demand & supply siom

8/14/2019 Demand & Supply Siom

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The Market Forces of

Supply and Demand


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The Market Forces of

Supply and DemandxSupplyanddemandare the two words

that economists use most often.

xSupplyanddemandare the forces that

make market economies work.

xModern microeconomics is aboutsupply, demand, and market

equilibrium.


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Markets

x Buyersdeterminedemand.

xSellersdeterminesupply.


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Demand

Quantity demanded

is the amountof a good that buyers are

willing and able

to purchase.


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Law of Demand

The law of demand states that,

ceteris paribus, there is aninverse relationship between price

and quantity demanded.


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Demand Schedule

The demand schedule is a table

that shows the relationshipbetween thepriceof the good

and thequantitydemanded.


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Demand Schedule

Pr


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Demand Curve

Thedemand curveisthe downward-

sloping line relating price to quantitydemanded.


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Demand Curve

Rs.32.5

02.001.50

1.00

0.50

21 3 4 5 6 7 8 9 10

12

11

Price of

Ice-CreamCone

Quantity

of Ice-Cream

0


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Ceteris Paribus

Ceteris paribusis a Latin phrase thatmeans all variables other than the

ones being studied are assumed to be

constant. Literally,ceteris paribus

means other things being equal.

The demand curve slopes downward

because, ceteris paribus, lower prices

imply a greater quantity demanded!


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Ceteris Paribus

s Ceteris Paribus means other things being

equal. What other things?

s Consumer income.s Consumer preferences.

s Fashion.

s

Price of related goods.s Government policies.

s Weather conditions.


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Market Demand

xMarket demand refers to the

sum of all individual demandsfor a particular good or service.


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Determinants of Demand

x

Market price : A larger quantity is demanded ata lower price & vice versa.

x Tastes, habits and preferences : Demand depends

upon a persons tastes, habits and preferences.Demand for ice creams, bhel puri etc depends

upon an individuals tastes. Tea, betal leafs,

tobacco etc is a matter of habits. People with

different tastes & habits have different

preferences. A strict veg. will have no demand

for fish and a person who likes non veg will

purchase fish even at a high price.


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sExpectations : If a consumer expects that the

prices of a product are going to rise in future, the

demand may increase and vice versa.xConsumer income : A rich consumer demands

more goods than a poor consumer.


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s Prices of related goods ( substitutes andcomplementary ) : When a desire or a want canbe satisfied by alternative similar goods, theyare called as substitutes. Eg. Peas and beans,groundnut oil and mustard oil, tea or coffee,

jowar or bajra etc.

s Demand for a commodity depends on therelative prices of the substitutes. There will bemore demand for a commodity if itssubstitutes are highly priced.


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s Complementary products : When, in order to

satisfy a given want, two or more goods are

needed in combination, these goods arereferred to as complementary goods. Eg. car

and petrol, pen and ink, shoes and socks, guns

and bullets. Complementary goods are always

in Joint Demand. Thus, when the price of acomplementary product will fall, the demand

for its complementary product will increase.


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Change in Quantity Demanded

versus Change in Demand

Change inQuantity Demandedx Movement along the demand curve.

x Caused by a change in theprice of

the product.


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Changes in Quantity

Demanded

0

D1

Price of

Cigarettesper Pack

Number ofCigarettes Smoked

A tax that raises theprice of cigarettes

results in a

movement along thedemand curve.

A

C

20

2.00

Rs.4.

00

12


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Change in Demandx A shift in the demand curve, either

to the left or right.

x

Caused by a change in adeterminant other than the price.


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Changes in Demand

0

D1

Price of

Ice-CreamCone

Quantity

of Ice-Cream

D3

D2

Increase in

demand

Decrease indemand


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Variables thatAffect Quantity

Demanded

A Change inThis Variable . . .

