Supply and Demand
Demand Curve= represents total quantity that all consumers together want to buy at any given
price.
The want to buy = willingness to pay (WTP) of buyers = an indicator of how much a person values
a good, measured by the maximum amount that he or she would par to have the unit of the good
Movement along the demand curve:
- when the price changes: only changes in price of the good result in a change of “quantity
demanded”.
- It is a change IN our supply model = endogenous change
NB: Pro ts = Total Revenue - Total costs
=PxQ
Supply
- quantity of goods and services producers can and plan to sell at every possible price point,
over a period of time
- If a rm supplies a good or service, the rm
has the resources and technology to produce it
can pro t from producing it
plans to produce it and plans to sell it
Law of supply:
- Other things remaining the same, the higher the price of good, the greater the quantity supplied
- the lower the price of a good, the smaller the quantity supplied it
Supply Curve
- reservation price = the lowest price at which someone is willing to sell a good.
- willingness to accept = the reservation price of a potential seller, who will be willing to see a unit
only for a price at least this high
- The intersection between market demand and supply gives use and equilibrium point at A
- At this stable equilibrium point, the quantity demanded equals the quantity supplied
- Any price above P* leads to excess supply. This menas that there aren’t enough customers
willing to buy the good.
- Any price below P* leads to excess demand. There are now too many hands clutching for too
few goods.
fi fifi fi
, When we have a non price change.
- it is a change that occurs outside our demand model = exogenous change
- changes in non price determinants of good result in a change of demand
eg.
change in price of substitutes
change in price of compliments
change in tastes and preferences
change in population size expectation
1. Change in price of substitutes
Substitutes=a good that can be used in place of another good to satisfy the same want/need.
- increase price of one results in an increase in demand of the other
- eg. Price of butter increase = demand for better decreases
- price of margarine is the same but the demand for margins will increase because people will
want the cheaper alternative
2. Change in price of compliments
Complements= Goods that are used jointly to satisfy a want
- increase in price of one results in a DECREASE in demand for the other
- eg. decrease in price of co ee = increase in demand for co ee
- therefore more milk is needed = increase in demand for milk
3. Change in consumer’s income
Normal goods= an increase in income leads to an increase in consumption (eg. food staples,
clothing)
Inferior goods= an increase income leads to a decrease in consumption (eg. store brand grocery
products)
4. Change in taste
5. Change in population
- The larger the population, the greater the demand for a product. Increase = shift in demand
curve
6. Expectations of future prices:
- if prices of a good are expected to fall, consumers will reduce demand now, preferring to wait
and buy more at a lower price in the future.
Shifts of the supply curve
Non price change= a change that occurs outside our supple model = exogenous change
-eg.
change in price of related goods
change in price of inputs
change in technology
change in number of sellers
1. Change in price of related goods
- producing good X and Y but Y is trading at a higher price = more money producing good Y
2. Change in price of inputs
- examples of inputs = labour and raw materials
- if they become cheaper then you can produce more of either good for a given budget.
- Decrease in inputs = supply curve shift outwards
3. Change in technology
- Improvements in technology shifts the supply curve outward by allowing you to produce more
goods for every rand spent on labour and capital goods.
- Increase in technology = supply shifts outwards
ff ff
Demand Curve= represents total quantity that all consumers together want to buy at any given
price.
The want to buy = willingness to pay (WTP) of buyers = an indicator of how much a person values
a good, measured by the maximum amount that he or she would par to have the unit of the good
Movement along the demand curve:
- when the price changes: only changes in price of the good result in a change of “quantity
demanded”.
- It is a change IN our supply model = endogenous change
NB: Pro ts = Total Revenue - Total costs
=PxQ
Supply
- quantity of goods and services producers can and plan to sell at every possible price point,
over a period of time
- If a rm supplies a good or service, the rm
has the resources and technology to produce it
can pro t from producing it
plans to produce it and plans to sell it
Law of supply:
- Other things remaining the same, the higher the price of good, the greater the quantity supplied
- the lower the price of a good, the smaller the quantity supplied it
Supply Curve
- reservation price = the lowest price at which someone is willing to sell a good.
- willingness to accept = the reservation price of a potential seller, who will be willing to see a unit
only for a price at least this high
- The intersection between market demand and supply gives use and equilibrium point at A
- At this stable equilibrium point, the quantity demanded equals the quantity supplied
- Any price above P* leads to excess supply. This menas that there aren’t enough customers
willing to buy the good.
- Any price below P* leads to excess demand. There are now too many hands clutching for too
few goods.
fi fifi fi
, When we have a non price change.
- it is a change that occurs outside our demand model = exogenous change
- changes in non price determinants of good result in a change of demand
eg.
change in price of substitutes
change in price of compliments
change in tastes and preferences
change in population size expectation
1. Change in price of substitutes
Substitutes=a good that can be used in place of another good to satisfy the same want/need.
- increase price of one results in an increase in demand of the other
- eg. Price of butter increase = demand for better decreases
- price of margarine is the same but the demand for margins will increase because people will
want the cheaper alternative
2. Change in price of compliments
Complements= Goods that are used jointly to satisfy a want
- increase in price of one results in a DECREASE in demand for the other
- eg. decrease in price of co ee = increase in demand for co ee
- therefore more milk is needed = increase in demand for milk
3. Change in consumer’s income
Normal goods= an increase in income leads to an increase in consumption (eg. food staples,
clothing)
Inferior goods= an increase income leads to a decrease in consumption (eg. store brand grocery
products)
4. Change in taste
5. Change in population
- The larger the population, the greater the demand for a product. Increase = shift in demand
curve
6. Expectations of future prices:
- if prices of a good are expected to fall, consumers will reduce demand now, preferring to wait
and buy more at a lower price in the future.
Shifts of the supply curve
Non price change= a change that occurs outside our supple model = exogenous change
-eg.
change in price of related goods
change in price of inputs
change in technology
change in number of sellers
1. Change in price of related goods
- producing good X and Y but Y is trading at a higher price = more money producing good Y
2. Change in price of inputs
- examples of inputs = labour and raw materials
- if they become cheaper then you can produce more of either good for a given budget.
- Decrease in inputs = supply curve shift outwards
3. Change in technology
- Improvements in technology shifts the supply curve outward by allowing you to produce more
goods for every rand spent on labour and capital goods.
- Increase in technology = supply shifts outwards
ff ff
