Demand and supply_analysis

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.

A market is a group of buyers and sellers of a particular good or service.

The terms supply and demand refer to the behavior of people . . . as they interact with one another in markets.

Buyers determine demand.

Sellers determine supply.

A competitive market is a market. . .

with many buyers and sellers.

that is not controlled by any one person.

in which a narrow range of prices are established that buyers and sellers act upon.

Products are the same Numerous buyers and sellers so that

each has no influence over price Buyers and Sellers are price takers

Perfect Competition

Monopoly One seller, and seller controls price

Oligopoly Few sellers Not always aggressive competition

Monopolistic Competition Many sellers Slightly differentiated products Each seller may set price for its own

product

Quantity demanded is the amount

of a good that buyers are willing and able

to purchase.

Price demand: Refers to the various quantities of goods and

services that a consumer would purchase at a given time in a market at various hypothetical prices.

Income demand: Refers to the various quantities of goods and services which would be purchased by the

consumers at various levels of income.

Cross demand: Means the quantities of goods and services which

will be purchased with reference to change in price not of this good but of other inter-related goods.

The law of demand states that there is an inverse

relationship between price and quantity demanded.

The demand schedule is a table that shows the relationship

between the price of the good and the quantity demanded.

Price Quantity Rs0.00 12

0.50 10 1.00 8 1.50 6 2.00 4 2.50 2 3.00 0

Average income Size of the market Prices of related goods Tastes or preferences Expectations Distinction

The demand curve is the downward-sloping line relating price to quantity

demanded.

Rs3.00

2.502.001.501.000.50

21 3 4 5 6 7 8 9 10

12

11

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones

0


0.50 10 1.00 8 1.50 6 2.00 4 2.50 2 3.00 0

Substitution effect: when the price of good rises, we substitute other similar goods for it.

Income effect: when prices price goes up we find ourselves poorer than we were before.

Ceteris paribus is a Latin phrase that means 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!

Market demand refers to the sum of all individual demands for a particular good or service.

Graphically, individual demand curves are summed horizontally to obtain the market demand curve.

Change in Quantity Demanded Movement along the demand curve. Caused by a change in the price of

the product.

0

D1

Price of Cigarettes per Pack

Number of Cigarettes Smoked per Day

A tax that raises the price of cigarettes

results in a movement along the

demand curve.

A

C

20

2.00

Rs4.00

12

Change in Demand A shift in the demand curve, either to

the left or right. Caused by a change in a

determinant other than the price.

0

D1



D3

D2

Increase in demand

Decrease in demand

As income increases the demand for a normal good will increase.

As income increases the demand for an inferior good will decrease.

Rs3.00

2.502.001.501.000.50

21 3 4 5 6 7 8 9 10

12

11



0

Increasein demand

An increase

in income...

D1

D2

Rs3.00

2.502.001.501.000.50

21 3 4 5 6 7 8 9 10

12

11



0

Decreasein demand

An increase

in income...

D1D2

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.

Quantity supplied is the amount of a good that sellers are willing and able to sell.

The law of supply states that there is a direct (positive)

relationship between price and quantity supplied.

Market price Cost of production(inputs)

Technology Expectations Government policies Special influences Number of producers

The supply schedule is a table that shows the relationship

between the price of the good and the quantity supplied.


0.50 0 1.00 1 1.50 2 2.00 3 2.50 4 3.00 5

The supply curve is the upward-sloping line relating price to

quantity supplied.

Rs3.00

2.502.001.501.000.50

21 3 4 5 6 7 8 9 10

12

11



0


0.50 0 1.00 1 1.50 2 2.00 3 2.50 4 3.00 5

Market supply refers to the sum of all individual supplies for all sellers of a particular good or service.

Graphically, individual supply curves are summed horizontally to obtain the market supply curve.

Change in Quantity Supplied Movement along the supply curve. Caused by a change in the market

price of the product.

1 5



0

S

1.00 A

CRs3.00 A rise in the price

of ice cream cones results in a

movement along the supply curve.

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.



0

S1 S2

S3

Increase in Supply

Decrease in Supply

Market Equilibrium Market Equilibrium comes at that

price and quantity where the forces of supply and demand are in balance.

The equilibrium price is also called the market-clearing price.

Equilibrium Price The price that balances supply and

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

Equilibrium Quantity The quantity that balances supply and

demand. On a graph it is the quantity at which the supply and demand curves intersect.


0.50 0 1.00 1 1.50 4 2.00 7 2.50 10 3.00 13


0.50 16 1.00 13 1.50 10 2.00 7 2.50 4 3.00 1

Demand Schedule

Supply Schedule

At Rs.2.00, the quantity demanded is equal to the quantity supplied!

Supply

Demand



21 3 4 5 6 7 8 9 10 12110

Rs3.00

2.502.001.501.000.50

Equilibrium



21 3 4 5 6 7 8 9 10

12110

Rs3.00

2.502.001.501.000.50

Supply

Demand

Surplus

When the price is above the equilibrium price, the quantity supplied exceeds the quantity demanded. There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby moving toward equilibrium.

Quantity ofIce-Cream Cones

Price ofIce-Cream

Cone

Rs2.00

0 1 2 3 4 5 6 7 8 9 10 11 12 13

Supply

Demand

Rs1.50

Shortage

When the price is below the equilibrium price, the quantity demanded exceeds 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.

Price ofIce-Cream

Cone

2.00

0 7 Quantity ofIce-Cream Cones

Supply

Initialequilibrium

D1

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

D2

2. ...resultingin a higherprice...

Rs2.50

103. ...and a higherquantity sold.

New equilibrium

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.

S2

Price ofIce-Cream

Cone

2.00

0 1 2 3 4 7 8 9 11 12 Quantity ofIce-Cream Cones

13

Demand

Initial equilibrium

S1

10

1. Increase in the price of inputs reduces the supply of ice cream...

Newequilibrium

2. ...resultingin a higherprice...

Rs2.50

3. ...and a lowerquantity sold.

Law

Demand and supply_analysis