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

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. 2.

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.

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).

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.

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?

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.

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.

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

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.