ppt 2 demand & supply

8/9/2019 Ppt 2 Demand & Supply

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DEMAND & SUPPLY


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Aims & ObjectivesAfter studying this lesson, you will be able to understand:

The concept of demand

Determinants of demand

Law of demand Process of demand estimation

Concept of supply and supply function

Determinants of supply

Law of supply

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Demand defined Demand is the desire, want or need to purchase a good or service at

a given price baced up by the willingness and ability to pay for it

!uantity demanded "normally denoted as !d# is the amount of aparticular good or service that consumers are willing or able topurchase at a given price, during a given period of time$

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Types of Demand %ndividual vs &aret demand

Company vs %ndustry demand

&aret segment vs Total maret demand Domestic vs 'ational demand

Direct vs %ndirect demand

Autonomous vs induced demand

'ew vs replacement demand

(ousehold vs Corporate vs )overnment demand

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Determinants of Demand Price of the commodity

%ncome of the consumer

Price of related goods * Price of substitutes + Price ofcomplements

ealth of the consumer

Price-%ncome ./pectation

Advertisement e/penditure

Taste + preferences 0ther factors

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Demand fnction A demand function is given as:

D/ 1 f "P/, Py, P2, %, , ., A, T, 0#

here,P/ price of good 3

Py price of substitute

P2 price of complement

% income of the consumer

wealth of the consumer. price-income e/pectation of the consumer

A advertisement e/penditure on the good

T taste + preference of the consumer

0 other e/ogenous factors

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Mar!et demand fnction &aret demand function is the summation of all the individual

demand functions

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La" of Demand All other factor affecting demand for a commodity remaining

constant, if price of the good rises then 4uantity demanded of thegood falls and vice versa$

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Demand sc#ed$e & Demand crve A tabular representation of

4uantity purchased of a good at

corresponding prices is

referred to as a demand schedule$

A graphical representation of the

demand schedule is the demand

curve

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Price/unit Quantity(unit)

P5 !5

P6 !6p7 !7

P

O Q

D


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%ncome effect hen the price of a commodity falls, less has to be spent on the

purchase of the same 4uantity of the commodity$ This leads to anincrease in purchasing power of the money with the buyer$ This isreferred to an increase in real income of the consumer$

The increase in real income leads to an increase in purchase of thecommodity whose price has fallen$ This is referred to as incomeeffect of a price change$

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P/ 9eal income !/


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%ncome effect neative or positive' P/ 9eal income !/ income effect is positive 3 is a

normal good

P/ 9eal income !/ income effect is negative 3 is an inferior good

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Sbstittion Effect hen price of a commodity falls, its becomes cheaper relative to

other commodities$ This leads to substitution of other commodities"which are now relatively more e/pensive# by this commodity$ Thusthe demand for the cheaper good rises$ This is called thesubstitution effect$

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P/ it is relatively cheaper and hence attractive !/


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%nferior ood vs (iffen ood A good with negative income effect is referred to as inferior good

A good whose negative income effect dominates the positive

substitution effect is a )iffen good$ Thus, all )iffen goods are inferior goods but all inferior goods arenot )iffen goods

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E)ception to La" of Demand)iffen parado/: when negative income effect of an inferior good

dominates its positive substitution effect, the total effect of a pricechange of the good on its 4uantity demanded tends to be positive$ That

is, as price falls, demand for its falls too + if price rises then demandfor its rises too$ This results in an upward sloping demand curve$

0ther e/ceptions are: 8nob-eblen effect, 8hare &aret, Demonstration effect

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Q

P

O

D

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S#ifts & movement a$on demand crve &ovement along demand curve 8hift of demand curve

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A

BP2

P1

Q1 Q2

P

Q1Q2 Q3

The change in demand isdue to

change in price of thegood allother factors aectingdemandbeing constant. This isreferredto as change in uantit!