Price Represents a movement

along the demand curve

Income Shifts the demand curve

Prices of relatedgoods

Shifts the demand curve

Tastes Shifts the demand curve

Expectations Shifts the demand curve

Number of

buyers

Shifts the demand curve


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Two Simple Rules for

Movements vs. Shiftss Rule One

When an independent variable changes and

that variable does not appear on the graph,the curve on the graph will shift.

s Rule Two

When an independent variable does appear

on the graph, the curve on the graph will notshift, instead a movement along the existingcurve will occur.


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Consumer IncomeNormal Good

Rs.3.00

2.50

2.001.501.00

0.50

21 3 4 5 6 7 8 9 10 1211

Price of

Ice-CreamCone

Quantity

of Ice-Cream0

Increasein demand

Anincrease

inincome...

D1

D2


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Consumer IncomeInferior Good

Rs.3.00

2.50

2.001.501.00

0.50

21 3 4 5 6 7 8 9 10 1211

Price of

Ice-CreamCone

Quantity

of Ice-Cream0

Decreasein demand

An

increasein

income...

D1D2


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Exceptions to the law of

Demands Law of Demand is a universal

phenomenon. Very rarely, it is so

observed that with a fall in price,demand also falls and a increase in price

increases demand.

s The demand curve in such cases isupward sloping.


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Demands A few such exceptions are seen in case of:

s Giffen Goods : In cases of some inferior goods,

as observed by Robert Giffen, when price falls,there is a fall in the demand for these products.

s Eg. This was observed by Giffen in Italy when

consumers purchased less of cheap potatoes

when the price went down and purchased meat

from the savings.


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Demands Snob Appeal : Goods that are used as Status

Symbol eg. Rolls Royce cars, Johney Walker

Scotch Whisky, Diamonds etc.s The demand for these goods increases even if

the price is increased because these goods are

purchased for their exclusiveness which

increases with an increase in price.


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Demands Speculation : When the consumers understand

that there is a increase in price of a product

and they are expecting a further rise, they willnot mind purchasing more of that product even

if its price is increased.

s Consumers psychology : Many consumers do

not purchase products at the time of discountsales etc assuming that the quality of the

products may have been compromised.


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Law of Supply

Thelaw of supplystates that, ceteris

paribus, there is a direct (positive)relationship between price and

quantitysupplied.


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Supply

Quantity suppliedis the amount of a

good that sellers are willing and ableto sell.


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Supply Schedule

Thesupply scheduleisa table that

shows the relationship between theprice of the good and the quantity

supplied.


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Supply Schedule

P


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Supply Curve

Thesupply curveis the upward-sloping line relating price to quantity

supplied.


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Supply Curve

Rs.3.002.502.00

1.501.00

0.50

21 3 4 5 6 7 8 9 10 1211

Price of

Ice-CreamCone

Quantity

of Ice-Cream0

P


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Market Supply

xMarket supply refers to the sum

of all individual supplies for all

sellers of a particular good or

service.


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Determinants of Supply

x Market price : The single largest factor that

affects supply is the price. More commodities

will be supplied at a higher price and vice

versa.x Input prices : When the factors of production

are available at low price, more investment is

encouraged. This increases supply.x Technology : The improvement in the

technique of production leads to increased

supply.


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x Natural conditions : The supply ofagricultural commodities depends uponthe natural conditions. Whenever there isgood monsoon, conductive temperature,the supply of such products increases.

x Transport conditions : Difficulties intransport may cause a temporarydecrease in supply. So, even at risingprice, quantity supplied may decrease.


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x Expectations : When a seller expects a further risein the price, he may withhold the supply and hencethe supply may decrease.

x Prices of other products : The prices of substitutes

or related products can influence the supply. If theprices of wheat are increasing, farmers may growmore of wheat and less of rice. If the price of sugarrises, the price of jaggary will also rise.

x Govt. policy : If the policies of the govt. areliberalized, more firms may tend to enter themarket and hence supply may rise.


