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EQUILIBRIUM PRICE

DETERMINATION

PRESENTED BY :-

RAHUL SAHU ( 13DM048 )

DEBANSHU GHOSH ( 13DM013 )

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OVERVIEW

• DEMAND• SUPPLY• EQUILIBRIUM PRICE & ITS MARKET

EQUILIBRIUM• CHANGES IN MARKET PRICES• CASE STUDIES

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WHAT IS DEMAND?

Demand is defined as various quantities of a product

which a consumer purchases at different price, at a given time, other things being equal.

In economics, demand for a commodity or a service signifies the following -

• Desire for a commodity or a service• Willingness to purchase it• Ability to pay for it.

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LAW OF DEMAND

Statement of the law -“ Higher the price, lower the quantity demanded, lower

the price higher the quantity demanded, other things remaining the same.”

• The law states inverse relationship between price of a commodity & its quantity demanded.

• The law holds under the condition - ‘other things remain constant’

( ‘Other things’ include ‘determinants other than own price’ )

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TYPES OF DEMAND

• INDIVIDUAL DEMAND

• MARKET DEMAND

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DEMAND CURVE AND DEMAND SCHEDULE

Price ($) Quantity Demanded

800 200

1200 160

1600 120

1800 100

2000 80

2200 60

2400 40

2800 0

Monthly Demand of Sony VAIO Laptops in Noida, UP, India.

Demand Schedule

Pri

ce

Quantity Demanded

2800

2400

2000

1600

1200

800

400

40 60 80 100 120 140 160 180 200

Demand Curve

MARKET DEMAND SCHEDULE

Price/Kg (in Rs.) of Mangoes

Quantity demanded per week (in units) of Individual A

Quantity demanded per week (in units) of Individual B

Quantity demanded per week (in units) of Individual C

Market demand per weekDM = DA+DB+DC

60 2 1 0 3

50 4 2 2 8

40 6 3 4 13

30 8 4 6 188

MARKET DEMAND CURVE

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Market demanded

Price

842 106

60

50

40

30

20

10

70

DA

DA

DB

DBDC

DC

14 16 18

DM = DA+DB+DC

DM

0

9

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WHAT IS SUPPLY?SUPPLY – Quantity of a commodity offered for sale by the producer at a

given price, in a given time.

STOCK – Total quantity of a commodity available with the producer at a

given time.• Stock is the basis or determinant of supply.• Without stock supply is not possible.

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LAW OF SUPPLY

Statement of the law - “ Higher the price higher the quantity supplied , lower the price

lower the quantity supplied, other things remaining the same ”.

• There is direct relationship between price of a commodity & its quantity supplied.

• The supply curve slopes upwards from left to right.

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SUPPLY CURVE AND SUPPLY SCHEDULE

Price ($) Quantity Supplied

800 0

1200 0

1600 40

1800 60

2000 80

2200 100

2400 120

2800 160

Monthly Supply of VAIO Laptops in Noida, UP, India by SONY

Supply Schedule

Pri

ce

Quantity Supplied

2800

2400

2000

1600

1200

800

400

40 60 80 100 120 140 160 180 200

Supply Curve

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EQUILIBRIUM

• MEANING OF EQUILIBRIUM –

State in which forces acting in opposite directions are perfectly in balance, so that there is no tendency to change.

• EQUILIBRIUM PRICE –

The price at which quantity demanded of a commodity is equal to its quantity supplied.

Qs = Qd

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MARKET EQUILIBRIUM

Price ($)

Qty. Demanded

Qty. Supplied

800 200 0

1200 160 0

1600 120 40

1800 100 60

2000 80 80

2200 60 100

2400 40 120

2800 0 160

The Market for VAIO Laptops in Noida, UP, India.

Pri

ce

Quantity

2800

2400

2000

1600

1200

800

400

40 60 80 100 120 140 160 180 200

Demand Curve

Supply Curve

Excess Supply

Excess Demand

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CHANGES IN MARKET CONDITIONS

I. Changes in demand or supply –• Effect of increase or decrease in demand (Demand changes

supply remaining the same)• Effect of increase or decrease in supply (Supply changes

demand remaining the same)

II. Simultaneous Changes in demand & supply -• Demand increases, supply increases• Demand increases, supply decreases• Demand decreases, supply increases• Demand decreases, supply decreases

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CHANGES IN MARKET PRICESThere are four “laws” of supply and demand.

1. An increase in demand causes an increase in both the equilibrium price and equilibrium quantity.

S

Pri

ce

D1D0

•

•

q0 q1

p1

p0

Quantity

2. A decrease in demand causes a decrease in both equilibrium price and equilibrium quantity.

E1

E0

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3. An increase in supply causes a decrease in the equilibrium price and an increase in the equilibrium quantity.

4. A decrease in supply causes an increase in the equilibrium price and a decrease in the equilibrium quantity.

S1

Pri

ce

S0D

•

q1q0

p0

p1

Quantity

•E1

E0

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CASE STUDIES...

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1. People come to believe that eating apples is good for them. The more apples they eat, the more likely they are to stay well. What is the effect on the market for apples?

P

Q

p0

q0

APPLE MARKET

supply

demand

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There is a change in preferences that affects demand. Here's the process.

P

Q

p0

q0

APPLE MARKET

supply

demand

new demand

p1

q1

Demand increases, so price and quantity are

higher.

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2. MSU agricultural scientists develop a new strain of corn that increases yields by about 15%. What is the effect of the improvement in technology on the market for corn?

P

Q

p0

q0

CORN MARKET

demand

supply

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P

Q

p0

q0

CORN MARKET

demand

supply

supply with improved technology

p1

q1

The improvement changes supply, creating an excess supply of corn. Here's the process.

Excess supply

In the new equilibrium price is lower and quantity higher.

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CONCLUSION

• Price changes in response to the existence of excess demand or excess supply.

• Changes in demand and changes in supply lead to changes in equilibrium prices and quantities.

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THANK YOU