Transcript Chapter 3: Demand, Supply, and Market Equilibrium

Demand, Supply, and
Market Equilibrium
Demand
Demand is a schedule or curve showing
the amounts of a product that buyers are
ready to purchase at each of a series of
possible prices during a specific period.
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The Law of Demand states that, all else
equal, as price rises, the quantity
demanded declines, and vice versa.
Supply
Supply is a schedule or curve showing the
amounts of a product that producers will
make available for sale at each of a series
of possible prices during a specific period.
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The Law of Supply states that, all else
equal, as price rises, the quantity
supplied rises, and vice versa.
Supply
A curve illustrating the positive, or direct
relationship between the price of a product
and the quantity supplied of it, other things
equal, is the supply curve.
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It slopes downward to the left (upward to the
right) reflect the Demand.
Supply
Supply
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Market supply is derived from adding the
individual supply by the individual
producers.
Determinants of supply are those factors
that cause supply to change.
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The basic determinants of supply are (1)
resources prices, (2) technology, (3) taxes and
subsidies, (4) price of other goods, (5)
expected prices, and (6) the number of sellers
in the market.
Market Equilibrium
In competitive markets, buyers and sellers
have no control over prices. When buyers
and sellers interact in a free competitive
market, the equilibrium price and
equilibrium quantity is determined by the
intersection of the demand and supply
curves.
Market Equilibrium
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The equilibrium price, or market-clearing
price, is the price at which the intentions of
buyers and sellers match.
The equilibrium quantity is the quantity
demanded and quantity supplied that
occurs at the equilibrium price in a
competitive market.
Market Equilibrium
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Any price above the equilibrium price
would create a surplus, or excess supply;
quantity supplied exceeds quantity
demanded.
Surpluses drive prices down to equilibrium.
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As prices fall, the incentive to produce declines
and the incentive for consumers to buy
increases.
Market Equilibrium
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Any price below the equilibrium price
would create a shortage, or excess
demand; quantity demanded exceeds
quantity supplied.
Shortages push prices up equilibrium.
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As prices rise, the incentive to produce
increases and the incentive for consumers to
buy decreases.
Market Equilibrium
Changes in Demand,
Supply, and Equilibrium
Changes in Demand
When supply is constant, an increase in
demand will result in a higher equilibrium
price and quantity. If demand falls,
equilibrium price and quantity decrease.
Changes in Demand,
Supply, and Equilibrium
Changes in Supply
With a constant demand, if supply
increases, equilibrium price falls while
equilibrium quantity rises. If supply
decreases, equilibrium price rises, and
equilibrium quantity falls.
Changes in Demand,
Supply, and Equilibrium
 Demand
and Supply Equilibrium
I want to sell few things,
how many of you are willing to
purchase
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What's wrong with this picture?
Sunset is a non-excludable good, in this case
non-payers can't be prevented from enjoying
them. Other examples of non-excludable
goods are national defense, fireworks, and
air. .
what you see in the pictures
Reliance petrol pumps
Reason to shut down
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Reliance sold petrol at a rate of around Rs.4
costlier than what was available at other
petrol pumps.. This is because the other
petrol pumps are government subsidized and
hence their prices are less.
Also, even after selling it Rs.4 costly,
Reliance was having a loss of Rs.3 per
liter(approximately) on the petrol.
Changes in Demand,
Supply, and Equilibrium
Complex Cases
When both supply and demand change,
the effect is a combination of the
individual effects.
The relative degrees of the change in
demand and supply will determine the
effect on equilibrium price and quantity.
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In some cases, the effect is certain; in others
the effect depends on the size of the shifts.
Changes in Demand,
Supply, and Equilibrium
Example: Supply Increases, Demand Decreases
CASE 1
CASE 2
D2
S1 S2
S1 S2
P1
P1
P2
P2
D2 D1
D1
Q2 Q 1
Price decreases, quantity decreases
Q1 Q2
Price decreases, quantity increases
Changes in Demand,
Supply, and Equilibrium
Change in
Supply
Change in
Demand
Change in
Price
Increases
Decreases
↓
Decreases
Increases
↑
Increases
Increases
Decreases
Decreases
↑, ↓, or no
change
↑, ↓, or no
change
Change in
Quantity
↑, ↓, or no
change
↑, ↓, or no
change
↑
↓
Government-Set Prices
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In most markets, prices are free to rise or
fall with changes in demand and supply.
However, sometimes the resulting price in
a market is “too high” or “too low”.
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Government may place legal limits on how
high or how low a price or prices may go.
High prices may be unfair to buyers whereas
low prices may be unfair to sellers.
Price Ceiling
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If the price of a product is unfairly high, the
government can set a price ceiling, or a
legal maximum price a seller may charge
for a product.
This purportedly enables consumers to
obtain some “essential” good or service
that they could not afford at the equilibrium
price;
however, it also creates a shortage of the
good.
Price Ceiling Example
Example of price ceiling
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Drug price control order
(DPCO) Impact: Pharma cos growth
suffers for drugs under price ceiling
AIOCD-AWACS analysis shows industry
has de-grown 2.2% in DPCO category of
drugs during July 2013.
Article from business standard.
Price Floor
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When the price of a good or service is “too
low”, the government can set a price floor,
or a minimum fixed price that sellers can
charge.
The goal is to provide a sufficient income
for certain groups of resource suppliers, or
producers who would otherwise receive
very low incomes at the equilibrium price.
However, a surplus of the good is created.
Ex. Agriculture products
Price Floor Example
Consumer Surplus:
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The value consumers get from a good but do
not have to pay for.
I got a great deal!
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That company offers a
lot of bang for the buck!
Total value greatly
exceeds total amount
paid.
Consumer surplus is
large.
I got a lousy deal!
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That car dealer drives
a hard bargain!
I almost decided not to
buy it!
They tried to squeeze
the very last cent from
me!
Total amount paid is
close to total value.
Consumer surplus is
low.
Q.- Examine the effects of
following on demand and supply
curves and on equilibrium price
and output of agricultural sector.
(Draw Diagrams)
1. Bumper crops
2. Subsidy on fertilizers
3. Crop restriction program
Case 1
Case 2
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The subsidy on fertilizer will not bring
any subsequent effect on the prices of
the final produce, as the quantity of
produce will be decided by the weather,
and if it affects, it will only affect the
price by very less %. The prices will be
reduced slightly, like for example may
by less than 1%.
Case 3- Solution
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How can crop restriction help farmers? We can
use the paradox of the bumper crop to explain
this. Suppose the government requires every
farmer to reduce the particular production. This
will move the supply curve up and towards the
left. Because the demand for food is inelastic,
crop restrictions not only raise the price of crops,
but also tend to raise the farmers revenues. As
opposite to the case of bumper harvest, (as it
hurts the farmers incomes) crop restrictions
raise the farmers incomes. Ofcourse customers
are hurt by the crop restrictions and higher
prices. (as in case of flood)
Effect of crop restriction
Thanks