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MICROECONOMICS                            Project Report                                 On                 Demand, Supply...
Demand, Supply and The Concept Of EquilibriumCONCEPT OF DEMAND        Demand is defined as the quantity of a good or servi...
tabulation of the quantity demanded at selected prices, assuming other things are held constant. Fromthe table, we can see...
B. Income:                With increase in income one can buy more goods. Thus a rich consumer usually                dema...
The Supply Curve       Price usually is a major determinant in the quantity supplied. For a particular good with allother ...
Shifts in the Supply curve                             While changes in price result in movement along the supply curve, c...
5. Expectations:-        If the sellers expect prices to increase, they may decrease the quantity currently y supplied at ...
2. If there is an importer who is willing to import orange from Europe to Africa, he will increase      the supply for Eur...
S     Price         P3         P1                                                                   D1                    ...
TOPIC-2                                                Consumer Surplus And Pricing  Consumer Surplus:          Consumer S...
Price SubsidiesSometimes governments try to assist low-income consumers by subsidizing the prices of “essential”goods and ...
Price SubsidiesSometimes governments try to assist low-income consumers by subsidizing the prices of “essential”goods and ...
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Micro economics (Shubham Suman)

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Demand, Supply & Concept of Equilibrium & Consumer Surplus & Pricing

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Micro economics (Shubham Suman)

  1. 1. MICROECONOMICS Project Report On Demand, Supply & Concept of Equilibrium & Consumer Surplus & PricingSubmitted to: Submitted By:Prof. Raj Kishan Nair Shubham SumanFT-IB-11-344Shubham Suman Page 1
  2. 2. Demand, Supply and The Concept Of EquilibriumCONCEPT OF DEMAND Demand is defined as the quantity of a good or services that consumers are willing and ableto buy at given price in a given time period. Each of us has an individual demand for particular goodsand services and the level of demand at each market price reflects the value that consumers place ona product and their expected satisfaction gained from purchase and consumption.The Demand Curve A Demand curve shows the relationship between the price of an item and the quantitydemanded over a period of time. There are two reasons why more is demanded as price falls. 1. The income Effect: There is an income effect when the price of a good falls because the consumer can maintain current consumption for less expenditure. Provided that the good is normal, some of the resulting increase in real income is used by consumers to buy more of this product. 2. The Substitution Effect: There is also a substitution effect when the price of a good falls because the product is now relatively cheaper than an alternative item and so some consumers switch their spending from the good in competitive demand to this product.If the price of denim paint is 300 pesos, how many pairs are we inclined to purchase versus when itsprice is 400 pesos? The law of demand asserts that the quantity demanded of a good and services is negatively orinversely related to its own price, i.e. when the price of movie ticket goes up, we are willing topurchase fewer ticket. There are two reasons why price and quantity demanded are inversely related.Price is an obstacle to consumption. The higher the price of good, the greater is its opportunity costin term of other goods that must be given up, and therefore the less consumers would want to buy ofthe item. The second reason for the negative relationship between price and quantity demanded has todo with our budget as consumers. Paying a higher for some amount or a commodity effectivelyreduces our income. It takes more pesos to buy a given quantity at a higher price. Fewer moviesticket will be sold at 60 pesos partly because those who do watch movies at that high price willrapidly deplete their budget for entertainment or leisure. Therefore, at higher prices, consumer areforced less of all the commodities they usually buy. The demand function can be illustrated in two different ways: via a schedule or table and agraph. An example of demand schedule for denim pants. A demand schedule is a numericalShubham Suman Page 2
  3. 3. tabulation of the quantity demanded at selected prices, assuming other things are held constant. Fromthe table, we can see that as price increases, quantity demanded decrease. For instance, 6 pairs ofpants are demanded at 100pesos but quantity demanded becomes 4 pairs at 200 pesos. Demand schedule for denim pants Price of denim pants(In pesos) quantity demanded per month (no of pairs) 0 8 50 7 100 6 150 5 200 4 250 3 300 2 350 1 400 0 Figure: 1.1A demand curve is a representation of the demand schedule. The demand curve is drawn asdownward sloping to illustrate the inverse relationship between price and quantity demanded. Figure1.1 is a sample demand curve based on the demand schedule given in table 1.1 P 400 300 PRICE 200 (IN PESOS) 100 D 0 2 4 6 8 QUANTITYFigure 1:1 demand curve. The demand curve is downward sloping illustrating the inverserelationship between price and quantity demanded.Determinants of Demand Factors influencing Individual Demand: An individual’s demand for a commodity isgenerally determined by such factors as: A. Price of the Product: Normally a larger quantity is demanded at a lower price than at a higher price.Shubham Suman Page 3
