ch-demand and supply
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Ch- Market Forcesof
Supply & Demand
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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.
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What is a market? A market is a group of buyers & sellers
for a particular good or service.
Markets can be organised or
unorganised.
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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.
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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.
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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.
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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
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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.”
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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.
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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.
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Market Demand Market demand curve just as individual
demand curve shows a inverserelationship between price and demand.
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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.
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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.
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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
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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
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Cont…
Price of substitute Demand of product
Price of substitute Demand of product
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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
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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.
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Cont…
Future price Demand of product
Future price Demand of product
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Cont…
Number of Buyers:
No. of Buyers Demand of product
No. of Buyers Demand of product
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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.”
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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
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Market Supply
Market supply is the sum of supply of all individual sellers.
Market supply curve is obtained byadding the individual supply curves
horizontally.
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Market Supply
Market supply curve also shows apositive relationship between price and
supply.
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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.
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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.
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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
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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.
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Cont….
No. of sellers:
NO. OF Sellers Supply of product
NO. OF Sellers Supply of product
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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.
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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.”
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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.