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(1)

Demand and Supply

Demand and Supply

Mr Cooney

(2)

Price rises when quantity supplied Price rises when quantity supplied

is scarce and

is scarce and demand increasesdemand increases

Price decreases when quantity Price decreases when quantity supplied

supplied increases increases and as and as a resula resultt demand increases

(3)

Demand

Demand

The amount consumers desire to purchase

The amount consumers desire to purchase

at various prices at any given time

at various prices at any given time

Demand does not necessarily mean a

Demand does not necessarily mean a

consumer WILL buy, but refers to a good or

consumer WILL buy, but refers to a good or

service they WOULD LIKE

(4)

Effective Demand

Effective Demand

••

Consumers must be willing to

Consumers must be willing to

buy

buy

 AND be

 AND be

capable of

capable of

paying

paying

 the price set by the

 the price set by the

supplier

(5)

Law of Demand

Law of Demand

If Price rises

If Price rises

 – 

 – 

 Quantity demanded

 Quantity demanded

falls

falls

P

QD

P

QD

If Price falls

If Price falls

 – 

 – 

 Quantity demanded

 Quantity demanded

rises

rises

P

QD

(6)

Individual Demand

Individual Demand

Individual Demand Schedule

Individual Demand Schedule

••

Lists the different quantities of a good

Lists the different quantities of a good that an

that an

individual consumer is prepared to buy at each

individual consumer is prepared to buy at each

price

(7)

Demand Schedule

Demand Schedule

(Demand for coffee monthly) (Demand for coffee monthly) (1) (1) (2) (2) (3) (3) (4)(4) Price Price (cent per g) (cent per g) Chris’s Chris’s demand demand (g) (g) David’s David’s demand demand (g) (g) Total market Total market demand demand (kg’s: 000s) (kg’s: 000s) A A 20 20 28 28 16 16 700700 B B 40 40 15 15 11 11 500500 C C 60 60 5 5 9 9 350350 D D 80 80 1 1 7 7 200200 E E 100 100 0 0 6 6 100100

(8)

0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 A A Demand Demand Point

Point Price Price per per g g Market Market DemandDemand

A

A 20 20 cent cent 700 700 kilogrammeskilogrammes

   P    P  r  r    i    i  c  c  e  e    (    (  c  c  e  e   n   n    t    t  p  p   e   e   r   r   g   g    )    )

(9)

0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 Point

Point Price Price per per g g Market Market DemandDemand A

A 20 20 cent cent 700 700 kilogrammeskilogrammes B

B 40 40 cent cent 500 500 kilogrammeskilogrammes

A A B B    P    P  r  r    i    i  c  c  e  e    (    (  c  c  e  e   n   n    t    t  p  p   e   e   r   r   g   g    )    )

(10)

0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 Point

Point Price Price per per g g Market Market DemandDemand A

A 20 20 cent cent 700 700 kilogrammeskilogrammes B

B 40 40 cent cent 500 500 kilogrammeskilogrammes C

C 60 60 cent cent 350 350 kilogrammeskilogrammes

A A B B C C    P    P  r  r    i    i  c  c  e  e    (    (  c  c  e  e   n   n    t    t  p  p   e   e   r   r   g   g    )    )

(11)

0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 Point

Point Price Price per per g g Market Market DemandDemand A

A 20 20 cent cent 700 700 kilogrammeskilogrammes B

B 40 40 cent cent 500 500 kilogrammeskilogrammes C

C 60 60 cent cent 350 350 kilogrammeskilogrammes D

D 80 80 cent cent 200 200 kilogrammeskilogrammes

A A B B C C D D    P    P  r  r    i    i  c  c  e  e    (    (  c  c  e  e   n   n    t    t  p  p   e   e   r   r   g   g    )    )

(12)

0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 Point

Point Price Price per per g g Market Market DemandDemand A

A 20 20 cent cent 700 700 kilogrammeskilogrammes B

B 40 40 cent cent 500 500 kilogrammeskilogrammes C

C 60 60 cent cent 350 350 kilogrammeskilogrammes D

D 80 80 cent cent 200 200 kilogrammeskilogrammes E

E 100 100 cent cent 100 100 kilogrammeskilogrammes

A A B B C C D D    P    P  r  r    i    i  c  c  e  e    (    (  c  c  e  e   n   n    t    t  p  p   e   e   r   r   g   g    )    ) E E

(13)

