Demand & supply iimm

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  • Demand & supply iimm

    1. 1. The Market Forces of Supply and Demand
    2. 2. The Market Forces of Supply and Demand <ul><li>Supply and demand are the two words that economists use most often. </li></ul><ul><li>Supply and demand are the forces that make market economies work. </li></ul><ul><li>Modern microeconomics is about supply, demand, and market equilibrium. </li></ul>
    3. 3. Markets <ul><li>A market is a group of buyers and sellers of a particular good or service. </li></ul><ul><li>The terms supply and demand refer to the behavior of people . . . as they interact with one another in markets . </li></ul>
    4. 4. Markets <ul><li>Buyers determine demand . </li></ul><ul><li>Sellers determine supply . </li></ul>
    5. 5. Demand <ul><li>Quantity demanded is the amount of a good that buyers are willing and able to purchase. </li></ul>
    6. 6. Law of Demand <ul><li>The law of demand states that, ceteris paribus, there is an inverse relationship between price and quantity demanded. </li></ul>
    7. 7. Demand Schedule <ul><li>The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded. </li></ul>
    8. 8. Demand Schedule
    9. 9. Demand Curve <ul><li>The demand curve is the downward-sloping line relating price to quantity demanded. </li></ul>
    10. 10. Demand Curve Rs.3 2.50 2.00 1.50 1.00 0.50 2 1 3 4 5 6 7 8 9 10 12 11 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0
    11. 11. Ceteris Paribus <ul><li>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.” </li></ul>The demand curve slopes downward because, ceteris paribus , lower prices imply a greater quantity demanded!
    12. 12. Ceteris Paribus <ul><li>Ceteris Paribus means “other things being equal”. What other things? </li></ul><ul><li>Consumer income. </li></ul><ul><li>Consumer preferences. </li></ul><ul><li>Fashion. </li></ul><ul><li>Price of related goods. </li></ul><ul><li>Government policies. </li></ul><ul><li>Weather conditions. </li></ul>
    13. 13. Market Demand <ul><li>Market demand refers to the sum of all individual demands for a particular good or service. </li></ul>
    14. 14. Determinants of Demand <ul><li>Market price : A larger quantity is demanded at a lower price & vice versa. </li></ul><ul><li>Tastes, habits and preferences : Demand depends upon a persons tastes, habits and preferences. Demand for ice – creams, bhel – puri etc depends upon an individual’s tastes. Tea, betal leafs, tobacco etc is a matter of habits. People with different tastes & habits have different preferences. A strict veg. will have no demand for fish and a person who likes non – veg will purchase fish even at a high price. </li></ul>
    15. 15. <ul><li>Expectations : If a consumer expects that the prices of a product are going to rise in future, the demand may increase and vice – versa. </li></ul><ul><li>Consumer income : A rich consumer demands more goods than a poor consumer. </li></ul>
    16. 16. <ul><li>Prices of related goods ( substitutes and complementary ) : When a desire or a want can be satisfied by alternative similar goods, they are called as substitutes. Eg. Peas and beans, groundnut oil and mustard oil, tea or coffee, jowar or bajra etc. </li></ul><ul><li>Demand for a commodity depends on the relative prices of the substitutes. There will be more demand for a commodity if it’s substitutes are highly priced. </li></ul>
    17. 17. <ul><li>Complementary products : When, in order to satisfy a given want, two or more goods are needed in combination, these goods are referred to as complementary goods. Eg. car and petrol, pen and ink, shoes and socks, guns and bullets. Complementary goods are always in Joint Demand. Thus, when the price of a complementary product will fall, the demand for its complementary product will increase. </li></ul>
    18. 18. Change in Quantity Demanded versus Change in Demand <ul><li>Change in Quantity Demanded </li></ul><ul><li>Movement along the demand curve. </li></ul><ul><li>Caused by a change in the price of the product. </li></ul>
    19. 19. Changes in Quantity Demanded 0 D 1 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 20 2.00 C Rs.4.00 12
    20. 20. Change in Quantity Demanded versus Change in Demand <ul><li>Change in Demand </li></ul><ul><li>A shift in the demand curve, either to the left or right. </li></ul><ul><li>Caused by a change in a determinant other than the price. </li></ul>
