DEMAND SUPPLY 2192013 1 Demand Analysis Demand refers

DEMAND SUPPLY 2/19/2013 1

Demand Analysis • Demand refers to the quantity of a good (commodity or service) that consumers are willing to purchase (buy) at each price per unit of time in a given market, other things being equal (ceteris paribus). • Demand is a relationship between quantity purchased and price 2/19/2013 2

Demand Analysis Demand represented as • Demand Schedule (Tabular) • Demand Curve (Graph) • Demand Function (Equation) 2/19/2013 3

Law of Demand The quantity of a commodity demanded increases as its own price falls, other things being equal. Or The quantity of a commodity demanded falls as its own price increases, other things being equal. 2/19/2013 4

Law of Demand • There is a negative or inverse relationship between price and quantity demanded. • This inverse relationship is called the law of demand. 2/19/2013 5

DEMAND SCHEDULE: MAIZE DEMAND BY A HOUSEHOLD PRICE( GHC/bag) 2/19/2013 QUANTITY DEMANDED (bags/month) 90 4 80 6 70 9 60 14. 5 50 20 40 25 30 28 6

DEMAND CURVE FOR MAIZE Price ₵/bag D 100 80 60 40 20 D 0 2/19/2013 5 10 15 20 25 30 Quantity bags/month 7

MARKET DEMAND The market demand for a commodity is the sum of individual household demand at each price. Assuming there are just 3 buyers in a market, each demanding the following quantities at various possible prices. The market demand is the sum of the individual demands. 2/19/2013 8

MARKET DEMAND FOR MAIZE, THREE BUYERS PRICE PER BAG (CEDI) QUANTITY DEMANDED TOTAL 1 ST BUYER 2 ND BUYER 3 RD BUYER MARKET DEMAND/WEEK 22 10 12 8 30 20 20 23 17 60 17 35 39 26 100 15. 5 55 60 39 154 13 80 87 54 221 2/19/2013 9

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Demand Function Pi Own price maize Pi Qi substitutes rice Pr bread Pi Qi complements butter/margarine normal good Y Q inferior good Y Q Y 2/19/2013 11

Factors Affecting Demand 1. 2. 3. 4. Own price of the commodity Income of consumers Prices of related commodities Size of the population/number of consumers in the market 5. Taste or preferences of consumers 6. Consumer expectations about future prices and incomes NB- to examine the effect of each factor on the demand for a particular commodity, all the other factors affecting demand must be held or assumed constant. 2/19/2013 12

Factors Affecting Demand Distinction between: • Change in quantity demanded: a movement along the demand curve • Change in Demand: a shift in the demand curve. • Apart from a commodity’s own price all other factors affecting demand are known as shift factors (demand shifters). 2/19/2013 13

Price D P 0 a P 1 0 b D q 0 q 1 Quantity The movement from point ‘a’ to point ‘b’ when the price changes from P 0 to P 1 is a change in quantity demanded of the commodity(from q 0 to q 1). A reverse movement is also a change in quantity demanded. 2/19/2013 14

Change in Demand • Is a change in the demand schedule data; or graphically, a shift in the location of the demand curve. • A Change in the level of any of the demand shift factors (demand shifters) causes the demand curve to shift (either upwards to the right or downwards to the left). • Therefore, a change in demand is caused by changes in the level of any demand shifters but not by the own price of the commodity. • Illustrate effect of changes in income on demand 2/19/2013 15

An upward shift of a demand curve to the right represents an increase in demand while a downward shift to the left represents a decrease in demand. Fig. Changes in Demand Price D 1 D 0 D 2 P 0 D 1 D 2 0 2/19/2013 q 2 q 0 q 1 D 0 quantity 16

Change in Demand In the figure, the shift in the original demand curve D 0 D 0 to either D 1 D 1, or D 2 D 2 represents a change in demand. The upward shift of the demand curve from D 0 D 0 to D 1 D 1 is an increase in demand. The downward shift from D 0 D 0 to D 2 D 2 represents a decrease in demand. Note that the own price (P) does not change. 2/19/2013 17

Discussion of Factors affecting Demand Income • Commodities whose demand varies directly with income are called superior or normal goods. • Commodities whose demand varies inversely with a change in income are called inferior goods. e. g. Rising income may decrease demand for used clothing, third hand automobiles, certain foods (e. g gari). 2/19/2013 18

Discussion of Factors affecting Demand Prices of Related Goods • A substitute is a good which can be used in place of another good. Butter and margarine are examples of substitute goods. • When two products are substitutes the price of one good and the demand for the other good are directly related. • A complement is a good used in conjunction with another good. They are jointly used. • When two commodities are complements, the price of one good and the demand for the other are inversely related. 2/19/2013 19