Demand Curve

Demand Curve

•• At higher prices, consumers are generally willing to purchase lessAt higher prices, consumers are generally willing to purchase less than at lower prices

than at lower prices

•• Demand curve is said to have a negative slope - downward slopingDemand curve is said to have a negative slope - downward sloping from left to right

from left to right

••  There are at least three accepted explanations of why demand There are at least three accepted explanations of why demand curves slope

curves slope downwdownwards:ards: - The law of

- The law of diminishing marginal utilitydiminishing marginal utility

- The

- The income effectincome effect

- The

- The substitution effectsubstitution effect

0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000

P

P

Q

Q

D

D

(14)

Utility = Satisfaction/Benefit

Utility = Satisfaction/Benefit

Marginal = Always means Extra

Marginal = Always means Extra

••

Diminishing Marginal Utility

Diminishing Mar

ginal Utility means tha

means that the

t the extr

extra

a

satisf

satisfaction is falling as you

action is falling as you consume an additional

consume an additional

product.

product.

••

E.g. If you eat 1 bar of chocolate you get quite a lot of

E.g. If you eat 1

bar of chocolate you get quite a lot of

benefit = YUM YUM

benefit = YUM YUM

••

If you continue eating and you begin

If you continue eating and you begin your 5

your 5

thth

 Bar, Do

 Bar, Do

you get the same

you get the same benefit?? = BARF

benefit?? = BARF

Theref

Theref

ore the Law

ore the Law

of Diminishing Marginal Utility

of Diminishing Marginal Utility

states that as more of a product is consumed the

states that as more of a product is consumed the

marginal (extr

marginal (extr

a) benefit to the

a) benefit to the

consumer falls, hence

consumer falls, hence

consumers are prepared to pay less.

(15)

The income effect

The income effect

••

The

The

income

income

 and

 and

substitution

substitution

 effect can also be used to

 effect can also be used to

explain why the demand

explain why the demand curve slopes downwards.

curve slopes downwards.

••

If we assume that money income is fixed, the income

If we assume that money income is fixed, the income

eff

effect suggests that, as the

ect suggests that, as the price of a

price of a good falls,

good falls,

real

real

income

-income -

that is, what consumers can buy with

that is, what consumers can buy with

their

their

money income

money income

(Their Spending Power)-

(Their Spending Power)-

rises and

rises and

consumers increase their demand.

consumers increase their demand.

••

Therefore, at a lower price, consumers can buy more

Therefore, at a lower price, consumers can buy more

from the same money income, and,

from the same money income, and,

ceteris paribus

ceteris paribus

(with other things the same)

(with other things the same)

demand will rise.

demand will rise.

Conversely, a rise in price will reduce real income and

Conversely, a rise in price will reduce real income and

for

(16)

The substitution effect

The substitution effect

••

In addition, as the price of one good falls, it

In addition, as the price of one good falls, it

becomes

becomes

relatively less expensive

relatively less expensive

. Th

. Theref

erefore,

ore,

assuming other alternative products stay at the

assuming other alternative products stay at the

same price, at lower prices the good appears

same price, at lower prices the good appears

cheaper, and consumers will switch from the

cheaper, and consumers will switch from the

expensive alternative to the relatively cheaper

expensive alternative to the relatively cheaper

one.

one.

••

It is important to remember that whenever the

It is important to remember that whenever the

price of any resource changes it will trigger both

price of any resource changes it will trigger both

an income and a substitution effect.

(17)

(i) Define the economic terms: individual (consumer)

(i) Define the economic terms: individual (consumer)

demand; market demand.

demand; market demand.

Individual demand:

Individual demand:

the quantity of a good an

the quantity of a good an

individual

individual consumer demands

consumer demands at diff

at different

erent

prices.

prices.

Market demand:

Market demand:

total quantity of a good th

total quantity of a good that

at

all consumers demand

(18)
(19)

(ii) Explain, with the aid of labelled

(ii) Explain, with the aid of labelled diagrams, the relationshipdiagrams, the relationship between individual (consumer) demand and market demand. between individual (consumer) demand and market demand.

(20)

••

T

T

•• To deriTo derive theve the market demandmarket demand add the quantity demanded by eachadd the quantity demanded by each individual consumer at each price

individual consumer at each price to calculate the overall quantityto calculate the overall quantity demanded by the market at each price.

demanded by the market at each price.

(ii) Explain, with the aid of labelled

(ii) Explain, with the aid of labelled diagrams, the relationshipdiagrams, the relationship between individual (consumer) demand and market demand. between individual (consumer) demand and market demand.

