Fundamentals of Economics Chapter 3 PDF

CHAPTER 3 DEMAND AND SUPPLY  LEARNING OUTCOMES At the end of the chapter, you should be able to:  Explain the definition of demand, individual demand, and market demand.  Law of demand,  Differentiate between change in quantity demanded, change in demand,...

CHAPTER 3 DEMAND AND SUPPLY  LEARNING OUTCOMES At the end of the chapter, you should be able to:  Explain the definition of demand, individual demand, and market demand.  Law of demand,  Differentiate between change in quantity demanded, change in demand,  Describe determinants of demand,  Explain the definition of supply, individual supply, and market supply.  Law of supply,  Differentiate between change in quantity supplied, change in supply,  Describe determinants of supply,  DEMAND, INDIVIDUAL DEMAND, AND MARKET DEMAND  Demand is defined as the different quantities of goods or services which buyers are willing and able to buy at different possible prices in a given period of time, ceteris paribus.  Individual demand—this refers to the demand of goods and services from a single consumer.  Market demand—this is a horizontal summation of all the individual demand in a particular market.  LAW OF DEMAND The law of demand states that when the price of a good itself increases, the quantity demanded for the good will fall and when the price of the good decreases, the quantity demanded will increase.  DEMAND SCHEDULE  The relationship between the individual demand and market demand is illustrated as below:  INDIVIDUAL DEMAND CURVE AND MARKET DEMAND CURVE  QUESTION The table shows the individual demand schedule for ice cream Price Ali’ Demand Hussein’s Sara’ Demand Market demand Demand 1 5 6 9 2 4 5 8 3 3 4 7 4 2 3 6 Drive the market demand for ice cream Draw the demand curve for ice cream market demand, Sara demand, Hussein’s demand and Ali demand  MOVEMENT ALONG A DEMAND CURVE VERSUS SHIFT OF A DEMAND CURVE  A Change in Demand Versus a Change in Quantity Demanded Change in price of a good or service leads to Change in quantity demanded (Movement along the curve). Change in income, preferences, or prices of other goods or services leads to Change in demand (Shift of curve).  DETERMINANTS OF DEMAND  Price of the good itself  Consumers’ preferences  Consumers’ income  Number of potential consumers/Market size  Changes in the prices of related goods and services  Consumers’ expectations of future prices Other factors include the following:  Geographical location of the consumer  Religion and culture  Government policy  Level of education  Age  Season of the year  SUPPLY, INDIVIDUAL SUPPLY, AND MARKET SUPPLY  Supply is defined as the producer’s ability and willingness to supply different quantities of goods and services at different possible prices and time range.  Individual supply—refers to the supply of goods and services from a single seller.  Market supply curve—this curve can be derived by horizontal summation of all individual supply curves  LAW OF SUPPLY The law of supply states that when the price of a good itself increases, the quantity supplied for the good will increase and when the price of the good decreases, the quantity supplied will decrease.  SUPPLY, LAW OF SUPPLY, INDIVIDUAL SUPPLY, AND MARKET SUPPLY (cont.) Individual Supply and Market Supply Individual Supply and Market Supply Curve  QUESTION The table shows the individual Supply schedule for Sorghum Price Firm A Firm B Firm C Market Supply 1 6 4 12 2 8 5 13 3 10 6 14 4 12 7 15 Drive the Supply for Sorghum Draw the Supply curve for Sorghum Market Supply, Firm A, Firm B and Firm C  DETERMINANTS OF SUPPLY  Price of the good itself (movement along a supply curve)  Cost and availability of the factors of production  Changes in the prices of related goods  Level of technology  Government or economic policy  Producers’ expectations of future prices  Number of suppliers  A Change in Supply Versus a Change in Quantity Supplied To summarize: Change in price of a good or service leads to Change in quantity supplied (Movement along the curve). Change in costs, input prices, technology, or prices of related goods and services leads to Change in supply (Shift of curve). CHANGE IN QUANTITY SUPPLIED AND CHANGE IN SUPPLY  TRY IT BY YOUR SELF 1. Explain the law of demand. 2. Why does a demand curve slope downwards? 3. Distinguish between a change in quantity demanded and a change in demand. 4. What are the determinants of demand? 5. Explain law of supply? 6. Why does the supply curve slope upwards? 7. What are the determinants of supply?