The change in demand is due

tochange in an! one of theother factors aectingdemand $sa!% income&% priceof the good remaining thesame. This is referred to as

change in uantit!demanded. "f uantit!

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Estimation of demand %nvolves estimating demand relationship and forecasting demand$

8teps involved are:

Collecting information: consumer surveys, &aret information Data Analysis by statistical estimation of demand relationships

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Spp$y !uantity supplied of any good or service is the amount that

sellers are willing and able to sell for a price

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Determinants of spp$y %nput prices

Technology

./pectation of future prices 'umber of sellers in the maret

Price of substitute or complementary goods

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Spp$y sc#ed$e & Spp$y crveA tabular representation of

4uantity supplied of a good at

corresponding prices is

referred to as a supply schedule$

A graphical representation of the

supply schedule is the supply

curve$ The supply curve is

upward rising as 4uantity supplied

of a good is directly related to its

own price

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Price/unit Quantity(unit)

P5 !5

P6 !6p7 !7

P

O Q

'

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S#ifts & movement a$on spp$y crve

&ovement along supply curve 8hift of supply curve

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A

BP2

P1

Q1 Q2

P

Q1Q2 Q3

The change in suppl! isdue to

change in price of thegood allother factors aectingsuppl!being constant.This isreferredto as change in uantit!

The change in suppl! is due

tochange in an! one of theother factors aectingsuppl!$sa!% technolog!&% priceof the good remaining thesame. This is referred to as

change in suppl!. "f uantit!supplied increases it is

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La" of Spp$y All other factor affecting supply of a commodity remaining constant,

if price of the good rises then 4uantity supplied of the good alsorises$

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&aret e4uilibrium

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Aims and ObjectivesAfter studying this lesson, you will be able to understand

Concept of maret e4uilibrium

.ffect of changes in demand on e4uilibrium .ffect of changes in supply on e4uilibrium

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Mar!et e*i$ibrim+Demand,spp$y e*i$ibrim & its

stabi$ity

./cess

demand

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(

P '

O

D

Q

P1 euilibrium

Q1

P2

(#cess suppl! &aret e4uilibrium occurs whendemand for a good matches itssupply and the maret gets cleared$An e4uilibrium is said to be stable

when following any deviation fromthe e4uilibrium there are someautomatic forces which bring thesystem bac to e4uilibrium

P3

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Effect on e*i$ibrim "#en demand c#anes

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(

P '

O

D

Q

P1

Q1

Let demand increase for somereason$ 'ew demand curve is D;now$ ith same supply there is

e/cess demand at each price$This pushes up the price andthe new e4uilibrium occurs at .;at a higher price and higher4uantity

()

P2

Q2

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Effect on e*i$ibrim "#en spp$y c#anes

P6

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(

P '

O

D

Q

P1

Q1

()

Let supply increase for somereason$ 'ew supply curve is 8;now$ ith same demand there

is e/cess supply at each price$This pushes down the price andthe new e4uilibrium occurs at .;at a higher 4uantity and lowerprice

Q2

')

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E)ercise

or out effect on e4uilibrium in the following situations:

hen there is a technological up gradation

hen income of consumer increases

hen input prices rise

hen price of substitute rises

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Price contro$s These are of two types: Price ceiling and Price floor

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Price .$oor hen the 9egulator "government# feels that the maret price "Pm# of a

good is too less and the producer welfare is at stae then thegovernment can fi/ the price at a level higher than the marete4uilibrium price$ This is referred to as price floor$

At the floor price "Pf#there is e/cess supply trying to push the pricebac to the lower level determined by maret e4uilibrium$ 8o to sustainthe price floor the government increases the demand to match the

e/cess supply and thereby eliminates the pressure of e/cess supply$ To increase the demand to match the e/cess supply, the government

procures these goods and taes initiatives to sell these procuredproducts itself

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Pm

P"

!upply cure

$emand cure &'en g( pr(cures

Original demand cure

Excess supply

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Thank You

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ppt 2 demand & supply

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