(21)

   P

   P  r  r    i    i  c  c  e  e

P P Q Q11 QQ Quantity Quantity

An Increase in Demand

An Increase in Demand

D  D 

(22)

   P

   P  r  r    i    i  c  c  e  e

P P Q Q QQ11 Quantity Quantity

A Decrease in Demand

A Decrease in Demand

D  D 

(23)

Trudie Murray ©

Trudie Murray ©

Factors affecting the demand for a

Factors affecting the demand for a

good

good

The Demand Function

The Demand Function

Dx = f ( Px, Pog, Y, T, E, G, U)

Dx = f ( Px, Pog, Y, T, E, G, U)

(24)

The Demand Function

The Demand Function

Dx = f ( Px, Pog, Y, T, E, G, U)

Dx = f ( Px, Pog, Y, T, E, G, U)

••

Px = Goods which obey and do not obey the Law of

Px

 = Goods which obey and do not obey the Law of

Demand

Demand

••

Pog = Price of Complimentary Goods and Cost of

Pog

= Price of Complimentary Goods and Cost of

Substitute Goods

Substitute Goods

••

Y

Y = Income of consumer

 = Income of consumer

••

T

T = Consumer tastes and preferences

 = Consumer tastes and preferences

••

E

E = Consumers expectations regarding future prices

 = Consumers expectations regarding future prices

••

G

G = Government regulations

= Government regulations

(25)

These all affect DEMAND

These all affect DEMAND

(26)

Demand for a good depends on its

Demand for a good depends on its own priceown price

NOTE: Price only causes a movement along the demand curve

NOTE: Price only causes a movement along the demand curve

not a SHIFT

not a SHIFT

If price rises quantity demanded

If price rises quantity demanded fallsfalls If price falls quantity demanded rises If price falls quantity demanded rises

P P 22 P P 11 Q Q 2 2 Q Q 11 Quantity Demanded Quantity Demanded

(27)

Demand for a good depends on the price of other

Demand for a good depends on the price of other goods

goods

Complimentary

Complimenta

ry Goods

Goods

Goods which are used

Goods which are used jointlyjointly. The . The use of one use of one involvinvolves the es the useuse of the other - E.g. bread and butter, cars and petrol

of the other - E.g. bread and butter, cars and petrol

Substitute Goods

Substitute Goods

Goods which satisfy the same needs

Goods which satisfy the same needs and thus can beand thus can be considered as alternatives to each other

considered as alternatives to each other – – E.g. Coke and Pepsi E.g. Coke and Pepsi or Tea and Coffee

(28)

Compliment

Complimentary

ary Goods

Goods

D 1 D 1 D 2 D 2 D 2 D 2 D 1 D 1 An increase in price of a An increase in price of a

complementary good causes the complementary good causes the demand for good X to fall

demand for good X to fall

An fall in price of a complementary An fall in price of a complementary good causes the demand for good X to good causes the demand for good X to rise

(29)

Substitute Goods

Substitute Goods

(The Substitute Effect)

(The Substitute Effect)

D 2 D 2 D 1 D 1 D 1 D 1 D 2 D 2 An increase in price of a

An increase in price of a substitutesubstitute good causes the demand for good X good causes the demand for good X toto rise

rise

An fall in price of a substitute good An fall in price of a substitute good causes the demand for good X to fall causes the demand for good X to fall

(30)

Demand for a good depends on level of income (The

Demand for a good depends on level of income (The

Income Effect)

Income Effect)

Normal Goods

Normal Goods

A normal good is a

A normal good is a good with a positive income effgood with a positive income effect. A riseect. A rise in income causes more of it to be

in income causes more of it to be demanded, while a fall indemanded, while a fall in income causes less of it to be demande

income causes less of it to be demandedd

Inferior Goods

Inferior Goods

An inferior good is a

An inferior good is a good with a negative income effect. Agood with a negative income effect. A rise in income causes less of it

rise in income causes less of it to be demanded, while a fall into be demanded, while a fall in income causes more of it to be demanded

(31)

Normal Goods

Normal Goods

D 2 D 2 D 1 D 1 D 1 D 1 D 2 D 2

A rise in income causes the demand for A rise in income causes the demand for a normal good to

a normal good to increase from D1 toincrease from D1 to D2

D2

An fall in income causes the

An fall in income causes the demanddemand for a normal good to fall from D1 to D2 for a normal good to fall from D1 to D2 P P Q Q P P Q Q

(32)

Inferior Goods

Inferior Goods

D 1 D 1 D 2 D 2 D 2 D 2 D 1 D 1 An increase in income causes the

An increase in income causes the demand for an inferior good to fall demand for an inferior good to fall from D1 to D2

from D1 to D2

A decrease in income causes the A decrease in income causes the demand for an inferior good to rise demand for an inferior good to rise from D1 to D2 from D1 to D2 P P Q Q P P Q Q

(33)