    21. 21. Changes in Demand 0 D 1 Price of Ice-Cream Cone Quantity of Ice-Cream Cones D 3 D 2 Increase in demand Decrease in demand
    22. 22. Change in Quantity Demanded versus Change in Demand Variables that Affect Quantity Demanded A Change in This Variable . . . Price Represents a movement along the demand curve Income Shifts the demand curve Prices of related goods Shifts the demand curve Tastes Shifts the demand curve Expectations Shifts the demand curve Number of buyers Shifts the demand curve
    23. 23. Two Simple Rules for Movements vs. Shifts <ul><li>Rule One </li></ul><ul><ul><li>When an independent variable changes and that variable does not appear on the graph, the curve on the graph will shift. </li></ul></ul><ul><li>Rule Two </li></ul><ul><ul><li>When an independent variable does appear on the graph, the curve on the graph will not shift, instead a movement along the existing curve will occur. </li></ul></ul>
    24. 24. Consumer Income Normal Good Rs.3.00 2.50 2.00 1.50 1.00 0.50 2 1 3 4 5 6 7 8 9 10 12 11 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in demand An increase in income... D 1 D 2
    25. 25. Consumer Income Inferior Good Rs.3.00 2.50 2.00 1.50 1.00 0.50 2 1 3 4 5 6 7 8 9 10 12 11 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Decrease in demand An increase in income... D 1 D 2
    26. 26. Exceptions to the law of Demand <ul><li>Law of Demand is a universal phenomenon. Very rarely, it is so observed that with a fall in price, demand also falls and a increase in price increases demand. </li></ul><ul><li>The demand curve in such cases is upward sloping. </li></ul>
    27. 27. Exceptions to the law of Demand <ul><li>A few such exceptions are seen in case of: </li></ul><ul><li>Giffen Goods : In cases of some inferior goods, as observed by Robert Giffen, when price falls, there is a fall in the demand for these products. </li></ul><ul><li>Eg. This was observed by Giffen in Italy when consumers purchased less of cheap potatoes when the price went down and purchased meat from the savings. </li></ul>
    28. 28. Exceptions to the law of Demand <ul><li>Snob Appeal : Goods that are used as “Status Symbol” eg. Rolls Royce cars, Johney Walker Scotch Whisky, Diamonds etc. </li></ul><ul><li>The demand for these goods increases even if the price is increased because these goods are purchased for their “exclusiveness” which increases with an increase in price. </li></ul>
    29. 29. Exceptions to the law of Demand <ul><li>Speculation : When the consumers understand that there is a increase in price of a product and they are expecting a further rise, they will not mind purchasing more of that product even if it’s price is increased. </li></ul><ul><li>Consumer’s psychology : Many consumers do not purchase products at the time of “discount sales” etc assuming that the quality of the products may have been compromised. </li></ul>
    30. 30. Law of Supply <ul><li>The law of supply states that, ceteris paribus, there is a direct (positive) relationship between price and quantity supplied. </li></ul>
    31. 31. Supply <ul><li>Quantity supplied is the amount of a good that sellers are willing and able to sell. </li></ul>
    32. 32. Supply Schedule <ul><li>The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied. </li></ul>
    33. 33. Supply Schedule
    34. 34. Supply Curve <ul><li>The supply curve is the upward-sloping line relating price to quantity supplied. </li></ul>
    35. 35. Supply Curve Rs.3.00 2.50 2.00 1.50 1.00 0.50 2 1 3 4 5 6 7 8 9 10 12 11 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0
    36. 36. Market Supply <ul><li>Market supply refers to the sum of all individual supplies for all sellers of a particular good or service. </li></ul>
    37. 37. Determinants of Supply <ul><li>Market price : The single largest factor that affects supply is the price. More commodities will be supplied at a higher price and vice versa. </li></ul><ul><li>Input prices : When the factors of production are available at low price, more investment is encouraged. This increases supply. </li></ul><ul><li>Technology : The improvement in the technique of production leads to increased supply. </li></ul>