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Change in Quantity Supplied

versus Change in Supply

Change in Quantity Suppliedx Movement along the supply curve.

x Caused by a change in the market price

of the product.


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1 5

Price of

Ice-CreamCone

Quantity

of Ice-Cream0

S

1.00

A

CRs.3.00

A rise in the price

of ice cream conesresults in a

movement along

the supply curve.


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versus Change in Supply

Change in Supply

x A shift in the supply curve, either to the

left or right.

x Caused by a change in a determinant

other than price.


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Change in Supply

Price of

Ice-CreamCone

Quantity

of Ice-Cream0

S1 S2

S3

Increasein Supply

Decreasein Supply


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versus Change in SupplyVariables thatAffect Quantity Supplied A Change in This Variable . . .

Price Represents a movement alongthe supply curve

Input prices Shifts the supply curve

Technology Shifts the supply curve

Expectations Shifts the supply curve

Number of sellers Shifts the supply curve


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Shifts in Curves versus

Movements along Curves

x A shift in the supply curve is called a

change in supply.

x A movement along a fixed supply curve iscalled achange in quantity supplied.

x A shift in the demand curve is called a

change in demand.x A movement along a fixed demand curve is

called achange in quantity demanded.


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Supply and Demand Together

Equilibrium Pricex The price that balances supply and

demand. On a graph, it is the price at which

the supply and demand curves intersect.Equilibrium Quantity

x The quantity that balances supply and

demand. On a graph it is the quantity atwhich the supply and demand curves

intersect.


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Supply and Demand Together

Price

Demand

Schedule

Supply

Schedule

At Rs.2.00, the quantity demanded is

equal to the quantity supplied!


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Supply

Demand

Price of

Ice-CreamCone

Quantity

of Ice-Cream

Equilibrium of

Supply and Demand

21 3 4 5 6 7 8 9 10 12110

Rs.3.00

2.502.00

1.5

01.00

0.50

Equilibrium


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Price of

Ice-CreamCone

Quantity

of Ice-Cream21 3 4 5 6 7 8 9 10 12110

Rs.3.002.50

2.00

1.5

01.00

0.50

Supply

Demand

Surplus

Excess Supply


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Surplus

When the price is above the equilibrium

price, the quantity supplied exceeds the

quantity demanded. There isexcess supply

or asurplus. Suppliers will lower the price

to increase sales, thereby moving toward

equilibrium.


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Excess Demand

Quantity ofIce-Cream Cones

Price ofIce-Cream

Cone

Rs.2.00

0 1 2 3 4 5 6 7 8 9 10111213

Supply

Demand

Rs.1.50

Shortage


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Shortage

When the price is belowthe equilibrium

price, the quantity demanded exceeds the

quantity supplied. There isexcess demand

or ashortage. Suppliers will raise the price

due to too many buyers chasing too few

goods, thereby moving toward equilibrium.


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Three Steps To Analyzing

Changes in Equilibriumx Decide whether the event shifts the

supply or demand curve (or both).

x Decide whether the curve(s) shift(s) to

the left or to the right.

x Examine how the shift affects

equilibrium price and quantity.

H I i D d


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How an Increase in Demand

Affects the EquilibriumPrice of

Ice-CreamCone

2.00

0 7 Quantity of

Ice-Cream Cones

Supply

Initialequilibrium

D1

1. Hot weather increasesthe demand for ice cream...

D2

2. ...resulting

in a higherprice...

Rs.2.50

10

3. ...and a higherquantity sold.

New equilibrium

H D i S l Aff t


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S2

How a Decrease in Supply Affects

the Equilibrium

Price ofIce-Cream

Cone

2.00

0 1 2 3 4 7 8 9 11 12 Quantity of13

Demand

Initial equilibrium

S1

10

1. Shortage of milk reducesthe supply of ice cream...

Newequilibrium

2. ...resulting

in a higherprice...

Rs.2.50

3 and a lower

demand & supply siom

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