  4. 4. B. Income: With increase in income one can buy more goods. Thus a rich consumer usually demands more and more goods than a poor consumer. C. Tastes and Habits: Demand for several products like ice-cream, chocolates, bhel-puri, etc depend on individual’s tastes. Demand for tea, betel, tobacco, etc, is a matter of habit. D. Consumers Expectations: When a consumer expects its prices to fall in future, he will tend to buy less at the present prevailing price. Similarly, if he expects its price to rise in future, he will tend to buy more at present. E. Advertisement Effect: In modern times, the preferences of a consumer can be altered by advertisement and sales propaganda although to a certain extent only.CONCEPT OF SUPPLY Supply is one of the forces that determine the price in the market. Supply is acommodity refers to the quantity of a product which a seller is willing and able to sell at a givenprice per unit of time. The relationship between amounts supplied and market prices is expressed inthe supply schedule or table, a graph or supply equation. A supply curve is a graphical representationof the supply schedule while a supply function mathematically represents the relationship betweenprice and quantity supplied. A demand curve, a supply curve has a positive slope, reflecting the law of supply. The law ofsupply states that quantity supplied is positively related to price. I.e., firms offer large amount athigher prices and smaller amounts at lower prices. In this case, price is the reward for production sothat higher market prices bring forth larger quantities. Higher prices provide firms with extra funds topurchase more resources or inputs to increase production. Higher prices also act as a signal toproducers that consumers value their goods highly and desire more of them.Definition of supply According to Meyers : supply may be defined as a schedule of the amount of a product thatwould be offered for sale at all possible prices at any one instant of time, or a during any one periodof time, for example, a day, a month, a year and so on, in which the conditions of supply remain thesame.According to Anatol Mirad: The quantity supplied is defined as the quantity of a commodityoffered for sale at a given price in a given market at a given time. Supply is always expressed with reference to a particular price and a particular time period.Shubham Suman Page 4
  5. 5. The Supply Curve Price usually is a major determinant in the quantity supplied. For a particular good with allother factors held constant, a table can be constructed of prices and quantity supplied based onobserved data. Such a table is called a supply schedule, as shown in the following example: Supply schedule Price Quantity supplied 01 10 02 20 03 30 04 40 05 50By graphing this data, one obtains the supply curve as shown below:Supply Curve y S 5 4 PRICE 3 2 1 0 10 20 30 40 50 x Quantity suppliedAs with the demand curve, the convention of the supply curve is to display quantity supplied on thex-axis as the independent variable and price on the y-axis as the dependent variable.The law of supply states that the higher the price, the larger the quantity supplied, all other thingconstant. The law of supply is demonstrated by the upward slope of the supply curve.As with the demand curve, the supply curve often is approximated as a straight line to simplifyanalysis. A straight-line supply function would have the following structure: Quantity = a+ (b x price)Where a and b are constant for each supply curve.A change in price results in a change in quantity supplied and represents movement along the supplycurve.Shubham Suman Page 5
  6. 6. Shifts in the Supply curve While changes in price result in movement along the supply curve, changein other relevant factors causes a shift in supply, that is , a shift of the supply curve to the left orright. Such a shift results in change in quantity supplied for a given price level. If the change causesan increase in the quantity supplied at each price, the supply curve would shift to the right: y S S1 5 4 PRICE 3 2 1 0 x 10 20 30 40 50 Quantity suppliedThere are several factors that may cause a shift in a good’s curve. Some supply-shifting factorsinclude: 1. Price of other goods: - The supply of one goods may decrease if the price of another goods increases, causing producers to reallocate resources to produce larger quantities of the more profitable goods. 2. Number of sellers: - More sellers result in more supply, shifting the supply curve to the night. 3. Price of relevant inputs:- If the cost of resources used to produce a goods increase, sellers will be inclined to supply the same quantity at a given price, and the supply curve will shift to the left. 4. Technology:- Technological advances that increase production efficiency shift the supply curve to the right.Shubham Suman Page 6
  7. 7. 5. Expectations:- If the sellers expect prices to increase, they may decrease the quantity currently y supplied at a given price in order to be able to supply more when the supply at a given price in order to be able to supply more when the price increases, resulting in a supply curve shift to the left. CONCEPT Of EQUILIBRIUAM The intersection of the supply and demand curve establishes equilibrium. Equilibrium pricesare prices that equate buyer’s willingness to pay for the last units of output (price along demandcurve) with seller’s willingness to sell (cost represented by the supply curve). Thus prices are said torepresent marginal evaluation of goods and services. At this equilibrium price, there is neither ashortage nor surplus in the market. Furthermore the autonomous actions of buyers and sellers tend tomove markets toward equilibrium. P S Price D Q QuantityChange in Market Equilibrium: Equilibrium price and quantity are determined by the intersection of supply and demand. Achange in supply or demand will necessarily change the equilibrium price, quantity or both. it ishighly unlikely that the change in supply and demand perfectly offset one another so that equilibriumremain the same.Example: 1. If there is an exporter who is willing to export orange from Europe to Asia, he will increase the demand for Europe’s oranges. An increase in demand will create a shortage, which increases the equilibrium price and equilibrium quantity.Shubham Suman Page 7
