3-Supply and demand.pptx

8/10/2019 3-Supply and demand.pptx

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Copyright 2004 South-Western

A marketis a group of buyers and sellers of a particulargood or service.

The terms supply and demand refer to the behavior of

people . . . as they interact with one another in markets.

Markets are like the weathersometimes stormy,

sometimes calm, but always changing.

To forecast prices and outputs in the individual markets,

you must first master the analysis of supply and demand.

MARKET


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Example

Why do hotels in hill stations charge more in summers

than in winters?

Why do roses cost more on Valentines Day than rest

of the year?

Why do cricket players earn more than hockey

players?

Answer to these questions boil down to analysis ofdemand and supplyin economics.


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DEMAND

Quantitydemand indicates the quantity

consumers are both willing and able to buy at

each possible price during a given time period.

Law of Demand

The law of demandstates that, other things equal,

the quantity demanded of a good falls when the

price of the good rises.


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The Demand Curve: The Relationshipbetween Price and Quantity Demanded

Demand Schedule

The demand scheduleis a table that shows the

relationship between the price of the good and the

quantity demanded.


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The Demand Curve: The Relationshipbetween Price and Quantity Demanded

Demand Curve

The demandcurveis a graph of the relationship

between the price of a good and the quantity

demanded.


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Figure 1 NagarjunsDemand Schedule and Demand Curve


Price of

Ice-Cream Cone

0

2.50

2.00

1.50

1.00

0.50

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

$3.00

12

1. A decrease

in price...

2. ... increases quantity

of cones demanded.


9/44Copyright 2004 South-Western

Market Demand versus Individual Demand

Market demand refers to the sum of all

individual demands for a particular good or

service.

Graphically, individual demand curves aresummed horizontally to obtain the market

demand curve.



Law of downward-sloping demand: Why ithappens?

When the price of commodity is raised (and

other things are held constant), buyers tend to

buy less of the commodity and vice-versa.

Substitution effect (price of good Araises, people substitute goods B, C,D,)

Income effect (increase in price make

the people poorer than was before)



Changes in Quantity Demanded vs.Change in Demand

Movement in Demand Curve

Change in Demand Curve



0

D

Price of Ice-CreamCones

Quantity of Ice-Cream Cones

A tax that raises theprice of ice-creamcones results in a

movement along thedemand curve.

A

B

8

1.00

$2.00

4

Changes in Quantity Demanded



Forces behind the Demand Curve

Average income of consumers

Own prices

Prices of related goods

Size of the market

Tastes or preferences

Expectations



Shifts in the Demand Curve

Change in Demand

A shift in the demand curve, either to the left or

right.

Caused by any change that alters the quantitydemanded at every price.


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Figure 3 Shifts in the Demand Curve

Copyright2003 Southwestern/Thomson Learning

Price of

Ice-CreamCone

Quantity of

Ice-Cream Cones

Increasein demand

Decreasein demand

Demand curve,D3

Demandcurve,D1

Demandcurve,D2

0




Consumer Income As income increases the demand for a normal good

will increase. (demand increases when income

increases and vice-versa)

As income increases the demand for an inferior

goodwill decrease. (when income rises, demand for

inferior goods falls and vice-versa)

Examples: NormalFood, clothing, etc.

Inferiorgeneric food products, ride a

bus, clothes from footpath market, etc.

Giffen goods: staple foods, bread, etc.



$3.00

2.50

2.00

1.50

1.00

0.50

21 3 4 5 6 7 8 9 10 1211

Price of Ice-Cream Cone

Quantity ofIce-Cream

Cones0

Increasein demand

An increasein income...

D1D2

Consumer IncomeNormal Good



$3.00

2.50

2.00

1.50

1.00

0.50

21 3 4 5 6 7 8 9 10 1211

Price of Ice-Cream Cone

Quantity of

Ice-Cream

Cones0

Decrease

in demand

An increase

in income...

D1D2

Consumer IncomeInferior Good




Prices of Related Goods

When a increase in the price of one good increases

the demand for another good, the two goods are

calledsubstitutes. (e.g. tea vs. coffee, red meat vs.chicken meat, Swift vs. i10 or Liva, etc.)

When a increase in the price of one good decreases

the demand for another good, the two goods are

called complements. (e.g. shoes and shocks, tea andsugar, car and crude oil, etc.)



SUPPLY

Supply indicates how much producers arewilling and able to sell per period at each

possible price.

Law of Supply The law of supplystates that, other things equal, the

quantity supplied of a good rises when the price of

the good rises.



The Supply Curve: The Relationship betweenPrice and Quantity Supplied

Supply Schedule

Thesupply scheduleis a table that shows the

relationship between the price of the good and the

quantity supplied.



