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Market & demand

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Market & demand

  1. 1. By Dr. Sanchit Dagar Market & demand
  2. 2. Concept of Market A market is a mechanism by which buyers and sellers interact to determine the price and quantity of a good or service Demand side of the market for a product refers to all its consumers and the price they are willing to pay for buying a certain quantity of a product during a period of time.
  3. 3. The Basic Decision-Making Units  A 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.
  4. 4. The circular flow of economic activity shows the connections between firms and households in input and output markets.
  5. 5. • Payments flow in the opposite direction as the physical flow of resources, goods, and services (counterclockwise). • Output, or product, 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.
  6. 6. Input Markets Input markets include:  The labor market, in which households supply work for wages to firms that demand labor.  The capital market, in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods.  The land market, in which households supply land or other real property in exchange for rent.
  7. 7. Determinants of Household Demand  The price of the product in question.  The income available to the household.  The household’s amount of accumulated wealth.  The prices of related products available to the household.  The household’s tastes and preferences.  The household’s expectations about future income, wealth, and prices. A household’s decision about the quantity of a particular output to demand depends on:
  8. 8. Concept of Market  A market is a mechanism by which buyers and sellers interact to determine the price and quantity of a good or service  Demand side of the market for a product refers to all its consumers and the price they are willing to pay for buying a certain quantity of a product during a period of time.
  9. 9. What is Demand???  Demand is the desire or want backed up by money  Always related to price and time
  10. 10. Statement of Law of Demand “All other things remaining constant, higher the price of a commodity, smaller is the quantity demanded and lower the price, larger the quantity demanded” Dx = f (Px)
  11. 11. Reasons for Inverse Relationship  Income effect- the decline in the price of a commodity leads to an equivalent increase in the income of a consumer because he has to spend less to buy the same quantity of goods. The part of the money left can be used for buying some more units of commodity.  For e.g.- suppose the price of mangoes falls from Rs.100/- per dozen to 50/- per dozen. Then with the same amount of 100/- you can buy one more dozen, i.e.,2 dozens at Rs. 50/-  Substitution effect- When the price of a commodity falls, the consumer tends to substitute that commodity for other commodity which is relatively expensive.  For e.g. – Suppose the price of the Urad falls, it will be used by some people in place of other pulses. Thus the demand will increase.
  12. 12. Assumptions Underlying the Law  No change in Consumer’s Income  No change in Consumer’s Preferences  No change in Fashion  No change in Price of related goods  No Expectation of future price changes or shortages
  13. 13. Individual Demand Schedule Tabular representation of Quantity of a commodity that an individual is willing and able to purchase over a given period of time at each price of the commodity, while holding constant all other relevant economic variables on which demand depends.
  14. 14. Individual Demand Schedule Price of Com X (Rs per kg) Quantity demanded of Com X (Qty in kg) 80 2 70 4 60 6 50 10
  15. 15. Determinants of Individual Demand  Income  Price of Substitute & Complementary products  Taste & Preferences  Advertisement  Expectation regarding future price changes  Climatic Conditions
  16. 16. Market demand Schedule Tabular representation of Quantity of a commodity that all individuals are willing and able to purchase over a given period of time at each price of the commodity, while holding constant all other relevant economic variables on which demand depends.
  17. 17. Market Demand Schedule Price in (Rs) Units of Commodity X Market demanded per day Demand by Individuals Total A B C 4 1 1 3 5 3 2 3 5 10 2 3 5 7 15 1 5 9 10 24
  18. 18. Determinants of Market Demand  Price of Product  Distribution of Income & wealth  Community’s Common Habits and Scale of Preferences  Spending Habits of People  Growth of Population  Age Structure and Sex ratio of Population  Future Expectations  Level of Taxation  Fashions  Climate Conditions  Customs  Advertisement
  19. 19. Multivariate Demand Function  Dx = D (Px, Py, Pz, B, W, A, E, T, U)  Here Dx, stands for demand for item x (say, a car)  Px, its own price (of the car)  Py, the price of its substitutes (other brands/models)  Pz, the price of its complements (like petrol)  B, the income (budget) of the purchaser (user/consumer)  W, the wealth of the purchaser  A, the advertisement for the product (car)  E, the price expectation of the user  T, taste or preferences of user  U, all other factors.
