will be considered
under conditions of ceteris paribus.

Price determines the point on the supply
curve showing the quantity suppliers are
willing to provide, and increases or
decreases in price will move behavior
along the static curve resulting in
contractions or extensions in supply.
Supply
 The
higher the price of a
particular farm output, the more
land will be devoted to it. This
illustrates
the
general
relationship between supply and
price: when the price of a good
rises, the quantity supplied will
also rise.
The supply curve
 The
amount that producers would like
to supply at various prices can be
shown in a supply schedule.
 Table
5.2 shows a monthly supply
schedule for potatoes, both for an
individual farmer (farmer X) and for
all farmers together (the whole
market).
The supply curve

Table 5.2 The supply of potatoes (monthly)
Price of potatoes
(pence per kg)
Farmer X’s supply
(tonnes)
Total market supply
(tonnes:000s)
A
20
50
100
B
40
70
200
C
60
100
350
D
80
120
530
E
100
130
700
The supply curve
The supply schedule can be represented
graphically as a supply curve.
 A supply curve may be an individual firm’s
supply curve or a market curve (i.e. that of
the whole industry).
 Figure 5.3 shows the market supply curve
of potatoes. As with demand curves, price
is plotted on vertical axis and quantity on
the horizontal axis.
 Each of the points a-e corresponds to a
figure in Table 5.2.

The supply curve
The supply curve
 For
example, a price rise from 60p per
kg to 80p per kg will cause a
movement along the supply curve
from point c to point d: total market
supply will rise from 350 000 tones per
month to 530 000 tones per month.
Other determinants of supply

Like demand, supply is not simply determined by
price. The other determinants of supply are as
follows:
 The cost of production
 The profitability of alternative products
(substitutes in supply)
 The profitability of goods in joint supply
 Nature, ‘random shocks’ and other
unpredictable evens
 The aims of producers
 Expectations of future price changes
 The number of suppliers
Shifts in the supply curve

It is changes in the other independent variables
that can cause the supply curve to shift to the
right (an increase in supply) or to the left (a
decrease in supply).

Of significance here is the price of other
products (other products may become more or
less profitable to produce), factor inputs (cost
and availability of productive resources), the
impact of technology, the goods or objectives of
suppliers, and government influences (e.g.
taxation and subsidy policy), and ‘acts of god’
(impacts of natural phenomena on production).
Shifts in the supply curve
Shifts in the supply curve
If any other determinant of supply
changes, the whole supply curve will shift.
 A rightward shift illustrates an increase in
supply.
 A leftward shift illustrates a decrease in
supply.
 In figure 5.4, if the original curve is S0, the
curve S1 represents an increase in supply,
whereas the curve S2 represents a decrease
in supply.
