Demand and supply : dntjnv@yahoo.co.in Demand and supply BY :- D.N.TIWARI
PGT (ECO)
JNV BAHRAICH UP
Chapter 4 : dntjnv@yahoo.co.in Chapter 4 Supply and Demand I:
How Markets Work
In this chapter you will… : dntjnv@yahoo.co.in In this chapter you will… Learn the nature of a competitive market.
Examine what determines the demand for a good in a competitive market.
Examine what determines the supply of a good in a competitive market.
See how supply and demand together set the price of a good and the quantity sold.
Consider the key role of prices in allocating scarce resources.
THE MARKET FORCES OF SUPPLY AND DEMAND : dntjnv@yahoo.co.in THE MARKET FORCES OF SUPPLY AND DEMAND Supply and Demand are the two words that economists use most often.
Supply and Demand are the forces that make market economies work!
Modern microeconomics is about supply, demand, and market equilibrium.
MARKETS AND COMPETITION : dntjnv@yahoo.co.in MARKETS AND COMPETITION The terms supply and demand refer to the behaviour of people. . .
. . .as they interact with one another in markets.
A market is a group of buyers and sellers of a particular good or service.
Buyers determine demand...
Sellers determine supply…
Competitive Markets : dntjnv@yahoo.co.in Competitive Markets A Competitive Market is a market with many buyers and sellers so that each has a negligible impact on the market price.
Competition: Perfect or Otherwise : dntjnv@yahoo.co.in Competition: Perfect or Otherwise Perfectly Competitive:
Homogeneous Products
Buyers and Sellers are Price Takers
Monopoly:
One Seller, controls price
Oligopoly:
Few Sellers, not aggressive competition
Monopolistic Competition:
Many Sellers, differentiated products
DEMAND : dntjnv@yahoo.co.in DEMAND Quantity Demanded refers to the amount (quantity) of a good that buyers are willing to purchase at alternative prices for a given period.
Determinants of Demand : dntjnv@yahoo.co.in Determinants of Demand What factors determine how much ice cream you will buy?
What factors determine how much you will really purchase?
Product’s Own Price
Consumer Income
Prices of Related Goods
Tastes
Expectations
Number of Consumers
1) Price : dntjnv@yahoo.co.in 1) Price Law of Demand
The law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises.
2) Income : dntjnv@yahoo.co.in 2) Income As income increases the demand for a normal good will increase.
As income increases the demand for an inferior good will decrease.
3) Prices of Related Goods : dntjnv@yahoo.co.in 3) Prices of Related Goods Prices of Related Goods
When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes.
When a fall in the price of one good increases the demand for another good, the two goods are called complements.
4) Others : dntjnv@yahoo.co.in 4) Others Tastes
Expectations
The Demand Schedule and the Demand Curve : dntjnv@yahoo.co.in The Demand Schedule and the Demand Curve The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.
The demand curve is a graph of the relationship between the price of a good and the quantity demanded.
Ceteris Paribus: “Other thing being equal”
Table 4-1: Catherine’s Demand Schedule : dntjnv@yahoo.co.in Table 4-1: Catherine’s Demand Schedule 8 1.00 10 0.50 12 0.00 Quantity of cones Demanded Price of Ice-cream Cone ($)
Figure 4-1: Catherine’s Demand Curve : dntjnv@yahoo.co.in Figure 4-1: Catherine’s Demand Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones
Market Demand Schedule : dntjnv@yahoo.co.in Market Demand Schedule Market demand is the sum of all individual demands at each possible price.
Graphically, individual demand curves are summed horizontally to obtain the market demand curve.