  20. 20. Demand equation  D= a – bP  Where ‘a’ is constant parameter signifying initial demand irrespective of price  ‘b’ represents slope of demand curve  functional relationship between price and demand, having minus sign denotes negative function
  21. 21. Exceptions to Law of Demand  Conspicuous consumption – The goods which are purchased for ‘Snob appeal’ are called as the conspicuous consumption. For e.g.- diamonds. They are the prestige goods. They would like to hold it only when they are costly and rare.  Speculative market: in this case the higher the price the higher will be the demand. It happens because of the expectation to increase the price in the future. For e.g. shares, lotteries
  22. 22. Contd…  Giffens goods: It is a special type of inferior goods where the fall in the price results into the decrease In the quantity demanded. This happens because of people’s preference for superior commodity  Consumer’s Psychological bias: Many a times consumer judges the quality of a good from its price. Such consumers may purchase high price goods because of the feeling of possessing a better quality. The exceptional demand curve shows a positive relation between the price and the quantity demanded.
  23. 23. The Law of Demand  The law of demand states that there is a negative, or inverse, relationship between price and the quantity of a good demanded and its price. • This means that demand curves slope downward.
  24. 24. Shifts in Demand Curve  Extension and Contraction of Demand occurs due to changes in price, other factors remaining constant  When more of a commodity is purchased with a fall in price then it is known as extension of Demand and vice versa  Refer to movement along same demand curve  Increase and Decrease in Demand refers to changes in demand due to factors other than price  An increase in demand signifies that more will be purchased at a given price than before .  Refer to movement from one demand curve to another
  25. 25. Shift of Demand Versus Movement Along a Demand Curve • A change in demand is not the same as a change in quantity demanded. • In this example, a higher price causes lower quantity demanded. • Changes in determinants of demand, other than price, cause a change in demand, or a shift of the entire demand curve, from DA to DB.
  26. 26. • When demand shifts to the right, demand increases. This causes quantity demanded to be greater than it was prior to the shift, for each and every price level. A Change in Demand Versus a Change in Quantity Demanded
  27. 27. A Change in Demand Versus a Change in Quantity Demanded To summarize: Change in price of a good or service leads to Change in quantity demanded (Movement along the curve). Change in income, preferences, or prices of other goods or services leads to Change in demand (Shift of curve).
  28. 28. The Impact of a Change in Income • Higher income decreases the demand for an inferior good • Higher income increases the demand for a normal good
  29. 29. The Impact of a Change in the Price of Related Goods • Price of hamburger rises • Demand for complement good (ketchup) shifts left • Demand for substitute good (chicken) shifts right • Quantity of hamburger demanded falls
  30. 30. Reasons for shifts (increase or decrease in Demand)  Changes in Income  Changes in Taste, habits and Preferences  Change in Fashions and Customs  Change in Distribution of Wealth  Change in Substitutes  Change in demand for Complementary goods  Advertisement and Publicity Persuasion  Change in level of taxation
  31. 31. Supply Analysis  Supply during a given period of time means the quantities of goods which are offered for sale at particular prices  Supply is what seller is able and willing to offer for sale  Supply and Stock are related but distinct terms- Supply comes out of Stock  Stock determines potential supply  Stock is outcome of production
  32. 32. Determinants of Supply  Cost of factors of production  State of Technology  Factors outside Economic Sphere such as weather conditions, natural calamities, etc  Tax and Subsidy
  33. 33. Law of Supply “Other things remaining same , supply of a commodity rises with a rise in price and falls with a fall in price”
  34. 34. Supply schedule
  35. 35. Assumptions :  Cost of production is unchanged  Technology is constant  Govt policies are unchanged  No change in Transport costs  No speculation  Prices of other goods constant
  36. 36. Positions: Supply Curve  Extension and Contraction : refer to change in supply due to price, other things remaining same.  Movement along the supply curve  Increase and Decrease in Supply: refer to change in supply due to determinants other than price  Shifts in Supply Curve
  37. 37. Causes for change in Supply  Change in Cost of Production  Supply also depends on Natural Factors  Change in Technique of Production  Policies of Government  Business Combines
  38. 38. When market is in Equilibrium?  Equilibrium price of a commodity is price at which quantity demanded of commodity equals quantity supplied and market clears  Equilibrium is condition which once achieved tends to persist in time.
