demand & supply edited by :- krishan jangra markets defined markets potential sellers potential...
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Demand & Supply
Edited By :- Krishan Jangra
MARKETS DEFINED
MARKETS
POTENTIALSELLERS
POTENTIALBUYERS
$54321
DEMAND DEFINED
P QD
1020355580
A schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices.
LAW OF DEMAND
• As Price Falls…
…Quantity Demanded Rises
• As Price Rises…
…Quantity Demanded Falls
An inverse relationship exists between price and quantity demanded
• Diminishing Marginal UtilityLAW OF DEMAND
• Diminishing Marginal UtilityLAW OF DEMAND
• Income Effect
• Diminishing Marginal UtilityLAW OF DEMAND
• Income Effect
• Substitution Effect
• Diminishing Marginal Utility
• Income Effect
• Substitution Effect
LAW OF DEMAND
• Demand Curve
• Individual and Market Demand
GRAPHING DEMANDP
Qo
$5
4
3
2
1
P QD
$54321
1020355580
Price of Corn
Quantity of Corn
CORN Plot the Points
10 20 30 40 50 60 70 80
55
P
Qo
$5
4
3
2
1
P QD
$54321
1020355580
Price of Corn
Quantity of Corn
CORN Plot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
35
P
Qo
$5
4
3
2
1
P QD
$54321
1020355580
Price of Corn
Quantity of Corn
CORN Plot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
P
Qo
$5
4
3
2
1
P QD
$54321
1020355580
Price of Corn
Quantity of Corn
CORN Plot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
P
Qo
$5
4
3
2
1
P QD
$54321
1020355580
Price of Corn
Quantity of Corn
CORN Plot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
P
Qo
$5
4
3
2
1
P QD
$54321
1020355580
D
Price of Corn
Quantity of Corn
CORN Connect the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
P
Qo
$5
4
3
2
1
P QD
$54321
1020355580
D
Price of Corn
Quantity of Corn
CORN
10 20 30 40 50 60 70 80
What if
Demand
Increases?
GRAPHING DEMAND
P
Qo
$5
4
3
2
1
P QD
$54321
D
Price of Corn
Quantity of Corn
CORN
10 20 30 40 50 60 70 80
D’
Increase
in
Demand
Increase
in Quantity
Demanded1020355580
30406080 +
GRAPHING DEMAND
P
Qo
$5
4
3
2
1
P QD
$54321
1020355580
D
Price of Corn
Quantity of Corn
CORN
10 20 30 40 50 60 70 80
What if
Demand
Decreases?
GRAPHING DEMAND
P
Qo
$5
4
3
2
1
P QD
$54321
1020355580
D
Price of Corn
Quantity of Corn
CORN
10 20 30 40 50 60 70 80
-- 10204060
D’
Decrease
in
Demand
Decrease
in Quantity
Demanded
GRAPHING DEMAND
DETERMINANTS OF DEMAND
• Tastes• Number of Buyers• Income
– Normal (Superior) & Inferior Goods
• Prices of Related Goods– Substitutes & Complements– Unrelated Goods
• Expectations
SUPPLY DEFINED
$12345
P QS
CORN
Supply is a schedule or a curve showing the amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices.
Supply is a schedule or a curve showing the amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices.
520355060
LAW OF SUPPLY
• As Price Rises…
…Quantity Supplied Rises
• As Price Falls…
…Quantity Supplied Falls
A direct relationship exists between price and quantity supplied
5
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the PointsGRAPHING SUPPLY
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the PointsGRAPHING SUPPLY
35
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the PointsGRAPHING SUPPLY
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the PointsGRAPHING SUPPLY
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the PointsGRAPHING SUPPLY
SP
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
Connect the Points
GRAPHING SUPPLY
SP
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
What if
Supply
Increases?
GRAPHING SUPPLY
SP
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
Price of Corn
Quantity of Corn
$54321
60503520 5
P QS
CORN
8070604530
S’Increase
in
Supply
Increase
in Quantity
Supplied
GRAPHING SUPPLY
SP
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
What if
Supply
Decreases?
GRAPHING SUPPLY
SP
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
S’
453020 0 --
Decrease
in
Supply
Decrease
in Quantity
Supplied
GRAPHING SUPPLY
DETERMINANTS OF SUPPLY
• Resource Prices
• Technology
• Taxes & Subsidies
• Prices of Other Goods
• Price Expectations
• Number of Sellers
DETERMINANTS OF SUPPLY
• Resource Prices
• Technology
• Taxes & Subsidies
• Prices of Other Goods
• Price Expectations
• Number of Sellers
Combining
with
Demand
MARKET DEMAND & SUPPLY
$54321
1020355580
$54321
60503520 5
200
B
U
Y
E
R
S
P QD
BUSHELS
OF CORNMARKET
DEMAND
2,0004,0007,000
11,00016,000
200
S
E
L
L
E
R
S
12,00010,000
7,0004,0001,000
P QS
BUSHELS
OF CORNMARKET
SUPPLY
EQUILIBRIUMGraphically…
x x
7
SP
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD
$54321
2,0004,0007,000
11,00016,000
$54321
12,00010,000
7,0004,0001,000
D
P QS
Price of Corn
Quantity of Corn
CORN
MARKET
CORN
MARKET
Market Clearing Equilibrium
MARKET DEMAND & SUPPLY
7
SP
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD
$54321
2,0004,0007,000
11,00016,000
$54321
12,00010,000
7,0004,0001,000
D
P QS
Price of Corn
Quantity of Corn
CORN
MARKET
CORN
MARKETSurplusAt a $4 price
more is being
supplied than
demanded
MARKET DEMAND & SUPPLY
117
SP
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD
$54321
2,0004,0007,000
11,00016,000
$54321
12,00010,000
7,0004,0001,000
D
P QS
Price of Corn
Quantity of Corn
CORN
MARKET
CORN
MARKET
At a $2 price
more is being
demanded than
supplied
Shortage
MARKET DEMAND & SUPPLY
117
SP
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD
$54321
2,0004,0007,000
11,00016,000
$54321
12,00010,000
7,0004,0001,000
D
P QS
Price of Corn
Quantity of Corn
CORN
MARKET
CORN
MARKET
Shortage
MARKET DEMAND & SUPPLY Surplus
MARKET EQUILIBRIUM
• Equilibrium Price & Quantity
• Rationing Function of Prices
• Changes in Demand
• Changes in Quantity Demanded
• Changes in Supply
• Changes in Quantity Supplied
Complex Cases• Supply Increases;
Demand Decreases–Prices Decrease–Quantity Indeterminate
• Supply Decreases; Demand Increases–Price Increases–Quantity Indeterminate
Multiple Shifts…
Complex Cases• Supply Increases;
Demand Increases–Prices Indeterminate–Quantity Increases
• Supply Decreases; Demand Decreases–Price Indeterminate–Quantity Decreases
Multiple Shifts…
Government Set Prices• Price Ceilings
–Shortages–Rationing Problem–Black Markets–Rent Controls
• Price Floors–Surpluses
Price Ceiling•A maximum price that sellers may charge for a good, usually set by government.
• Excess Demand (Shortage) Created by a Price Ceiling
Price ceiling
• Price Rationing :The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.
• Ration coupons Tickets or coupons that entitle individuals to purchase a certain amount of a given product per month.
• Black market A market in which illegal trading takes place at market-determined prices.
•PRICE FLOORS
•Price floor A minimum price below which exchange is not permitted.
•Minimum wage A price floor set under the price of labor.
•Agricultural Products