4. TASTE:

4. TASTE:

Demand depends on Consumer Tastes

Demand depends on Consumer Tastes

••

If the movement in taste or preferences is in favour

If the movement in taste or preferences is in favour

of the good it causes an increase in demand which

of the good it causes an increase in demand which

shifts the demand curve to the right

shifts the demand curve to the right

••

If the movement in taste or preferences is against the

If the movement in taste or preferences is against the

good it causes a fall in demand which shifts the

good it causes a fall in demand which shifts the

demand curve to the left

demand curve to the left

(34)

Movem

Movement i

ent in

n T

Taste

aste

D 2 D 2 D 1 D 1 D 1 D 1 D 2 D 2 A movem

A movement in taste in ent in taste in favour of a goodfavour of a good causes demand to increase

causes demand to increase

A movement in taste against a good A movement in taste against a good causes demand to fall

causes demand to fall P P Q Q P P Q Q

(35)

5. Demand for a good

5. Demand for a good depends on the

depends on the expecta

expectations of

tions of

consumers

consumers

••

Demand for a good will shift to the right if

Demand for a good will shift to the right if

consumers expect:

consumers expect:

1.

1. The The priprice oce of gof good od X tX to be o be highigher her in tin the fhe futuuture re e.g. e.g. prpropeopertyrty 2.

2. A sA scacarcrcitity oy of gf good ood X iX in tn the he futfuturure ee e.g. .g. oioill 3.

3. TheTheir iir incncomomes tes to be ho be higigheher in tr in the fhe fututurure e.e e.g. pg. prromomototioionn

••

Demand for a good will shift

Demand for a good will shift to the left if

to the left if

consumers expect:

consumers expect:

1.

1. The The prpricice oe of gf gooood X d X to to be be lolowewer ir in tn the he fufututurere 2.

2. A plA plenentitifuful sul supppply ly of gof gooood X id X in thn the fue fututurree 3.

(36)

Consumer

Consumer Expectations

Expectations

D 2 D 2 D 1 D 1 D 1 D 1 D 2 D 2

Demand for Good X will rise if Demand for Good X will rise if

consumers expect higher future prices, consumers expect higher future prices, scarcity or higher future incomes

scarcity or higher future incomes

Demand for Good X will fall if Demand for Good X will fall if

consumers expect lower future prices, consumers expect lower future prices, abundance or lower future incomes abundance or lower future incomes

(37)

6. Demand for a

6. Demand for a

good depends on government

good depends on government

regulations

regulations

••

If the government implement a programme which

If the government implement a programme which

reduces/increases consumption of a particular

reduces/increases consumption of a particular

product than demand for this good will be

product than demand for this good will be aff

affected

ected

E.g.

E.g. The smoking

The smoking ban /

ban / educational

educational campaign

campaign to

to

reduce alcohol consumption (Cause demand

reduce alcohol consumption (Cause demand to

to

shift left)

shift left)

The cycle to work scheme cause demand for

The cycle to work scheme cause demand for

bicycles to shift right

(38)

Government Regulations

Government Regulations

D 2 D 2 D 1 D 1

If the government implement a If the government implement a  policy to restrict consumption  policy to restrict consumption demand for Good X will fall demand for Good X will fall Example:

Example:

The Smoking Ban The Smoking Ban

(39)

Government Regulations

Government Regulations

D 1 D 1 D 2 D 2 Example: Example:

The Cycle to Work The Cycle to Work

Scheme Scheme

(40)

7. Demand for a good depends on

7. Demand for a good depends on unplanned

unplanned

factors

factors

••

If there is a sudden heat wave

If there is a

sudden heat wave

 –

 –

 an unplanned factor

 an unplanned factor

 –

 –

 this may result in an increase in demand for

 this may result in an increase in demand for

sunscreen and a decrease in the demand of home

sunscreen and a decrease in the demand of home

heating oil

heating oil

••

If flash floods occur across the country

If flash floods occur across the country

 –

 –

 an

 an

unplanned factor

unplanned factor

 –

 –

 this may result in an increase in

 this may result in an increase in

the demand

(41)

Unplanned Factors

Unplanned Factors

D 1 D 1 D 2 D 2

Factors such as weather Factors such as weather

can effect the demand can effect the demand for goods

for goods –  –  e.g. a sudden e.g. a sudden heat wave would

heat wave would

increase the demand for increase the demand for

sunscreen sunscreen

(42)

(EQ) Two factors that would cause a shift in a

(EQ) Two factors that would cause a shift in a

demand curve for concert

(43)