Assume the ice cream market has two buyers as follows…
Table 4-2: Market demand as the Sum of Individual Demands : dntjnv@yahoo.co.in 0 3.00 10 0.50 12 0.00 Catherine Price of Ice-cream Cone ($) Table 4-2: Market demand as the Sum of Individual Demands + 1 6 7 Nicholas 1 16 19 Market =
Figure 4-3: Shifts in the Demand Curve : dntjnv@yahoo.co.in Price of Ice-Cream Cone Quantity of Ice-Cream Cones Figure 4-3: Shifts in the Demand Curve
Table 4-3: The Determinants of Quantity Demanded : dntjnv@yahoo.co.in Table 4-3: The Determinants of Quantity Demanded
Shifts in the Demand Curve versus Movements Along the Demand Curve : dntjnv@yahoo.co.in Shifts in the Demand Curve versus Movements Along the Demand Curve
Figure 4-4 a): A Shifts in the Demand Curve : dntjnv@yahoo.co.in Price of Cigarettes, per Pack. Number of Cigarettes Smoked per Day A policy to discourage smoking shifts the demand curve to the left. 0 20 Figure 4-4 a): A Shifts in the Demand Curve
Figure 4-4 b): A Movement Along the Demand Curve : dntjnv@yahoo.co.in Price of Cigarettes, per Pack. Number of Cigarettes Smoked per Day 0 20 $2.00 Figure 4-4 b): A Movement Along the Demand Curve
SUPPLY : dntjnv@yahoo.co.in SUPPLY Quantity Supplied refers to the amount (quantity) of a good that sellers are willing to make available for sale at alternative prices for a given period.
Determinants of Supply : dntjnv@yahoo.co.in Determinants of Supply What factors determine how much ice cream you are willing to offer or produce?
Product’s Own Price
Input prices
Technology
Expectations
Number of sellers
1) Price : dntjnv@yahoo.co.in 1) Price Law of Supply
The law of supply states that, other things equal, the quantity supplied of a good rises when the price of the good rises.
The Supply Schedule and the Supply Curve : dntjnv@yahoo.co.in The Supply Schedule and the Supply Curve The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied.
The supply curve is a graph of the relationship between the price of a good and the quantity supplied.
Ceteris Paribus: “Other thing being equal”
Table 4-4: Ben’s Supply Schedule : dntjnv@yahoo.co.in Table 4-4: Ben’s Supply Schedule 1 1.00 0 0.50 0 0.00 Quantity of cones Supplied Price of Ice-cream Cone ($)
Figure 4-5: Ben’s Supply Curve : dntjnv@yahoo.co.in Price of Ice-Cream Cone Quantity of Ice-Cream Cones 6 8 10 12 0 Figure 4-5: Ben’s Supply Curve
Market Supply Schedule : dntjnv@yahoo.co.in Market Supply Schedule Market supply is the sum of all individual supplies at each possible price.
Graphically, individual supply curves are summed horizontally to obtain the market demand curve.
Assume the ice cream market has two suppliers as follows…
Table 4-5: Market supply as the Sum of Individual Supplies : dntjnv@yahoo.co.in 5 3.00 0 0.50 0 0.00 Ben Price of Ice-cream Cone ($) Table 4-5: Market supply as the Sum of Individual Supplies + 8 0 0 Nicholas 13 0 0 Market =
Figure 4-7: Shifts in the Supply Curve : dntjnv@yahoo.co.in Price of Ice-Cream Cone Quantity of Ice-Cream Cones Figure 4-7: Shifts in the Supply Curve
Table 4-6: The Determinants of Quantity Supplied : dntjnv@yahoo.co.in Table 4-6: The Determinants of Quantity Supplied
SUPPLY AND DEMAND TOGETHER : dntjnv@yahoo.co.in SUPPLY AND DEMAND TOGETHER Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded.
Equilibrium : dntjnv@yahoo.co.in Equilibrium Equilibrium Price
The price that balances quantity supplied and quantity demanded.
On a graph, it is the price at which the supply and demand curves intersect.
Equilibrium Quantity
The quantity supplied and the quantity demanded at the equilibrium price.
On a graph it is the quantity at which the supply and demand curves intersect.
Equilibrium : dntjnv@yahoo.co.in At $2.00, the quantity demanded is equal to the quantity supplied! Demand Schedule Supply Schedule Equilibrium
Figure 4-8: The Equilibrium of Supply and Demand : dntjnv@yahoo.co.in 6 8 10 0 Quantity of Ice-Cream Cones Price of Ice-Cream Cone 4 2 1 3 5 7 9 11 Figure 4-8: The Equilibrium of Supply and Demand
Equilibrium : dntjnv@yahoo.co.in Equilibrium Surplus
When price > equilibrium price, then quantity supplied > quantity demanded.