  39. 39. Equilibrium of Supply and Demand S D E D&S Price Excess Supply Excess Demand
  40. 40. Effect of Shift in Supply or Demand Demand & Supply shifts Effect on price and quantity If demand rises Demand curve shifts to right Both P & Q increases If demand falls Demand curve shifts to left Both P & Q falls If supply rises Supply curve shifts to right P falls but Q increases If supply falls Supply curve shifts to left P increases & Q decreases
  41. 41. Simultaneous shifts of Supply and Demand  New equilibrium price and quantity may be greater than, equal or even less than initial equilibrium levels depending on the magnitude and direction of two curves  If both D & S shift to right by same amount , the equilibrium point shifts to right by same amount and hence equilibrium price remains same.
  42. 42. Impact of Excise tax on Price and Quantity  An excise is a tax on each unit of commodity  If collected from sellers tax causes supply curve to shift upward by the amount of tax  Result is that consumers purchase a smaller quantity at a higher price while sellers receive a smaller net price after payment of tax
  43. 43. Impact of Excise tax on Price and Quantity D S0 S1 E0 TaxE1 Q0Q1 T Po P1
  44. 44. Impact of Rent Control on Housing Markets  Rent control is a type of price ceiling or maximum rent set below equilibrium price that government use for making rented housing affordable, however the effect has been opposite ie shortage of apartments
  45. 45. Rent Control create shortages Shortage S D E 1.2 1.6 2 Millions of Apartments $1400 Monthly Rent $1000 $600
  46. 46. Quantity Demanded  Quantity demanded is the amount (number of units) of a product that a household would buy in a given time period if it could buy all it wanted at the current market price.
  47. 47. Demand in Output Markets  A demand schedule is a table showing how much of a given product a household would be willing to buy at different prices.  Demand curves are usually derived from demand schedules. PRICE (PER CALL) QUANTITY DEMANDED (CALLS PER MONTH) $ 0 30 0.50 25 3.50 7 7.00 3 10.00 1 15.00 0 ANNA'S DEMAND SCHEDULE FOR TELEPHONE CALLS
  48. 48. The Demand Curve  The demand curve is a graph illustrating how much of a given product a household would be willing to buy at different prices. PRICE (PER CALL) QUANTITY DEMANDED (CALLS PER MONTH) $ 0 30 0.50 25 3.50 7 7.00 3 10.00 1 15.00 0 ANNA'S DEMAND SCHEDULE FOR TELEPHONE CALLS
  49. 49. Other Properties of Demand Curves  Demand curves intersect the quantity (X)-axis, as a result of time limitations and diminishing marginal utility.  Demand curves intersect the (Y)-axis, as a result of limited incomes and wealth.
  50. 50. Income and Wealth  Income is the sum of all households wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. It is a flow measure.  Wealth, or net worth, is the total value of what a household owns minus what it owes. It is a stock measure.
  51. 51. Related Goods and Services  Normal Goods are goods for which demand goes up when income is higher and for which demand goes down when income is lower.  Inferior Goods are goods for which demand falls when income rises.
  52. 52. Related Goods and Services  Substitutes are goods that can serve as replacements for one another; when the price of one increases, demand for the other goes up. Perfect substitutes are identical products.  Complements are goods that “go together”; a decrease in the price of one results in an increase in demand for the other, and vice versa.