EQ: Distinguish between the economic meanings of a

EQ: Distinguish between the economic meanings of a ‘movement along a‘movement along a demand curve’

demand curve’ and aand a ‘shift in a demand curve’‘shift in a demand curve’ for concert tickets. Illustratefor concert tickets. Illustrate

your answer using diagrams

(44)

Exceptions to the Law of Demand

Exceptions to the Law of Demand

P

P

D

D

••

Giffen Goods

Giffen Goods

••

Goods of ostent

Goods of

ostentatious consumption

atious consumption

(snob goods)

(snob goods)

••

Goods affected by consumers’ expectations

Goods affected by consumers’ expectations

(45)

Giffen Goods

Giffen Goods

• Giffen goods are those which are consumed in greater quantitiesGiffen goods are those which are consumed in greater quantities

when their price rises.

when their price rises. These goods are named after the ScottishThese goods are named after the Scottish economist

economist Sir Robert GiffenSir Robert Giffen, who is credited with identifying them, who is credited with identifying them by

by Alfred MarshallAlfred Marshall in his highly influential in his highly influential Principles ofPrinciples of Economics

Economics (1895). (1895).

•• In essence, a Giffen good is aIn essence, a Giffen good is a staplestaple food, such as bread or rice, food, such as bread or rice,

which forms are large percentage of the diet of the poorest sections which forms are large percentage of the diet of the poorest sections of a society, and for which there are no close substitutes.

of a society, and for which there are no close substitutes.

•• From time to time the poor may supplement their diet with higherFrom time to time the poor may supplement their diet with higher quality foods, and they may even consume the odd luxury (E.g.

quality foods, and they may even consume the odd luxury (E.g.

Meat), although their income will be such that they will not be able Meat), although their income will be such that they will not be able to save. A rise in the price of such a staple food will not result in a to save. A rise in the price of such a staple food will not result in a typical substitution effect, given there are no close substitutes. typical substitution effect, given there are no close substitutes.

••  If the real incomes of the poor increase they would tend to If the real incomes of the poor increase they would tend to reallocate some of this income to luxuries, and if real incomes reallocate some of this income to luxuries, and if real incomes de

decrease they wcrease they would buy more of the staple good, meaning it isould buy more of the staple good, meaning it is an

(46)

Goods of ostentatious consumption

Goods of ostentatious consumption

(Snob/Veblen Goods)

(Snob/Veblen Goods)

•• Snob goods are a second possible exception to the geneSnob goods are a second possible exception to the gene ral law of demanral law of demand.d. These goods are named after the American sociologist,

These goods are named after the American sociologist, Thorsten VeblenThorsten Veblen, who,, who, in the early 20th

in the early 20th centurycentury, identified a 'new' , identified a 'new' high-spending leisure class.high-spending leisure class.

•• According to Veblen,According to Veblen, a rise in the price of hia rise in the price of high status luxury ggh status luxury goods might leadoods might lead

members of this leisure class to increase in their consumption, rather than

members of this leisure class to increase in their consumption, rather than

reduce it.

reduce it. The purchasThe purchase of such higher e of such higher priced goods wpriced goods wouldould conferconfer

status

status(make these people seem (make these people seem Cool/WealthCool/Wealthy/Rich) on y/Rich) on the purchaserthe purchaser - a- a process which Veblen called

process which Veblen called conspicuous consumptionconspicuous consumption..

••

Some commodities by their Some commodities by their exexclusiveness or expensivenessclusiveness or expensiveness are attractiv

are attractive to some buyers. A rise e to some buyers. A rise in price makes themin price makes them

more exclusive, and therefore, more attractive to those with more exclusive, and therefore, more attractive to those with

the incomes to purchase them. A fall in

the incomes to purchase them. A fall in price may lead to aprice may lead to a fall in quantity demanded as they may no longer a

fall in quantity demanded as they may no longer appear asppear as ex

exclusive to the rich clusive to the rich and are still outside and are still outside the price range ofthe price range of the poor.

(47)

Goods the purchase of which is influenced by

Goods the purchase of which is influenced by

expect

expect

ations as

ations as

to future prices

to future prices

/ Speculative goods

/ Speculative goods

••

If prospective buyers think that prices

If prospective buyers think that prices are

are

lik

likely to be even higher in

ely to be even higher in the future, the

the future, the

current level of demand may not

current level of demand may not fall even if

fall even if

prices increase

prices increase

E.g. if a person is considering buying a house

E.g. if a person is considering buying a house

the possibility that prices are likely to be

the possibility that prices are likely to be

even higher in the future will probably

even higher in the future will probably

stimulat

(48)

Goods of Addiction

Goods of Addiction

••

In the case of those goods to which a person

In the case of those goods to which a person

becomes addicted

becomes addicted

e.g. drugs

e.g. drugs

, they no longer

, they no longer

act

act rationally

rationally..