Aloks Supply Schedule



The Supply Curve: The Relationship between

Price and Quantity Supplied

Supply Curve

Thesupplycurveis the graph of the relationship

between the price of a good and the quantity

supplied.


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Aloks Supply Schedule and Supply Curve


Price of

Ice-CreamCone

0

2.50

2.00

1.50

1.00

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

$3.00

12

0.50

1. Anincrease

in price ...

2. ... increases quantity of cones supplied.



Market Supply versus Individual Supply

Market supply refers to the sum of allindividual supplies for all sellers of a particular

good or service.

Graphically, individual supply curves aresummed horizontally to obtain the market

supply curve.



Shifts in the Supply Curve

Input prices

Technology

Expectations

Number of sellers


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Change in Quantity Supplied

Movement along the supply curve.

Caused by a change in anything that alters the

quantity supplied at each price.


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1 5

Price of Ice-Cream

Cone

Quantity of

Ice-Cream

Cones0

S

1.00

A

C$3.00

A rise in the priceof ice creamcones results in amovement alongthe supply curve.

Change in Quantity Supplied


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Change in Supply

A shift in the supply curve, either to the left or right.

Caused by a change in a determinant other than

price.


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Figure 7 Shifts in the Supply Curve


Price of

Ice-CreamCone

Quantity of

Ice-Cream Cones

0

Increasein supply

Decreasein supply

Supply curve,S3

curve,Supply

S1Supply

curve, S2


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SUPPLY AND DEMANDTOGETHER

Equilibrium refers to a situation in which the

price has reached the level where quantity

supplied equals quantity demanded.


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Equil ibr ium Price

The price that balances quantity supplied and

quantity demanded.

On a graph, it is the price at which the supply anddemand curves intersect.

Equil ibr ium Quantity

The quantity supplied and the quantity demanded atthe equilibrium price.

On a graph it is the quantity at which the supply and

demand curves intersect.


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At $2.00, the quantity demandedis equal to the quantity supplied!


Demand Schedule Supply Schedule

Fi 8 Th E ilib i f S l d D d


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Figure 8 The Equilibrium of Supply and Demand


Price of

Ice-CreamCone

0 1 2 3 4 5 6 7 8 9 10 11 12

Quantity of Ice-Cream Cones

13

Equilibriumquantity

Equilibrium price Equilibrium

Supply

Demand

$2.00

Fi 9 M k t N t i E ilib i


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Figure 9 Markets Not in Equilibrium


Price of

Ice-Cream

Cone

0

Supply

Demand

(a) Excess Supply

Quantity

demanded

Quantity

supplied

Surplus

Quantity of

Ice-Cream

Cones

4

$2.50

10

2.00

7


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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.


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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.

Fi 9 M k t N t i E ilib i


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Figure 9 Markets Not in Equilibrium


Price of

Ice-Cream

Cone

0 Quantity of

Ice-Cream

Cones

Supply

Demand

(b) Excess Demand

Quantity

suppliedQuantity

demanded

1.50

10

$2.00

74

Shortage


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Three Steps to Analyzing Changes inEquilibrium

Decide whether the event shifts the supply ordemand 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.

Figure 10 How an Increase in Demand Affects the


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Figure 10 How an Increase in Demand Affects theEquilibrium


Price of

Ice-Cream

Cone

0 Quantity ofIce-Cream Cones

Supply

Initialequilibrium

D

D

3.. . . and a higher

quantity sold.

2. . . . resultingin a higherprice . . .

1. Hot weather increases

the demand for ice cream . . .

2.00

7

New equilibrium$2.50

10

Th St t A l i Ch i


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Three Steps to Analyzing Changes in

Equilibrium

Shifts in Curves versus Movements alongCurves

A shift in the supply curve is called a change in

supply. A movement along a fixed supply curve is called a

change in quantity supplied.

A shift in the demand curve is called a change in

demand.

A movement along a fixed demand curve is called a

change in quantity demanded.

Figure 11 How a Decrease in Supply Affects the


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g pp yEquilibrium


Price of

Ice-Cream

Cone

0 Quantity ofIce-Cream Cones

Demand

New

equilibrium

Initial equilibrium

S1

S2

2. . . . resultingin a higherprice of icecream . . .

1. An increase in the

price of sugar reducesthe supply of ice cream. . .

3.. . . and a lower

quantity sold.

2.00

7

$2.50

4

A h i b th S l d


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A change in both Supply andDemand (e.g. Immigration)

Quantity of Labour

Wa

g

e

r

a

t

e

E

E/

E

E//

(a) Imm igrat ion Alone (b) Imm igrat ion to growing cit ies

Table 4 What Happens to Price and Quantity When Supply


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Table 4 What Happens to Price and Quantity When Supplyor Demand Shifts?

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3-Supply and demand.pptx