  53. 53. From Household to Market Demand  Demand for a good or service can be defined for an individual household, or for a group of households that make up a market.  Market demand is the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.
  54. 54. From Household Demand to Market Demand  Assuming there are only two households in the market, market demand is derived as follows:
  55. 55. Supply in Output Markets • A supply schedule is a table showing how much of a product firms will supply at different prices. • Quantity supplied represents the number of units of a product that a firm would be willing and able to offer for sale at a particular price during a given time period. PRICE (PER BUSHEL) QUANTITY SUPPLIED (THOUSANDS OF BUSHELS PER YEAR) $ 2 0 1.75 10 2.25 20 3.00 30 4.00 45 5.00 45 CLARENCE BROWN'S SUPPLY SCHEDULE FOR SOYBEANS
  56. 56. The Supply Curve and the Supply Schedule • A supply curve is a graph illustrating how much of a product a firm will supply at different prices. 0 1 2 3 4 5 6 0 10 20 30 40 50 Thousands of bushels of soybeans produced per year Priceofsoybeansperbushel($) PRICE (PER BUSHEL) QUANTITY SUPPLIED (THOUSANDS OF BUSHELS PER YEAR) $ 2 0 1.75 10 2.25 20 3.00 30 4.00 45 5.00 45 CLARENCE BROWN'S SUPPLY SCHEDULE FOR SOYBEANS
  57. 57. The Law of Supply  The law of supply states that there is a positive relationship between price and quantity of a good supplied.  This means that supply curves typically have a positive slope. 0 1 2 3 4 5 6 0 10 20 30 40 50 Thousands of bushels of soybeans produced per year Priceofsoybeansperbushel($)
  58. 58. Determinants of Supply  The price of the good or service.  The cost of producing the good, which in turn depends on:  The price of required inputs (labor, capital, and land),  The technologies that can be used to produce the product,  The prices of related products.
  59. 59. A Change in Supply Versus a Change in Quantity Supplied • A change in supply is not the same as a change in quantity supplied. • In this example, a higher price causes higher quantity supplied, and a move along the demand curve. • In this example, changes in determinants of supply, other than price, cause an increase in supply, or a shift of the entire supply curve, from SA to SB.
  60. 60. • When supply shifts to the right, supply increases. This causes quantity supplied to be greater than it was prior to the shift, for each and every price level. A Change in Supply Versus a Change in Quantity Supplied
  61. 61. A Change in Supply Versus a Change in Quantity Supplied To summarize: Change in price of a good or service leads to Change in quantity supplied (Movement along the curve). Change in costs, input prices, technology, or prices of related goods and services leads to Change in supply (Shift of curve).
  62. 62. From Individual Supply to Market Supply  The supply of a good or service can be defined for an individual firm, or for a group of firms that make up a market or an industry.  Market supply is the sum of all the quantities of a good or service supplied per period by all the firms selling in the market for that good or service.
  63. 63. Market Supply  As with market demand, market supply is the horizontal summation of individual firms’ supply curves.
  64. 64. Market Equilibrium  The operation of the market depends on the interaction between buyers and sellers.  An 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.
  65. 65. Market Equilibrium  Only in equilibrium is quantity supplied equal to quantity demanded. • At any price level other than P0, the wishes of buyers and sellers do not coincide.
  66. 66. Market Disequilibria  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.
  67. 67. Market Disequilibria  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.
  68. 68. Increases in Demand and Supply  Higher demand leads to higher equilibrium price and higher equilibrium quantity.  Higher supply leads to lower equilibrium price and higher equilibrium quantity.
  69. 69. Decreases in Demand and Supply  Lower demand leads to lower price and lower quantity exchanged.  Lower supply leads to higher price and lower quantity exchanged.
  70. 70. Relative Magnitudes of Change • The relative magnitudes of change in supply and demand determine the outcome of market equilibrium.
  71. 71. Relative Magnitudes of Change • When supply and demand both increase, quantity will increase, but price may go up or down.

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