••

They become so addicted to the drug that in

They become so addicted to the drug that in

order to get the same 'buzz'

order to get the same 'buzz' from

from

consumption of the drug, demand for the

consumption of the drug, demand for the

commodity may increase, even when the price

commodity may increase, even when the price

of the commodity increases.

(49)

Supply

Supply

••

The quantity of a good that firms are willing to

The quantity of a good that firms are willing to

mak

make available over a particular pe

e available over a particular period of time

riod of time

••

The supplier determines the level of output it

The supplier determines the level of output it

is willing

is willing to supply at the prevailing marke

to supply at the prevailing markett

price

(50)

Individual Supply

Individual Supply

Individual supply

Individual supply

:

:

the quantity of a good an

the quantity of a good an

individual

individual firm is willing

firm is willing to supply at differ

to supply at different

ent

prices.

(51)

Market Supply

Market Supply

••

Market supply

Market supply

: the total quantity of a good

: the total quantity of a good

that all firms

that all firms are willing to supply at d

are willing to supply at diff

ifferent

erent

prices.

(52)

(EQ) Explain, with

(EQ) Explain, with the aid of labelled diagrams, the relationshipthe aid of labelled diagrams, the relationship

between individual (firm) supply and market supply.

(53)

(EQ) Explain, with

(EQ) Explain, with the aid of labelled diagrams, the relationshipthe aid of labelled diagrams, the relationship

between individual (firm) supply and market supply.

(54)

Supply Schedule

Supply Schedule

((supply of coffee monthlysupply of coffee monthly))

Price of Price of Coffee Coffee (cent per g) (cent per g) Bean Bean Grower X's Grower X's supply supply (kg’s)(kg’s) Total Market Total Market supply supply (kg’s: 000s) (kg’s: 000s) A A 20 20 50 50 100100 B B 40 40 70 70 200200 C C 60 60 100 100 350350 D D 80 80 120 120 530530 E E 100 100 130 130 700700

(55)

Supply Curve

Supply Curve

••

At higher prices, suppliers are willing to

At higher prices, suppliers are willing to

produce more of a good or service and

produce more of a good or service and supply

supply

it to the market

it to the market

••

Supply curve is said to have a positive slope

Supply curve is

said to have a positive slope

 –

 –

upwards from left to right indicating a

upwards from left to right indicating a positive

positive

relationship between supply and price

(56)

0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 A A Supply Supply P P QQ A A 20 20 100100    P    P  r  r    i    i  c  c  e  e    (    (  c  c  e  e   n   n    t    t  s  s   p   p   e   e   r   r   g   g    )    )

(57)

0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 P P QQ A A 20 20 100100 B B 40 40 200200 A A B B    P    P  r  r    i    i  c  c  e  e    (    (  c  c  e  e   n   n    t    t  s  s   p   p   e   e   r   r   g   g    )    )

(58)

0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 P P QQ A A 20 20 100100 B B 40 40 200200 C C 60 60 350350 A A B B C C    P    P  r  r    i    i  c  c  e  e    (    (  c  c  e  e   n   n    t    t  s  s   p   p   e   e   r   r   g   g    )    )

(59)

0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 P P QQ A A 20 20 100100 B B 40 40 200200 C C 60 60 350350 D D 80 80 530530 A A B B C C D D    P    P  r  r    i    i  c  c  e  e    (    (  c  c  e  e   n   n    t    t  s  s   p   p   e   e   r   r   g   g    )    )

(60)

0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 P P QQ A A 20 20 100100 B B 40 40 200200 C C 60 60 350350 D D 80 80 530530 E E 100 100 700700 A A B B C C D D E E    P    P  r  r    i    i  c  c  e  e    (    (  c  c  e  e   n   n    t    t  s  s   p   p   e   e   r   r   g   g    )    )

(61)
(62)

P P Q Q S  S xx Increase Increase S  S 11

Increase in Supply

Increase in Supply

(63)

P P Q Q S  S 22 S S XX 1 1 Increase Increase Decrease Decrease

Increase/Decrease in Supply

Increase/Decrease in Supply

(64)

Factors effecting the supply of a good

Factors effecting the supply of a good

The Supply Function

(65)

The Supply Function

The Supply Function

Sy = f ( Py, Pr, C, Tch, Tx, N, U)

Sy = f ( Py, Pr, C, Tch, Tx, N, U)

