SRI KRISHNA COLLEGE OF ENGINEERING AND TECHNOLOGY
(An Autonomous Institution, Accredited by NAAC with ‘A’ Grade)
Kuniamuthur, Coimbatore – 641008
Department of Electrical and Electronics Engineering
21MG701 - Engineering Economics
Module 1: Introduction to Economics
1.2 - Law of Demand and Law of Supply
Presented by,
Mr. [Link]
Assistant Professor/Department of Electrical and Electronics Engineering
Sri Krishna College of Engineering and Technology
Kuniyamuthur, Coimbatore-641008
[Link], SKCET,AP/EEE 1
MODULE 1: INTRODUCTION TO ECONOMICS
Economics- Definition, Scope; Micro Economics; Macro Economics; Law of
Demand; Law of supply; Types of efficiency- technical Efficiency, Economic
efficiency; Types of costs fixed cost vs variable cost, Total cost, Average cost,
Marginal cost, opportunity cost, Short run cost, Long run cost, Sunk cost Break-
Even analysis.
Teaching Methods
•Lecture
•Observation
•Case Study
•Brain Storming
Module Outcome: Understand theories and principles in microeconomics and macro economics including price
theory, comparative advantage, Cost, consumer theory, public goods, externalities and market failure.
Engineering Economics - Introduction 2
LAW OF DEMAND AND LAW OF SUPPLY
[Link], SKCET,AP/EEE 3
WHAT IS LAW OF SUPPLY & DEMAND?
•The law of supply and demand is a theory that explains the interaction between the
sellers of a resource and the buyers for that resource.
•The theory defines the relationship between the price of a given good or product
and the willingness of people to either buy or sell it.
•Generally, as price increases, people are willing to supply more and demand less
and vice versa when the price falls.
•The theory is based on two separate "laws," the law of demand and the law of
supply.
•The two laws interact to determine the actual market price and volume of goods on
the market.
Engineering Economics - Introduction 4
WHAT IS LAW OF SUPPLY?
•The law of supply is a basic principle in economics that asserts that, assuming all
else being constant, an increase in the price of goods will result in a corresponding
direct increase in the supply thereof.
•The law works similarly with a decrease in prices.
•The law of supply depicts the producer’s behavior when the price of a good rises or
falls.
•With a rise in price, the tendency is to increase supply because there is now more
profit to be earned.
•On the other hand, when prices fall, producers tend to decrease production due to
the reduced economic opportunity for profit.
Engineering Economics - Introduction 5
WHAT IS LAW OF DEMAND?
•The law of demand says that at higher prices, buyers will demand less of an
economic good.
•The law of demand states that other factors being constant (cetris peribus), price
and quantity demand of any good and service are inversely related to each other.
•When the price of a product increases, the demand for the same product will fall.
Engineering Economics - Introduction 6
WHAT IS DEMAND?
•Quantities of a particular good or service consumers are willing and able to buy
at different possible prices.
•Demand for any commodity implies the consumers' desire to acquire the good,
the willingness and ability to pay for it.
•The demand for a good that the consumer chooses, depends on the price of it,
the prices of other goods, the consumer’s income and their tastes and
preferences.
•Whenever one or more of these variables change, the quantity of the good
chosen by the consumer is likely to change as well.
Engineering Economics - Introduction 7
WHAT IS DEMAND?
• If the prices of other goods, the consumer’s income and their tastes and
preferences remain unchanged, the amount of a good that the consumer
optimally chooses, becomes entirely dependent on its price.
• The relation between the consumer’s optimal choice of the quantity of a
good and its price is called the demand function.
Engineering Economics - Introduction 8
MEANING OF DEMAND
Desire to acquire it
Willingness to pay for it
Ability to pay for it
TYPES OF DEMAND
Demand for consumers’ and producers’ goods.
Demand for perishable and durable goods.
Derived and autonomous demands
Firm and industry demands
Demands by total market and by market segments
Engineering Economics - Introduction 9
DETERMINANTS OF DEMAND
Consumer’s income
Prices of related goods or services
Population and its distribution
Consumer tastes and preferences
Consumers’ expectations
Price of the commodity or service
Engineering Economics - Introduction 10
FACTORS OF DEMAND
SUBSTITUTION EFFECT
• The substitution effect is the decrease in sales for a product that can be
attributed to consumers switching to cheaper alternatives when its price rises.
• A product may lose market share for many reasons, but the substitution effect
is purely a reflection of frugality.
• If a brand raises its price, some consumers will select a cheaper alternative.
• When the price of a product or service increases but the buyer's income
stays the same, the substitution effect generally.
Engineering Economics - Introduction 11
CONSUMERS’ INCOME- ENGEL’S CURVE
Engel Curves are the locus of all points representing the quantities
demanded of the goods at various levels of income, when prices and
preferences are held constant
Engineering Economics - Introduction 12
FACTORS OF DEMAND
COMPLEMENTARY GOODS
• A Complementary good is a product or service that adds value to another. In other
words, they are two goods that the consumer uses together.
• For example, cereal and milk, or a DVD and a DVD player.
• Complementary goods that cannot be used without each other are known to have a
strong relationship.
• In other words, when the price goes up on one, the demand goes down for the other
good.
• Examples include: Tennis Balls and Tennis Racket; PlayStations and Games; and
Mobile Phones and Sim Cards.
Engineering Economics - Introduction 13
FACTORS OF DEMAND
CUSTOMER BEHAVIOUR
• Consumer preferences among different goods are the most important determinant
of demand.
• Customer preferences changes, affects the supply & demand principles.
• The existence and prices of other consumer goods that are substitutes or
complementary products can modify demand.
• Changes in conditions that influence consumer preferences can also be significant,
such as seasonal changes or the effects of advertising.
• Changes in incomes can also be important in either increasing or decreasing the
quantity demanded at any given price.
Engineering Economics - Introduction 14
THANK YOU
[Link], SKCET,AP/EEE 15