  8. 8. 2. If there is an importer who is willing to import orange from Europe to Africa, he will increase the supply for Europe’s orange. An increase in supply will create a surplus, which lowers the equilibrium price and increase the equilibrium quantity New equilibrium following shifts in supply S Price S1 P1 P3 D Q1 Q3 QuantityWhen the supply curve shift to the right, the market clears at a lower price P3 and a larger price Q3.In this graph, demand is constant, and supply increases. As the supply curve (supply 1) has shown,the new curve is located on the right side of the original supply curve.The new curve intersects the original demand curve at a new point. At this point, the equilibriumprice (market price) is lower, and the equilibrium quantity is higher. New equilibrium following shifts in demand When the demand curve shift to the right, the market clears at a higher price P3 and a larger quantity Q3Shubham Suman Page 8
  9. 9. S Price P3 P1 D1 D Q1 Q3 QuantityIn this graph, supply is constant, demand increases. As the new demand curve (demand 1) hasshown, the new curve is located on the right hand side of the original demand curve.The new curve intersects the original supply curve at a new point. At this point the equilibrium price(market price) is higher, and equilibrium quantity is higher also.Shubham Suman Page 9
  10. 10. TOPIC-2 Consumer Surplus And Pricing Consumer Surplus: Consumer Surplus is a difference between the maximum amount that a consumer is willing to pay for a goods and amount that the consumer actually pays. Suppose, for example, a consumer goes out for shopping for a CD player and that consumer is willing to spend Rs. 250 and consumer find that the player is on sale Rs. 150,. The Rs. 100 difference is his or her consumer surplus. The determination of consumer surplus is illustrated in figure, which depicts the market demand curve for some goods. Price of goods in $ 10 9 8 7 6 Equilibrium Price 5 S4 S3 S2 S1 4 Market Demand 3 Curve 2 1 0 0 1 2 3 4 5 6 7 8 9 10 Units demand Calculation of consumer surplus The market price is $5, and the equilibrium quantity demanded is 5 units of the goods. The market demand curve that consumers are willing to pay $9 for the first unit of the goods, $8 for the second unit, $7 for the third unit, and $6 for the fourth unit. However, they can purchase 5th units of the goods for just $5per unit. The surplus from the first unit purchased is therefore $9-$5 = $4. Similarly, their surpluses from the second, third and fourth units purchased are $3, $2, and $1, respectively. These surplus are illustrated the vertical bars drawn in figure. The sum total of these surpluses is the consumer surplus: $4+$3+$2+$1 = $10 Shubham Suman Page 10
  11. 11. Price SubsidiesSometimes governments try to assist low-income consumers by subsidizing the prices of “essential”goods and services. France and Russia, for example, have taken this approach at various points bysubsidizing the price of bread. But as the following example illustrate, such subsidies are like priceceilings in that they reduce total economic surplus.By how much subsidies reduce total economic surplus in the market for bread?A small island nation imports bread for its population at the world price of $2 per loaf. If thedomestic demand curve for bread is as shown this figure by how much will total economic surplusdefine in this market if the government provides a $1 per loaf subsidy? Consumer surplus = $4,000,000/month 5 Price of bread ($/loaf) 4 3 World price = $2 1 0 2 4 6 8 Quantity (millions of loaves/month)With no subsidy, the equilibrium price of bread in this market would be the world price of $2 perloaf, and the equilibrium quantity would be 4,000,000 loaves per month. The shaded triangle in thisfigure. Represents consumer economic surplus for buyers in the domestic bread market. The heightof this triangle is $2 per loaf, and its base is 4,000,000 loaves per month, so its area is equal to (½)(4,000,000 loaves/month) ($2/loaf) = $4,000,000 per month. Because the country can import asmuch bread as it wishes as the marginal cost of each loaf of bread to sellers is exactly the same as theprice buyers pay, producer surplus in this market is zero. So total economic surplus is exactly equalto consumer surplus, which, again, is $4,000,000 per month.Shubham Suman Page 11
  12. 12. Price SubsidiesSometimes governments try to assist low-income consumers by subsidizing the prices of “essential”goods and services. France and Russia, for example, have taken this approach at various points bysubsidizing the price of bread. But as the following example illustrate, such subsidies are like priceceilings in that they reduce total economic surplus.By how much subsidies reduce total economic surplus in the market for bread?A small island nation imports bread for its population at the world price of $2 per loaf. If thedomestic demand curve for bread is as shown this figure by how much will total economic surplusdefine in this market if the government provides a $1 per loaf subsidy? Consumer surplus = $4,000,000/month 5 Price of bread ($/loaf) 4 3 World price = $2 1 0 2 4 6 8 Quantity (millions of loaves/month)With no subsidy, the equilibrium price of bread in this market would be the world price of $2 perloaf, and the equilibrium quantity would be 4,000,000 loaves per month. The shaded triangle in thisfigure. Represents consumer economic surplus for buyers in the domestic bread market. The heightof this triangle is $2 per loaf, and its base is 4,000,000 loaves per month, so its area is equal to (½)(4,000,000 loaves/month) ($2/loaf) = $4,000,000 per month. Because the country can import asmuch bread as it wishes as the marginal cost of each loaf of bread to sellers is exactly the same as theprice buyers pay, producer surplus in this market is zero. So total economic surplus is exactly equalto consumer surplus, which, again, is $4,000,000 per month.Shubham Suman Page 12

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