••

Py

Py = Price of Good Y

 = Price of Good Y

••

Pr

Pr = Price of related goods

 = Price of related goods

••

C

C = Cost of

= Cost of Production

Production

••

T

Tch

ch = S

 = State of T

tate of Technolo

echnology

gy

••

T

Txx

 –

 –

 T

 Taxation / Su

axation / Subsidy

bsidy

••

N

N

 –

 –

 number of sellers in the industry

 number of sellers in the industry

(66)

Supply of a good depends on its own price

Supply of a good depends on its own price

(Causes a movement along supply curve)

(Causes a movement along supply curve)

If price rises quantity supplied rises

If price rises quantity supplied rises

If price falls quantity supplied falls

If price falls quantity supplied falls

P P 22 P P 11 Q Q 1 1 Q Q 22 Quantity Supplied Quantity Supplied

(67)

Supply of a good depends on prices of related goods

Supply of a good depends on prices of related goods

S 2 S 2 S 1 S 1 S 1 S 1 S 2 S 2 An increase in price of a

An increase in price of a related goodrelated good will cause a fall in the supply of Good will cause a fall in the supply of Good Y

Y

An fall in price of a related good will An fall in price of a related good will cause an increase in the supply of cause an increase in the supply of Good Y

(68)

Supply of a good depends on

Supply of a good depends on the cost of production

the cost of production

••

Causes of an increase in the cost of production:Causes of an increase in the cost of production:

•• A rise in labour costsA rise in labour costs

•• A rise in A rise in the cost of raw materialsthe cost of raw materials

•• An increase in taxesAn increase in taxes

•• A reduction in subsidiesA reduction in subsidies

••

Causes of a decrease in Causes of a decrease in the cost of productionthe cost of production

::

•• A fall in labour costsA fall in labour costs

•• A fall in the A fall in the cost of raw materialscost of raw materials

•• A reduction in taxesA reduction in taxes

(69)

Supply of a good depends on cost of production

Supply of a good depends on cost of production

S 2 S 2 S 1 S 1 S 1 S 1 S 2 S 2

An increase in the cost of production An increase in the cost of production will cause a fall in the supply of Good will cause a fall in the supply of Good Y

Y

An fall in the cost of production will An fall in the cost of production will cause an increase in the supply of cause an increase in the supply of Good Y

(70)

Supply of a good depends on the state of technology

Supply of a good depends on the state of technology

S 1 S 1

S 2

S 2

An improvement in the state of An improvement in the state of

technology will cause an increase in technology will cause an increase in the supply of Good Y

the supply of Good Y

We do not generally discuss We do not generally discuss

a ‘fall’ in technology –  a ‘fall’ in technology –  we we assume any new method of assume any new method of  production is an option

 production is an option for afor a firm

(71)

Supply of a good depends on

Supply of a good depends on the rat

the rates of

es of

taxation / granting of subsidies

taxation / granting of subsidies

••

A reduction in taxes will result in a reduction in

A reduction in taxes will result in a reduction in

the cost of raw materials / production and supply

the cost of raw materials / production and supply

will increase.

will increase.

••

An increase in subsidies

An increase in

subsidies grant

granted to a firm

ed to a firm for ra

for raw

w

materials / labour employed will result in a

materials / labour employed will result in a

reduction in costs and supply will increase

reduction in costs and supply will increase

(72)

Supply of a good depends on the rates of

Supply of a good depends on the rates of

taxation / granting of subsidies

taxation / granting of subsidies

S 2 S 2 S 1 S 1 S 1 S 1

An increase in the level of taxa

An increase in the level of taxation /tion / decrease in subsidies will cause a fall in decrease in subsidies will cause a fall in the supply

the supply of Good of Good YY

S 2

S 2

An fall in the level of taxation / An fall in the level of taxation / increase in subsidies will cause an increase in subsidies will cause an increase in the supply of Good Y increase in the supply of Good Y

(73)

6. Supply of a

6. Supply of a good depends on the number of

good depends on the number of

sellers in the industry

sellers in the industry

••

If the number of sellers in the industry decrease

If the number of sellers in the industry decrease

(due to

(due to rat

rationalisation) than

ionalisation) than overall quantity

overall quantity

supplied will also decrease

supplied will also decrease

••

If the number of sellers in the industry increase

If the number of sellers in the industry increase

than overall quantity supplied will also i

(74)

6. Supply of a

6. Supply of a good depends on the number

good depends on the number

of sellers in the industry

of sellers in the industry

S 2

S 2

S 1 S 1

A decr

A decrease in the ease in the number of sellers innumber of sellers in industry will cause a fall in the supply industry will cause a fall in the supply of Good Y of Good Y S 1 S 1 S 2 S 2

