DEFINITIONTHE AMOUNT OF COMMODITY WHICH THE SELLER(OR PRODUCER) ARE ABLE AND WILLING TO OFFER FOR SALE AT A PARTICULAR PRICE, DURING CERTAIN PERIOD OF TIME
Firms and Households:The Basic Decision-Making UnitsA firm is an organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy.An entrepreneur is a person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.Households are the consuming units in an economy.
Input Markets and Output Markets:The Circular Flow The circular flow of economic activity shows how firms and households interact in input and output markets.
Product or output markets are the markets in which goods and services are exchanged.Input markets are the markets in which resources—labor, capital, and land—used to produce products, are exchanged.
Input Markets and Output Markets:The Circular Flow Goods and services flow clockwise. Firms provide goods and services; households supply labor services. • Payments (usually money) flow in the opposite direction (counterclockwise) as the flow of labor services, goods, and services.
Supply in Product/Output Markets • Quantity supplied AMITABHS SUPPLY represents the number of units of a product that a firm SCHEDULE FOR would be willing and able to SOYBEANS offer for sale at a particular QUANTITY price during a given time SUPPLIED period. PRICE (THOUSANDS (PER OF BUSHELS • A supply schedule is a table BUSHEL) PER YEAR) showing how much of a Rs. 1 0 product firms will supply at 1.75 10 different prices 2.25 20 3.00 30 4.00 45 5.00 50
Price and Quantity Supplied:The Law of Supply AMITABHS SUPPLY SCHEDULE FOR 6 SOYBEANS 5 QUANTITY Price of soybeans per bushel (r 4 SUPPLIED 3 PRICE (THOUSANDS (PER OF BUSHELS ) 2 BUSHEL) PER YEAR) 1 Rs. 1 0 0 1.75 10 0 10 20 30 45 50 Thousands of bushels of soybeans 2.25 20 produced per year 3.00 30 4.00 45 5.00 50
Price and Quantity Supplied:The Law of Supply The law of supply states that there is a positive 6Price of soybeans per bushel (rs) relationship between 5 price and quantity of a 4 good supplied. This means that supply 3 curves typically have a 2 positive slope. 1 0 0 10 20 30 40 50 60 Thousands of bushels of soybeans produced per year
Determinants of SupplyPRICECOST OF PRODUCTIONSTATE OF TECHNOLOGYFACTOR PRICE & THEIR AVAILABILITYPRICE OF OTHER PRODUCTTRANSPORT CONDITIONGOVERNMENT’S POLICYNATURAL CONDITIONS
ASSUMPTION UNDERLYING THE LAW OFSUPPLYCOST OF PRODUCTION IS UNCHANGEDNO CHANGE IN TECHNIQUE OF PRODUCTIONFIXED SCALE OF PRODUCTIONGOVERNMENT POLICIES ARE UNCHANGEDNO CHANGE IN TRANSPORT COSTNO SPECULATIONPRICE OF OTHER GOODS ARE HELD CONSTANT
Shift of Supply VersusMovement Along a Supply Curve A higher price causes higher quantity supplied, and a move along the demand curve. • A change in determinants of supply other than price causes an increase in supply, or a shift of the entire supply curve, from SA to SB.
Shift of Supply Curve for SoybeansFollowing Development of a New Seed Strain In this example, since the factor affecting supply is not the price of soybeans but a technological change in soybean production, there is a shift of the supply curve rather than a movement along the supply curve • The technological advance means that more output can be supplied for at any given price level.
Shift of Supply VersusMovement Along a Supply Curve Change in price of a good or service leads to Change in quantity supplied (Movement along the curve).
Shift of Supply VersusMovement Along a Supply Curve Change in costs, input prices, technology, or prices of related goods and services leads to Change in supply (Shift of curve).
Market EquilibriumMarket equilibrium is the condition that exists when quantity supplied and quantity demanded are equal.At equilibrium, there is no tendency for the market price to change.
Market Equilibrium Only in equilibrium is quantity supplied equal to quantity demanded. At any price level other than P0, such as P1, quantity supplied does not equal quantity demanded
Excess demand, or shortage, is the condition that exists when quantity demanded exceeds quantity supplied at the current price. When quantity demanded exceeds quantity supplied, price tends to rise until equilibrium is restored
Excess Supply Excess supply, or surplus, is the condition that exists when quantity supplied exceeds quantity demanded at the current price. When quantity supplied exceeds quantity demanded, price tends to fall until equilibrium is restored
Changes in Equilibrium Higher demand leads to higher equilibrium price and higher equilibrium quantity.
Changes in Equilibrium Higher supply leads to lower equilibrium price and higher equilibrium quantity.
Changes in Equilibrium Lower demand leads to lower price and lower quantity exchanged.
Changes in Equilibrium Lower supply leads to higher price and lower quantity exchanged.
Relative Magnitudes of Change• When supply and demand both increase, quantity will increase, but price may go up or down.
Relative Magnitudes of Change• The relative magnitudes of change in supply and demand determine the outcome of market equilibrium.
University QuestionExplain the relationship between price and quantity demanded of a commodity. OrDescribe the price or demand relationship with suitable example.Why does the normal demand curve slope downward? Can there be an upward rising demand curve? Explain with example.Explain law of supply . What are the determinant of supply.