    38. 38. <ul><li>Natural conditions : The supply of agricultural commodities depends upon the natural conditions. Whenever there is good monsoon, conductive temperature, the supply of such products increases. </li></ul><ul><li>Transport conditions : Difficulties in transport may cause a temporary decrease in supply. So, even at rising price, quantity supplied may decrease. </li></ul>
    39. 39. <ul><li>Expectations : When a seller expects a further rise in the price, he may withhold the supply and hence the supply may decrease. </li></ul><ul><li>Prices of other products : The prices of substitutes or related products can influence the supply. If the prices of wheat are increasing, farmers may grow more of wheat and less of rice. If the price of sugar rises, the price of jaggary will also rise. </li></ul><ul><li>Govt. policy : If the policies of the govt. are liberalized, more firms may tend to enter the market and hence supply may rise. </li></ul>
    40. 40. Change in Quantity Supplied versus Change in Supply <ul><li>Change in Quantity Supplied </li></ul><ul><li>Movement along the supply curve. </li></ul><ul><li>Caused by a change in the market price of the product. </li></ul>
    41. 41. Change in Quantity Supplied 1 5 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 S 1.00 A C A rise in the price of ice cream cones results in a movement along the supply curve . Rs.3.00
    42. 42. Change in Quantity Supplied versus Change in Supply <ul><li>Change in Supply </li></ul><ul><li>A shift in the supply curve, either to the left or right. </li></ul><ul><li>Caused by a change in a determinant other than price. </li></ul>
    43. 43. Change in Supply Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 S 1 S 2 S 3 Increase in Supply Decrease in Supply
    44. 44. Change in Quantity Supplied versus Change in Supply
    45. 45. Shifts in Curves versus Movements along Curves <ul><li>A shift in the supply curve is called a change in supply . </li></ul><ul><li>A movement along a fixed supply curve is called a change in quantity supplied . </li></ul><ul><li>A shift in the demand curve is called a change in demand . </li></ul><ul><li>A movement along a fixed demand curve is called a change in quantity demanded . </li></ul>
    46. 46. Supply and Demand Together <ul><li>Equilibrium Price </li></ul><ul><li>The price that balances supply and demand. On a graph, it is the price at which the supply and demand curves intersect. </li></ul><ul><li>Equilibrium Quantity </li></ul><ul><li>The quantity that balances supply and demand. On a graph it is the quantity at which the supply and demand curves intersect.  </li></ul>
    47. 47. Supply and Demand Together Demand Schedule Supply Schedule At Rs.2.00, the quantity demanded is equal to the quantity supplied!
    48. 48. Equilibrium of Supply and Demand Price of Ice-Cream Cone Quantity of Ice-Cream Cones 2 1 3 4 5 6 7 8 9 10 12 11 0 Rs.3.00 2.50 2.00 1.50 1.00 0.50 Supply Demand Equilibrium
    49. 49. Excess Supply Price of Ice-Cream Cone Quantity of Ice-Cream Cones 2 1 3 4 5 6 7 8 9 10 12 11 0 Rs.3.00 2.50 2.00 1.50 1.00 0.50 Supply Demand Surplus
    50. 50. 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.
    51. 51. Excess Demand Quantity of Ice-Cream Cones Price of Ice-Cream Cone Rs.2.00 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Supply Demand Rs.1.50 Shortage
    52. 52. 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.
    53. 53. Three Steps To Analyzing Changes in Equilibrium <ul><li>Decide whether the event shifts the supply or demand curve (or both). </li></ul><ul><li>Decide whether the curve(s) shift(s) to the left or to the right. </li></ul><ul><li>Examine how the shift affects equilibrium price and quantity. </li></ul>
    54. 54. How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 2.00 0 7 Quantity of Ice-Cream Cones Supply Initial equilibrium D 1 1. Hot weather increases the demand for ice cream... D 2 2. ...resulting in a higher price... Rs.2.50 10 3. ...and a higher quantity sold. New equilibrium
    55. 55. How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 2.00 0 1 2 3 4 7 8 9 11 12 Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S 1 10 1. Shortage of milk reduces the supply of ice cream... New equilibrium S 2 2. ...resulting in a higher price... Rs.2.50 3. ...and a lower quantity sold.

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