Discussion of Factors affecting Demand Taste or preferences A change in taste or preferences in favor of a commodity increase the demand while unfavorable change in taste will decrease the demand. Number of buyers An increase (decrease) increased (decreases) dd. 2/19/2013 20

Summary: An increase in demand can be caused by; 1. A favorable change in consumer tastes. 2. An increase in the number of buyers. 3. Rising incomes if the product is a normal good. 4. Falling incomes if the product is an inferior good. 5. An increase in the price of a substitute good. 6. A decrease in the price of a complementary good. 7. Consumer expectations of higher future prices (and incomes). 2/19/2013 21

Supply Analysis • Supply Is the quantity of a particular commodity or service that producers are willing to offer or put on the market for sale at each price per unit of time, ceteris paribus. 2/19/2013 22

Law of Supply • Law of Supply: the quantity supplied of a commodity per unit of time increases with its price, ceteris paribus. • There is a positive or direct relationship between price and quantity supplied. • As price rises, the corresponding quantity supplied rises. • As price falls the quantity supplied also falls. 2/19/2013 23

Supply Schedule Is a list of possible prices and their respective quantities of a commodity offered for sale (supplied) 2/19/2013 24

A SUPPLY SCHEDULE FOR A COMMODITY 2/19/2013 PRICE ( CEDI/BAG) QUANTITY SUPPLIED (BAGS/MONTH) 90 27 80 25 70 19 60 14. 5 50 10 40 5. 5 30 3 25

A FARMER’S SUPPLY CURVE FOR MAIZE Price (₵ /bag) 100 S 80 60 40 S 20 5 2/19/2013 10 15 20 25 30 Quantity (bags/month 26

Supply Function Factors Affecting Supply - the commodity’s own price - Prices of other goods - Prices of factor inputs(resources) - Type of technology used (technique of production) - Number of producers - Future price expectation of producers - Natural factors (such as weather (rainfall), bushfires, pests and diseases outbreak. 2/19/2013 27

Change in Quantity Supplied and Change in Supply A Change in Quantity Supplied Is a movement along a given supply curve. Changes in the commodity’s own price leads to a change in quantity supplied of a commodity but not a change in supply. S Price b P 1 a P 0 S q 0 2/19/2013 q 1 Quantity 28

A Change in Supply Is a shift of a supply curve It means the entire supply curve shifts An increase in supply shifts the curve downwards or outward to the right A decrease in supply shifts the curve upwards or inwards to the left Apart from the commodity’s own price, all the other factors of supply are known as shift factors (shifters). A change in the level of any of the shift factors will causes the supply curve to shift 2/19/2013 29

Price S 2 S 0 S 1 P 0 S 2 S 0 S 1 0 q 2 q 0 q 1 Quantity - The shift in the original supply curve from S 0 S 0 downwards to S 1 S 1 is an increase in supply from q 0 to q 1 at the same own price P 0. 2/19/2013 30

FACTORS EFFECT Increase in Supply can be caused by any of the following 1. Decrease in price of other commodities produced with the same/similar inputs. 2. Decrease in price of input (cost of production). 3. Used of improved or modern technology in farm production. 4. Increase(larger) in number of producers/suppliers. 5. Favourable weather conditions( ie. Good and adequate rainfall). 2/19/2013 31

- Decrease in supply can be caused by 1. Increase in price of other commodities produced with the same/similar inputs. 2. Increase in price of input (cost of production). 3. Use of primitive or traditional production methods. 4. Decrease/smaller number of producer/supplier. 5. Unfavourable factors (e. g. Flooding, drought, bushfires, pest and diseases outbreak). 2/19/2013 32

Market Equilibrium The market equilibrium occurs when at a certain price, quantity demanded is equal to quantity supplied Market clears. Equilibrium price: Also known as market clearing price, is the price at which the quantity demanded is equal to the quantity supplied. Equilibrium quantity: is the quantity exchanged at the equilibrium price. 2/19/2013 33

P D S EXCESS SUPPLY (SURPLUS) E PE EXCESS DEMAND (SHORTAGE) S D q. E 2/19/2013 Q 34

PRICE QUANTITY DEMANDED QUANTITY SUPPLIED STATE OF MARKET PRESSURE ON PRICE 90 4 27 23 - excess supply (surplus) DOWNWARD 80 6 25 19 - excess supply (surplus) DOWNWARD 70 9. 5 19 9. 5 - excess supply(surplus) DOWNWARD 60 14. 5 0– equilibrium NEUTRAL 50 20 10 10 - excess UPWARD demand(shortage) 40 25 5. 5 19. 5 - excess UPWARD demand(shortage) 30 28 3 25 - excess UPWARD demand(shortage) 2/19/2013 35