Supply and Demand

1
Supply and Demand

• Basis of all macroeconomics
• Relevant to understanding how prices are set (by
  the market) and impact on profits
• Useful underpinning for later discussions on
  costing of changed quantities and alternative
  equipment proposals

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
2
The Law of Demand

• The price of a product and the amount purchased
  are inversely related. If the price rises, the
  quantity demanded falls if the price falls, the
  quantity demanded rises.
• Quantity demanded the amount of any good or
  service consumers are willing (and able) to
  purchase at some specific price.

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
3
Demand Curve

• The Law of Demand often is represented
  graphically by a demand curve.
• Economists often illustrate the law of demand by
  a straight line with a negative slope in the
  first quadrant of Price (P) - Quantity (Q) space
• note the odd arrangement of axes

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
4
Demand Curve

• Properly, it will be a general curve with
  negative slopes in the first quadrant.
• At times the curve may show a step function
• Demand curves exist for individuals and the
  market

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
5
Change in Demand

• Demand curves are drawn on the assumption of all
  things other than price are held constant
  (ceteris paribus)
• A change in any factor other than price is shown
  as causing a (parallel) shift of the demand curve

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
6
Factors affecting Demand

• Anything other than price that determines the
  amount of a product that people are willing and
  able to purchase
• change in income
• change in related goods
• change in time since product released
• change in income and price expectation
• change in time period being considered
• change in utility
• change in number of consumers

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
7
Factors affecting Demand (cont)

• Normal Good a product that an individual chooses
  to purchase in larger amounts as income rises
  or in smaller amounts as income falls
• Inferior Good a product that an individual
  chooses to purchase in smaller amounts as income
  rises or in larger amounts as income falls.

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
8
Factors affecting Demand (cont)

• Substitutes (alternatives) products that have a
  relation such that an increase in the price of
  one will increase the demand for the other or
  vice versa
• Complements products that have a relation such
  that an increase in the price of one will
  decrease the demand for the other or vice versa

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
9
The Law of Supply

• The price of a product and the amount that
  producers are willing and able to offer are
  directly related. If price rises, then quantity
  supplied rises if price falls, then quantity
  supplied falls.
• Quantity supplied the amount of any good or
  service that producers are willing to produce at
  some specified price.

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
10
Supply Curve

• The Law of Supply can be represented by a
  schedule or curve
• Economists often illustrate the law of supply by
  a straight line with a positive slope and
  intercept in the first quadrant of Price (P) -
  Quantity (Q) space
• note same axes as for demand curve

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
11
Supply Curve

• Properly, it will be a general curve with
  positive slopes in the first quadrant.
• At times the curve may show a step function

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering