By Muhammad Shahid Iqbal

1. Engineering Economics By Muhammad Shahid Iqbal • Module No. 02 Forces of Demand and Supply

2. Demand • A market is defined as a group of buyers and sellers of a particular product or service. • Competitive markets are markets with many buyers and sellers, so that each has a very small influence on the price. • Demand and supply is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. • The demand for a product is the amount that buyers are willing and able to purchase. • Quantity demanded is the demand at a particular price, and is represented as the demand curve. • The relationship between price and quantity demanded is known as the demand relationship.

3. The law of Demand • The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. • In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. • As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more.

4. The law of Demand • A, B and C are points on the demand curve. • Each point on the curve reflects a direct correlation between quantity demanded (Q) and price (P). • The demand relationship curve illustrates the negative relationship between price and quantity demanded. • The higher the price of a good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C).

5. Determinants of Demand • Income: Generally, as income increases, we are able to buy more of most goods. When demand for a good increases when incomes increase, we call that good a “Normal good". When demand for a good decreases when incomes increase, then that good is called an “Inferior good”. • Prices of related goods: Related goods come in two types, the first of which are "substitutes". Substitutes are similar products that can be used as alternatives. • Examples Coke/Pepsi, and butter/margarine. Usually, people substitute away to the less expensive good. • Other related products are classified as "complements". Complements are products that are used in conjunction with each other. • Examples pencil/eraser, left/right shoes, and coffee/sugar.

6. Determinants of Demand • Consumer expectations: When you expect the price of a good to go up in the future, you tend to increase your demand today. • Tastes and Preferences: Tastes are a major determinant of the demand for products, but usually does not change much in the short run. • Population: If population of the country increased, it will lead to increase the demand and vice versa • Number of Buyers: The more buyers in the market for a good, the greater the total quantity demanded of the good at a given price. Since the quantity demanded is higher at every given price, the demand has increased. • The Availability of Credit: If it is easier to borrow money (credit cards have lower interest rates or are easier to obtain, etc.), do you think people will buy more or less of a good at a given price?

7. Supply • Supply represents how much the market can offer. • The supply of a product is the amount that producers are willing and able to bring to the market for sale. • Quantity supplied is the amount offered for sale at a particular price. • The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship.

8. Law of Supply • As the price of a product rises, ceteris paribus, suppliers will offer more for sale. This implies that price and quantity supplied are positively related. • Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.

9. Determinants of Supply • Prices of Relevant Resources (Input prices) • Technology • Number of firms • Government regulations (Taxes and Subsidies) • Changes in the Availability of Credit • Substitutes in production • Producer expectations of Future Price

10. Equilibrium in Market • Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at current price), resulting in an economic equilibrium of price and quantity.