An increase in the number of

An increase in the number of sellers insellers in industry will cause a rise in the supply industry will cause a rise in the supply of Good Y

(75)

7. Supply of a good depends on factors outside the control of a 7. Supply of a good depends on factors outside the control of a

firm / unforseen circumstances firm / unforseen circumstances

••

Favourable or unfavourable unplanned

Favourable or unfavourable unplanned

factors:

factors:

••

WeWeather conditions e.g. floods or ather conditions e.g. floods or sunshinesunshine

••

StrikesStrikes

••

Shortage of raw materialsShortage of raw materials

(76)

7. Supply of a good depends on factors outside the

7. Supply of a good depends on factors outside the

control of a firm

control of a firm

S 2 S 2 S 1 S 1 S 1 S 1 S 2 S 2

Favourable unplanned factors will Favourable unplanned factors will cause an increase in supply and a

cause an increase in supply and a shiftshift to the right

to the right

Unfavourable unplanned factors will Unfavourable unplanned factors will cause a decrease in supply and a

cause a decrease in supply and a shiftshift to the left

(77)

Outline FOUR factors, other than price,

Outline FOUR factors, other than price, which affect thewhich affect the

supply curve of an individual

supply curve of an individual firm. In each case explain howfirm. In each case explain how

the factor affects the supply curve.

(78)

Outline FOUR factors, other than price,

Outline FOUR factors, other than price, which affect thewhich affect the

supply curve of an individual

supply curve of an individual firm. In each case explain howfirm. In each case explain how

the factor affects the supply curve.

(79)

Market Equilibrium

Market Equilibrium

••

If no interference in the market occurs (by

If no interference in the market occurs (by

government or other agency) price will

government or other agency) price will

eventually settle at the level

eventually settle at the level where quantity

where quantity

demanded equals quantity supplied. This

demanded equals quantity supplied. This

position is called

(80)

Market Equilibrium

Market Equilibrium

0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 Price Price quantity quantity D1 D1 S2 S2

(81)

Market Equilibrium and Price

Market Equilibrium and Price

••

If the price on the market is above the

If the price on

the market is above the

equilibrium price,

equilibrium price, there will be a downward

there will be a downward

pressure on the price

pressure on the price

••

Quantity supplied will exceed quan

Quantity supplied

will exceed quantity

tity

demanded and

demanded and producer

producers will lower the price

s will lower the price

to get rid of surplus

to get rid of surplus stock

stock

(82)

Market Equilibrium and Price

Market Equilibrium and Price

••

If the price on the market is below the

If the price on

the market is below the

equilibrium price, there will be a upward

equilibrium price, there will be a upward

pressure on the price

pressure on the price

••

Quantity demanded will exceed quan

Quantity demanded

will exceed quantity

tity

supplied. Scarcity would exist and price would

supplied. Scarcity would exist and price would

increase

increase

(83)
(84)

An Increase in Demand

An Increase in Demand

Causes:

Causes:

••

A decrease in the price of the good itselfA decrease in the price of the good itself

••

An increase in the price An increase in the price of a substitute goodof a substitute good

••

A fall in the price of A fall in the price of a complimentary gooda complimentary good

••

An increase in income (if the An increase in income (if the good is normal)good is normal)

••

A change in A change in taste in favtaste in favour of our of the goodthe good

••

Expectations of higher prices in future or Expectations of higher prices in future or scarcityscarcity

(85)

A Decrease in Demand

A Decrease in Demand

Causes:

Causes:

••

An increase in the price of the good itselfAn increase in the price of the good itself

••

An fall in the price of An fall in the price of a substitute gooda substitute good

••

A increase in the price A increase in the price of a complimentary goodof a complimentary good

••

An fall in income (if the good is An fall in income (if the good is normal)normal)

••

A change in A change in taste awataste away from the y from the goodgood

••

Expectations of lower prices in future or greaterExpectations of lower prices in future or greater supplies

supplies

(86)

An Increase in Supply

An Increase in Supply

Causes:

Causes:

••

A fall in the price of A fall in the price of a related gooda related good

••

A fall in the cost of productionA fall in the cost of production

••

An improvement in technologyAn improvement in technology

••

Favourable unplanned factorsFavourable unplanned factors

••

A reduction in A reduction in taxataxation / granting of tion / granting of subsidysubsidy

(87)

A Fall in Supply

A Fall in Supply

Causes:

Causes:

••

A rise in the A rise in the price of a price of a related goodrelated good

••

A rise in the A rise in the cost of productioncost of production

••

Unfavourable unplanned factorsUnfavourable unplanned factors

••

An increase in An increase in taxataxation / decrease tion / decrease in subsidiesin subsidies

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