DEMAND

1
DEMAND

• The relationship between demand and price
• the law of demand
• the income effect
• the substitution effect
• The demand curve

2
DEMAND

• Other determinants of demand
• tastes
• number and price of substitute goods
• number and price of complementary goods
• income
• distribution of income
• expectations
• Movements along and shifts in the demand curve

3
An increase in demand
P
Price
D1
D0
O
Q0
Q1
Quantity
4
SUPPLY

• The relationship between supply and price
• The supply curve
• why supply curves generally slope upwards
• Other determinants of supply
• costs of production
• profitability of alternative products
  (substitutes in supply)
• profitability of goods in joint supply
• nature and other random shocks
• aims of producers
• expectations of producers
• Number of producers

5
Shifts in the supply curve
P
S2
S0
S1
Increase
Decrease
Q
O
6
The determination of market equilibrium
(potatoes monthly)
E
e
Supply
d
D
c
C
Price (pence per kg)
b
B
a
A
Demand
Quantity (tonnes 000s)
7
The determination of market equilibrium
(potatoes monthly)
E
e
Supply
d
D
c
C
Price (pence per kg)
b
SHORTAGE
B
(300 000)
a
A
Demand
Quantity (tonnes 000s)
8
The determination of market equilibrium
(potatoes monthly)
E
e
Supply
d
D
SURPLUS
(330 000)
c
C
Price (pence per kg)
b
B
a
A
Demand
Quantity (tonnes 000s)
9
The determination of market equilibrium
(potatoes monthly)
E
e
Supply
d
D
c
C
Pe
Price (pence per kg)
b
B
a
A
Demand
Qe
Quantity (tonnes 000s)
10
Effect of a shift in the demand curve
P
S
i
Pe2
g
h
Pe1
D2
D1
O
Qe1
Qe2
Q
11
Effect of a shift in the supply curve
P
S2
S1
k
Pe3
j
g
Pe1
D
O
Qe3
Qe1
Q
12
ELASTICITY

• Elasticity
• use of proportionate or percentage changes
• the sign (positive or negative)
• the value (greater or less than one)
• Price elasticity of demand (PÎd) determinants
• number and closeness of substitute goods
• the proportion of income spent on the good
• time

13
ELASTICITY

• Price elasticity of demand and consumer
  expenditure (P x Q)
• effects of a price change on expenditure elastic
  demand
• effects of a price change on expenditure
  inelastic demand
• extreme cases
• applications to price decisions

14
ELASTICITY

• Measurement of elasticity arc elasticity
• the formula for price elasticity of demand ?Q/Q
  ?P/P
• using the average or 'mid-point' method

15
Measuring elasticity using the arc method
DQ DP
Ped

mid Q mid P
m
10 -2 15 7


10/15 x -7/2 -70/30 -7/3
-2.33
n
P ()
Demand
Q (000s)
16
ELASTICITY

• Measurement of elasticity point elasticity
• the formula for price elasticity of demand dQ/dP
  x P/Q
• the elasticity of a straight-line demand curve
  (constant dQ/dP)
• the elasticity of a curved demand curve dQ/dP is
  the tangent to the curve

17
Measuring elasticity at a point
50
Ped (1 / slope) x P/Q -100/50 x
30/40 -60/40 -1.5
r
30
P
D
0
40
100
Q
18
Supply in different time periods
P
Si
SS
b
P2
c
SL
P3
d
P4
P1
a
D2
D1
O
Q4
Q1
Q3
Q
19
ELASTICITY

• Income elasticity of demand
• measurement
• determinants
• applications
• Cross-price elasticity of demand
• measurement
• determinants
• applications