Understanding Economics Fundamentals: Demand and Supply Interaction

1. ECS 1501 Learning Unit 4

2. Learning Outcomes Onceyou havestudiedthischapteryou shouldbe abletoexplain whateconomicsis allabout: • Understand the interaction between households and firms • Explain demand and supply with wordsand with a graph • Define the law of demand • Explain the difference between demand and quantity demanded • Explain the difference between supply and quantity supplied • Show the shift of the demand or supply curves and a movement of along the curves. • Identify determinant of demand and supply.

3. Read pg. 60 in your textbook 4.1 Demand and supply: .An introduction • We focus on the goods market, the market where firms are suppliers, and households are consumers who demand goods and services • In the market economy prices and quantities traded in the goods markets are determined by the interactionof demand and supply

4. The interaction between households and firms Rent, wages, salaries, interest and profit paid to households Natural resources, labour, capital and entrepreneurship sold to firms Households Firms Supply goods and services Demand for goods and services Goods market

5. Read pg. 61 – 68 in your textbook 4.2 Demand • Demand is the outcome of decisions about which wants to satisfy, given the available means • Sally’s demand for coffee means she intends to buy the coffee and has the means to do so. • Demand refers to the quantity of coffee that Sally is willing and able to buy • Demands are NOT wants. Wants are unlimited desires that people have • Demand is only effective when a consumer is willing and able to buy • Demands are NOT needs or claims either

6. The demand function Where: = Quantity of Coffee demanded = Price of Coffee = Prices of related goods Y = Household’s (or Sally’s) income during the period T = Tastes or preferences of the consumer (Sally) N = The number of people in the household … = Other possible influences on Sally’s demand is the dependent variable and is expressed as a function of five independent variables

8. For introductory purposes we make the ceteris paribus assumption meaning that all other variables are assumed to be constant except the price of the product. Hence the quantity demanded becomes a function of the price ) Therefore, the Law of Demand states: All other things being equal (ceteris paribus),the higher the price of a good, the lower the quantity demanded will be.

9. The Law of Demand • The law of demand states that there is a negative/ inverse relationship between the price of a product and the quantity demanded • A negative relationship can be identified by one variable increasing while another variable decreases, a positive relationship can be identified by both variables increasing or both variable decreasing at the same time.

10. Sally’s demand for coffee tins Sally’s demand for coffee tins is a clear reflection of the law of demand. As the price of coffee increases, Sally’s quantity demanded for coffee decreases. Sally’s demand can be presented graphically by putting the Price of coffee on the y-axis and the quantity demanded on the x-axis. This will create a demand curve