BBA 2413

Micro Economics
Umesh khadka
[email protected]

BBA First Semester

GPLC
2021 February
Theory of Demand
What is Demand?

Quantity demanded of a product

or service is the number that
would be bought by the public at
a given price
The Law of Demand

When a good’s price is lower,

consumers will buy more of it
When a good’s price is higher,
consumers will buy less of it
The Law of Demand

The Law of Demand is affected

by two behavior patterns
The Substitution Effect
The Income Effect
The Substitution Effect
As the price for one good rises
compared to a similar good,
consumers will substitute the
similar good for their purchases.
The Income Effect

As prices go up, your money

becomes worth less than it was
worth before
People are less likely to buy the
good now
Demand Schedule

A demand schedule shows the

likely number of purchases
based on a series of arbitrarily
chosen prices
Demand Schedule
Demand Schedule › Demand
Curve
A Change (Shift) in Demand

If one of 5 other factors changes,

the entire demand curve will
shift to the left or right
The curve does NOT shift if the
price of the good is the only
change
A Change in Demand
(Graph)
A Change in Quantity
Demanded (Graph)
Income
When people’s income changes,
demand shifts accordingly
Normal Goods –
• Higher income = higher demand
• Lower income = lower demand
Income
When people’s income changes,
demand shifts accordingly
Inferior Goods –
• Higher income = lower demand
• Lower income = higher demand
Consumer Expectations

If consumers expect a price to

rise in the future, current
demand increases
If consumers expect a price to
fall in the future, current
demand decreases
Population
When one sector of the population
grows, demand increases for
products that sector uses
Fastest growing sector of the
population today?
Consumer Tastes and
Advertising
Increased advertising can
increase consumer demand
Bad news about a product can
decrease demand
Price of Related Goods
Complimentary Goods – goods
that are bought and used together
Higher Complementary Price =
decrease in demand
Lower Complementary Price =
increase in demand
Price of Related Goods
Substitute Goods – goods that are
used in place of one another
Higher Substitute Price = increase
in demand
Lower Substitute Price = decrease
in demand
The concept of Supply
Meaning of Supply
In general, supply refers to the
availability of goods in the market
»But in Economics
Supply of a commodity refers to the
quantity of product which a seller is
willing and able to sell at a given price
within a fixed period of time.
Determinants of supply
Determinants of supply are those factors
which influence the supply of goods ;
They are as follows:
 Determinants of Supply

Market price
Input prices
Technology
Expectations
Number of producers
What are some examples?
Supply function
➢ The functional relationship between
supply and its determinants of supply is
known as supply function.
➢ A supply function is the study of how the
quantity supply changes with the change
in its determinants?
Supply function
Symbolically;
Qs = f(P,Pi,T,Pr,Ep,Np…..etc)
Where,
P= price, Pi = price of inputs
T= technology, Pr=price of related goods
Ep=Expectation of price change
Np=number of producer
 Law of Supply

❖ The law of supply explain the

relationship between price and
quantity supply.
❖ The law of supply states that there is
a direct (positive) relationship
between price and quantity supplied.
The Law of Supply
There is a direct relationship between
price and quantity supplied.
Quantity supplied rises as price rises, other
things constant.
Quantity supplied falls as price falls, other
things constant.
The Supply Curve
The supply curve is the graphic
representation of the law of supply.
The supply curve slopes upward to the
right.
The slope tells us that the quantity
supplied varies directly – in the same
direction – with the price.
Supply Curve DVDs
Price of
Supply Curve
Ice-Cream
Cone
$3.00

2.50

2.00

1.50

1.00

0.50

Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
Shifts in Supply Versus
Movements Along a Supply Curve

Changes in price causes changes in

quantity supplied represented by a
movement along a supply curve.
Movements Along a Supply Curve

A movement along a supply curve – the

graphic representation of the effect of a
change in price on the quantity supplied.
 Change in Quantity Supplied
Price of
Ice-Cream
Cone
S
C
$3.00 A rise in the price
of ice cream cones
A results in a
2 movement along
the supply curve.
1.00 B

