# LESSON 3

0
49

Main Lecture:

1. What is Demand?

Demand is the want or willingness of consumers to buy goods and services. To be an effective demand, consumers must have enough money to buy commodities given a number of possible prices. Producers will only make those commodities if people have money to buy them.

The amount of a good or service consumers are willing and able to buy is known as the quantity demanded of that product.

1. Factors affecting demand.

The most important factor in affecting the demand of a certain product is the Price of that product. Other factors include income ,fashion , taste, brand, price of substitute*, price of complement*, advertisement etc. There are also some specific factors affecting demand of a certain product ; For e.g a car’s resale value is also taken into account when buying it, hence its resale value affects its demand.

(* substitute goods are those goods which can replace a certain good. For e.g car and motorbikes are substitutes to each other)

(* complement goods are those goods which are used alongside a certain good. For e.g car and petrol are complement goods)

1. Relation b/w Price and Demand.

Price and Demand have a negative relationship. Which means that if the price of commodity X goes up the demand for commodity X will fall (considering other things remain constant: also called). Similarly if the price for commodity X goes down, the demand for commodity X will rise. Please bear in mind that this relation doesn’t work in both ways. It is just a one way relationship. That is, I can say that when price increases demand fall, but I can’t say that when demand falls price increase. The changes in price and demand, along with their respective effects will be better understood once we have done the graphs.

Below is the diagram for a demand curve. As you can see, the gradient is negative because of the negative relationship between the two quantities.

From the above diagram it can be seen that when price rises from P1 to P2 the Quantity demanded decreases from Q1 to Q2. Another important thing to note is that when ever the price changes, there is a movement along the demand curve

However when there is a change in the demand of the product (lets say because of a change in income) , then there is a shift in the demand curve. This has been illustrated below

As you can see the leftward shift in demand curve from D1 to D2 shows a decrease in the quantity demanded of the product. Hence for the same price now, the quantity demanded has fallen from q2 to q1.

1. What is Supply?

Supply refers to the amount of a good or service firms or producers are willing to make and sell at a number of possible prices. The amount of a good or service producers are willing and able to make and sell to consumers in the market is known as the quantity supplied of that product, measured per period of time, say each week, month or year. The market supply of a commodity will consist of the supply of all the individual producers competing to supply that commodity.

1. Relation b/w Supply and Price.

Supply and price have a positive relationship. In general, the supply curve will slope upwards, showing that as price rises, quantity supplied rises or extends.

As price falls, quantity supplied contracts. This is because as price falls firms will expect to earn less profits as revenue will exceed costs by a smaller amount.

Following is a supply curve diagram:

As you can see when the price rises from P1 to P2 quantity demanded also rises from Q1 to Q2.

When there is a change in supply, then it results in a shift in the supply curve. This has been illustrated below.

A leftward shift from S1 to S2 shows a decrease in demand. As you can see, when supply falls, the quantity demanded for the same price becomes less, and the price for the same quantity demanded becomes high.

Market Equilibrium:

So far, we’ve looked at supply, we’ve looked at demand, and the main question that now arises is, “How do these two opposing forces of supply and demand shape the market?” Buyers want to buy as many goods as possible, as cheaply as possible. Sellers want to sell as many goods as possible, at the highest price possible. Obviously, they can’t both have their way. How can we figure out what the price will be, and how many goods will be sold? In most cases, supply and demand reach some sort of compromise on the price and quantity of goods sold: the market price is the price at which buyers are willing to buy the same number of goods that sellers are willing to sell. This point is called market equilibrium.

On a graph this point would be like:

The equilibrium price is PA, the point where both the curves intersect each other.

Q1. Michelle is shopping for shirts. She chooses one, then notices that the shirts are on sale, and gets another two shirts. How can you explain this with a graph?

This is an example of moving along a demand curve. Nothing except for the price has changed, so when Michelle notices the price change, she buys more shirts.

Q2. If Jean’s supply curve for babysitting looks like this:

Jean’s Supply Curve

What is the minimum amount you would have to pay her if you wanted her to babysit for 2 hours? 5 hours? (Remember that wage is the hourly rate of pay).

ANS: If we look for Jean’s minimum wage at 2 hours on the graph, we find that it is \$4. Since \$4 is only the hourly pay, you have to multiply it by the number of hours worked to see how much you actually have to pay Jean. For 2 hours of babysitting, you will have to pay Jean at least

(2 hours) x (\$4/hour) = \$8

Similarly, to get Jean to work for 5 hours, you have to pay her at least \$8 an hour, giving a total pay of

(5 hours) x (\$8/hour) = \$40