Ch-Demand and Supply

7/30/2019 Ch-Demand and Supply

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Ch- Market Forcesof

Supply & Demand



Demand and Supply Demand and supply are the two words, used

most by economists.

Demand & supply are two forces that make themarket economies work.

Demand & supply forces determine the prices of goods & services in a market economy.



What is a market? A market is a group of buyers & sellers

for a particular good or service.

Markets can be organised or

unorganised.



Organised Markets Products & Services follow a certain

standard.

There is generally a regulatory authorityto look after the market.

Eg: the stock market, the market of commercial banks, agricultural products.



Unorganised Markets Products are not necessarily the same.

There is no regulatory authority.

Eg: market for ice creams in a town, fastfood joints, clothes & apparels.



What is competition? Competition are of many kinds, but for

simplicity we assume that the markets

are perfectly competitive.

Perfect Competition: There are large numbers of buyers &

sellers.

The product sold is homogenous.



What is competition? No single buyer or seller can influence the

price.

Prices are always determined by marketforces of demand & supply (price takers).

Eg: the market of wheat



Demand and Demand Curve Demand means the amount of good or

service that buyers are willing and able

to purchase.

Law of Demand:

“Other things being constant, when theprice of a good rises its quantitydemanded falls and vice-versa.”



Demand and Demand Curve Demand Curve:

Demand curve is a downward slopping line,

relating the price & the quantity demanded of a particular product.

The X-axis shows the quantity demanded

The Y-axis shows the price. The negative slope of the curve shows the

inverse relationship between demand andsupply.



Market Demand Market demand is the sum of individual

demands for a particular good or

service.

Market demand curve is obtained byadding the individual demand curveshorizontally.



Market Demand Market demand curve just as individual

demand curve shows a inverserelationship between price and demand.



Shifts in Demand Curve The law of demand holds good with the

assumption of other factors remainingconstant.

Thus when a change in any other factor

causes a change in demand of theproduct, then a shift in demand curveoccurs.



Shifts in Demand Curve If the demand rises at a given price the

original demand curve shifts to the

right.

If the demand falls at a given price, the

original demand curve shifts to the left.



Factors that cause a shift in

demand curve Income:

For normal goods: Increase in income leads

to increase in demand.

For inferior goods: Increase in income leadsto decrease in demand.

Eg: maize & wheat



Cont… Price of related goods:

There are two types of related goods

1.) Substitutes: These are goods which are usedin place of one another serving the sameneed.

Eg: tea & coffee, cold drinks & juices,hotdogs & ham burgers



Cont…

Price of substitute Demand of product

Price of substitute Demand of product



Cont…

2.) Complementary goods:

These are such goods which are often used in

pairs together. Eg: shoes and socks, pen and ink, cars and petrol,

computer and software.

Price of Complementary Demand of product

Price of Complementary Demand of product



Cont…

Tastes:

Demand for a product can change with thechange in taste & preference for theproduct.

Expectations: Future expectations regarding change in

price of a product also affects its demand.



Cont…

Future price Demand of product

Future price Demand of product



Cont…

Number of Buyers:

No. of Buyers Demand of product

No. of Buyers Demand of product



Supply and Supply Curve

Supply means the quantity of goods orservices that the sellers are willing &

able to sell.

Law of Supply:

“Other things being constant, whenprice of good rises, its quantity suppliedalso rises & vice-versa.”



Supply and Supply Curve

Supply Curve:

Supply curve is an upward slopping linerelating price & supply of a product.

X-axis shows the supply

Y-axis shows the price



Market Supply

Market supply is the sum of supply of all individual sellers.

Market supply curve is obtained byadding the individual supply curves

horizontally.



Market Supply

Market supply curve also shows apositive relationship between price and

supply.



Shifts in Supply Curve

The law of supply holds good with theassumption of other factors remaining

constant.

Thus when a change in any other factor

causes a change in supply of theproduct, then a shift in supply curveoccurs.



Shifts in Supply Curve

If the supply rises at a given price theoriginal supply curve shifts to the right.

If the supply falls at a given price, theoriginal supply curve shifts to the left.



Factors that cause shift insupply curve

Input prices:

With rise in input prices, the profitability of

selling it goes down, the seller reduces thesupply.

Input prices Supply of product

Input prices Supply of product



Cont….

Technology:

Use of technology either make a product

more costly or less costly to make, henceaffects the supply.

Expectations:

Future expectations regarding price of theproduct also leads to change in quantitysupplied by the seller.



Cont….

No. of sellers:

NO. OF Sellers Supply of product

NO. OF Sellers Supply of product



Supply & Demand Equilibrium

If we plot supply curve & demand curvetogether, the point at which they

intersect is called market equilibrium.

The price at this intersection is knownas equilibrium price & the quantity isknown as equilibrium quantity.



Supply & Demand Equilibrium

At equilibrium the quantity of goods that buyersare willing & able to buy exactly equal to thequantity of goods the sellers are willing & able to

sell.

Law of demand & supply:

“the price of any good adjusts to bring thequantity supplied & demanded for that good intobalance.”



Change in Equilibrium

Sometimes sudden events can causechanges in equilibrium.

3 steps to analyze this change:

1) The event has shifted supply curve ordemand curve or both.

2) In which direction the shift is

3) Use the DC and SC to find newequilibrium price & equilibrium quantity.

Ch-Demand and Supply

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