Quantity of
0 1 5 Ice-Cream
2 Cones
Shifts in Supply curve

If the amount supplied is affected by

anything other than a change in price, there
will be a shift in supply.
Shifts in Supply Curve

Shift in supply – the graphic representation

of the effect of a change in a factor other
than price on supply.
Shift in Supply
S0
S1
Price (per unit)

A B
$15
Shift in Supply
(a shift of the curve)

1,250 1,500
Quantity supplied (per unit of time)
 Shift in Supply
Price of S3
Ice-Cream
Cone
S1 S2
Decrease in
Supply

Increase in
Supply

Quantity of
0 Ice-Cream
Cones
 Factors that Shift Supply
Resource
Prices

Technology
Prices of Related
Goods and Services
And
Productivity
Supply

Number Expectations
Of Of
Producers Producers
Price of Inputs (Resource Prices)
• When costs go up, profits go down, so that
the incentive to supply also goes down.
 Technology
• Advances in technology reduce the
number of inputs needed to produce a
given supply of goods.
• Costs go down, profits go up, leading to
increased supply.
 Expectations
• If suppliers expect prices to rise in the
future, they may store today's supply to
reap higher profits later.
 Number of Suppliers
• As more people decide to supply a good
the market supply increases (Rightward
Shift).
 Market Supply

Market supply refers to the sum of

all individual supplies for all sellers
of a particular good or service.
Graphically, individual supply
curves are summed horizontally to
obtain the market supply curve.
From Individual Supplies to a
Market Supply

(1) (2) (3) (4) (5)

Quantities Price Ann's Barry's Charlie's Market
Supplied (per DVD) Supply Supply Supply Supply
A $0.00 0 0 0 0
B 0.50 1 0 0 1
C 1.00 2 1 0 3
D 1.50 3 2 0 5
E 2.00 4 3 0 7
F 2.50 5 4 0 9
G 3.00 6 5 0 11
H 3.50 7 5 2 14
I 4.00 8 5 2 15
From Individual Supplies to a Market
Supply

Charlie Barry Ann Market Supply

$4.00 I
3.50
Price per DVD

H
3.00 G
2.50 F
2.00 E
1.50 D
1.00 C
0.50 B CA
0 A
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quantity of DVDs supplied
(per week)
 Equilibrium of
Price of
Supply and Demand
Ice-Cream
Cone
Supply
$3.00

2.50 Equilibrium

2.00

1.50

1.00

0.50 Demand
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Excess Supply
Price of
Ice-Cream
Cone
Supply
$3.00 Surplus

2.50

2.00

1.50

1.00

0.50 Demand
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Excess Demand
Price of
Ice-Cream
Cone

Supply

$2.00

$1.50

Shortage Demand

0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of
Ice-Cream Cones
Three Steps To Analyzing
Changes in Equilibrium

Decide whether the event shifts the

supply or demand curve (or both).
Decide whether the curve(s) shift(s) to the
left or to the right.
Examine how the shift affects
equilibrium price and quantity.
 Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

How an Increase in Demand

Affects the Equilibrium
Price of 1. Hot weather increases
Ice-Cream the demand for ice cream...
Cone

Supply

$2.50 New equilibrium

2.00
2. ...resulting Initial
in a higher equilibrium
price...
D2

D1
0 7 10 Quantity of
3. ...and a higher Ice-Cream Cones
quantity sold.
 How a Decrease in Supply Affects
the Equilibrium
Price of
Ice-Cream 1. An earthquake reduces
Cone the supply of ice cream...
S2
S1

New
$2.50 equilibrium

2.00 Initial equilibrium

2. ...resulting
in a higher
price...
Demand

0 1 2 3 4 7 8 9 10 11 12 13 Quantity of
3. ...and a lower Ice-Cream Cones
quantity sold.