There is excess supply or a surplus.
Suppliers will lower the price to increase sales, thereby moving toward equilibrium.
Shortage
When price < equilibrium price, then quantity demanded > the quantity supplied.
There is excess demand or a shortage.
Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.
Figure 4-9 a): Excess Supply : dntjnv@yahoo.co.in 6 8 10 0 Quantity of Ice-Cream Cones Price of Ice-Cream Cone 4 2 1 3 5 7 9 11 Figure 4-9 a): Excess Supply
Figure 4-9 b): Excess Demand : dntjnv@yahoo.co.in 6 8 10 0 Quantity of Ice-Cream Cone Price of Ice-Cream Cone 4 2 1 3 5 7 9 11 Figure 4-9 b): Excess Demand
Three Steps To Analyzing Changes in Equilibrium : dntjnv@yahoo.co.in Three Steps To Analyzing Changes in Equilibrium Decide whether the event shifts the supply or demand curve (or both).
Decide whether the curve(s) shift(s) to the left or to the right.
Use the supply-and-demand diagram to see how the shift affects equilibrium price and quantity.
Example: A Heat Wave
Figure 4-10: How an Increase Demand Affects the Equilibrium : dntjnv@yahoo.co.in D1 6 10 0 Quantity of Ice-Cream Cone Price of Ice-Cream Cone 4 2 1 3 5 7 11 New equilibrium Figure 4-10: How an Increase Demand Affects the Equilibrium
Figure 4-11: How a Decrease Demand Affects the Equilibrium : dntjnv@yahoo.co.in Demand 10 0 Quantity of Ice-Cream Cones Price of Ice-Cream Cone 4 2 1 3 7 11 New equilibrium Initial equilibrium Figure 4-11: How a Decrease Demand Affects the Equilibrium
Figure 4-12 a): A Shift in Both Supply and Demand : dntjnv@yahoo.co.in S1 0 Quantity of Ice-Cream Cone Price of Ice-Cream Cone Q1 P1 Figure 4-12 a): A Shift in Both Supply and Demand
Figure 4-12 b): A Shift in Both Supply and Demand : dntjnv@yahoo.co.in S1 0 Quantity of Ice-Cream Cone Price of Ice-Cream Cone Q1 P1 Figure 4-12 b): A Shift in Both Supply and Demand
Table 4-8: What Happens to Price and Quantity when Supply or Demand Shifts : dntjnv@yahoo.co.in Table 4-8: What Happens to Price and Quantity when Supply or Demand Shifts
Concluding Remarks… : dntjnv@yahoo.co.in Concluding Remarks… Market economies harness the forces of supply and demand. . .
Supply and Demand together determine the prices of the economy’s different goods and services. . .
Prices in turn are the signals that guide the allocation of resources.
Summary : dntjnv@yahoo.co.in Summary Economists use the model of supply and demand to analyze competitive markets.
In a competitive market, there are many buyers and sellers, each of whom has little or no influence on the market price.
Summary : dntjnv@yahoo.co.in Summary The demand curve shows how the quantity of a good depends upon the price.
According to the law of demand, as the price of a good falls, the quantity demanded rises. Therefore, the demand curve slopes downward.
In addition to price, other determinants of how much consumers want to buy include income, the prices of complements and substitutes, tastes, expectations, and the number of buyers.
If one of these factors changes, the demand curve shifts.
Summary : dntjnv@yahoo.co.in Summary The supply curve shows how the quantity of a good supplied depends upon the price.
According to the law of supply, as the price of a good rises, the quantity supplied rises. Therefore, the supply curve slopes upward.
In addition to price, other determinants of how much producers want to sell include input prices, technology, expectations, and the number of sellers.
If one of these factors changes, the supply curve shifts.
Summary : dntjnv@yahoo.co.in Summary Market equilibrium is determined by the intersection of the supply and demand curves.
At the equilibrium price, the quantity demanded equals the quantity supplied.
The behavior of buyers and sellers naturally drives markets toward their equilibrium.
The End : dntjnv@yahoo.co.in The End