Market forces of Demand &

Supply
Theory of Supply and Demand
Supply and demand comprises the fundamental
concept on which our global economy stands.
Supply and demand are important in economics
for the following reasons:
They are the forces that make market economies
work
It shows how buyers and sellers behave and how they
interact with one another
They determine the quantity of each good produced
and the price at which it is sold

Principle of Supply and

Demand
The principle of supply and demand
states that when a particular good or
service has limited supply and
increased demand, the price of the
good or service increases.
Conversely, when a particular good
or service has an abundant supply
and little demand, the price of the
good or service decreases.

Economic Impact of Demand &

Supply
When central bank policy increases
the available money supply,
consumers react and spend more.
This creates increased demand for
goods and services. Companies
respond and increase production to
meet the increased demand.

Initially, that creates lower prices in

the market because an adequate
supply of products exists. But when
this cycle continues too long,
companies reach their production
capacity and can no longer meet the
demand. When this happens the
supply shrinks compare to demand,
causing prices to increase.

Demand
Amount of a goods or services
buyers are willing and able to
purchase at a given price at a
given time.

Relationship between price and

quantity demanded
Other things being same:

When the price of the good rises

Quantity demanded of a good falls and
VISE VERSA

Demand schedule
A table that shows the relationship
between Price of a good and its
corresponding
demand
Demand curve
Graphical presentation of relation between
the price and its corresponding demand.

Individual demand
Demand of one individual for a
particular goods in a given time
Market Demand
Demand of all individuals for a
particular goods in a given time

Price and demand of Icecream

Pric Quantit Quantity
e ($)
y
individu
individu
al-II
al-I
5
10
15
4
15
20
3
20
22
2
22
25
1
25
27

Market
Demand
(Q)
25
35
42
47
52

Demand Curve
a

5
4
3
2
1
25

35

42

47

52

Forces of Demand curve

shifters
Increase in demand
Any change that increases the quantity
demanded at every price

Effect: Demand curve shifts right

Decrease in demand
Any change that decreases the quantity
demanded at every price
Effect: Demand curve shifts left

Variables that can shift the demand curve

Income:
Normal goods-Anything, demand
for that goods is increased as a result
of rise in income.
Example: goods that improves the
standard of living. Like; branded
products, luxurious goods

Inferior goods-Anything, demand

for that goods is decreased as a
result of rise in income.
Example: Low price Rice VS high
price Rice
Bus VS Car, Economic VS
Business
class air travelling

Prices of related goods

Substitutes -two goods
An increase in the price of one
Leads to an increase in the demand for
the other
Example: Price of Coke increases, but
Pepsi price remain unchanged, demand
for Pepsi will increase. And the demand
curve for Pepsi will shift right ward.

Advertisement and Consumer

Taste
Iodized VS Unionized Salt
Preservative VS Without Preservative
foods
Smart phone VS Old fashioned phone
set
Smoking causes cancer due to ad
changes peoples taste

Population
Size and composition of population
also influence the market demand for
a product.

Consumers Expectations

Graph

D2

D
1

D3

Supply
Basic Concept
Amount of a good sellers are willing and

able to sell at each level of price

Law of supply
Other things being equal When the
price of the good rises Quantity
supplied of a good rises and VISE
VERSA

Supply schedule
A table showing the Relationship
between Price of a good and its
corresponding Quantity supplied

Supply curve
A graphical Relationship between Price of
a good
Quantity supplied

Individual supply
Supply of one seller at a given price
Market supply
Sum of the supplies of all sellers for a
good or service at a given price

Supply curve
Y
S
Price

0
Quantity

Equilibrium Price &

quantity
Buyers and sellers interact in
markets. Market equilibrium occurs
when the desires of buyers and
sellers align exactly so that neither
group has reason to change its
behavior.

Graph
.

The market equilibrium quantity, q*,

is also the socially optimal output
level. For each unit from 0 up to q*,
the demand curve is above the
supply curve, meaning that people
are willing to pay more to buy those
units than they cost to produce.
There are gains from producing and
then consuming those units.

Forces of Supply Curve

shifters
Shifts in supply
Increase in supply
Any change that increases the quantity
supplied at every price
Effect-Supply curve shifts right

Decrease in supply
Any change that decreases the quantity
supplied at every price
Effect-Supply curve shifts left

S
3

.
Pric
e

Quantit
y

S
1

S
2

Variables that can shift the supply curve

Input Prices
Supply negatively related to prices of
inputs

Technology
Advance in technology increase in supply
Number of sellers/Firms
Increase Market supply -increase and VISE
VERSA

Taxes
Substitutions in productionTruck VS Car, in a restaurant Porota VS
Luchi

Producers expectations

Equilibrium Price &

quantity
Buyers and sellers interact in
markets. Market equilibrium occurs
when the desires of buyers and
sellers align exactly so that neither
group has reason to change its
behavior.

The market equilibrium price, p*, and

equilibrium quantity, q*, are
determined by where the demand
curve of the buyers, D, crosses the
supply curve of the sellers, S. At that
price, the amount that the buyers
demand equals the amount that the
sellers offer.

In the absence of externalities (costs or

benefits that fall on persons not directly
involved in an activity), the market
equilibrium quantity, q*, is also the socially
optimal output level. For each unit from 0
up to q*, the demand curve is above the
supply curve, meaning that people are
willing to pay more to buy those units than
they cost to produce. There are gains from
producing and then consuming those units.