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7/31/2019 Economics For Managers GTU MBA sem 1 Chapter 3 Market Forces of Demand and Supply
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Market Forces of Demandand Supply
Chapter 4
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Demand and Supply
Supply and demand are the twowords that economists use most
often. Supply and demand are the forces
that make market economies work.
Modern microeconomics is aboutsupply, demand, and marketequilibrium.
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Market
A marketis a group of buyers and sellersof a particular good or service.
The terms supply and demand refer tothe behavior of people . . . as theyinteract with one another in markets.
Buyers determine demand.
Sellers determine supply
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Demand
Quantitydemandedis the amount ofa good that buyers are willing and
able to purchase. Law of Demand
The law of demandstates that, other
things equal, the quantity demanded ofa good falls when the price of the goodrises.
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The Demand Curve: Therelationship between Price andQuantity Demanded
Demand Schedule
The demand schedule is a table that
shows the relationship between theprice of the good and the quantitydemanded.
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Meetas Demand Schedule
Price of Ice cream
(Rs)
Quantity Demanded
0.0 12
5.00 10
10.00 8
15.00 6
20.00 4
25.00 2
30.00 0
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Demand Curve
Demand Curve
The demandcurve is a graph of the
relationship between the price of agood and the quantity demanded.
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Meetas Demand Curve
Copyright 2004 South-Western
Price ofIce-Cream Cone
0
25.00
20.0015.0010.005.00
1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones
30.00
12
1. A decrease
in price...
2. ... increases quantityof cones demanded.
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Market Demand VersusIndividual Demand
Market demand refers to the sum ofall individual demands for a
particular good or service. Graphically, individual demand
curves are summed horizontally to
obtain the market demand curve.
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Shifts in Demand Curve
Change in Quantity Demanded
Movement along the demand curve.
Caused by a change in the price of theproduct.
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0
D
Price of Ice-CreamCones (Rs.)
Quantity of Ice-Cream Cones
A tax that raises theprice of ice-creamcones results in a
movement along thedemand curve.
A
B
8
10.00
20.00
4
Changes in QuantityDemanded
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Shift in the demand Curve
Consumer income
Prices of related goods
Tastes
Expectations
Number of buyers
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Shift in the demand Curve
Change in Demand
A shift in the demand curve, either to
the left or right. Caused by any change that alters the
quantity demanded at every price.
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Shifts in the Demand Curve
Copyright2003 Southwestern/Thomson Learning
Price ofIce-CreamCone
Quantity ofIce-Cream Cones
Increasein demand
Decreasein demand
Demand curve,D3Demandcurve, D1
Demand
curve, D2
0
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Shift in the Demand Curve
Consumer Income
As income increases the demand for a
normal goodwill increase. As income increases the demand for an
inferior goodwill decrease.
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30.00
25.00
20.00
15.00
10.00
5.00
21 3 4 5 6 7 8 9 10 1211
Price of Ice-Cream Cone
Quantity ofIce-Cream
Cones0
Increasein demand
An increasein income...
D1
D2
Consumer IncomeNormal Good
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30.00
25.00
20.00
15.00
10.00
5.00
21 3 4 5 6 7 8 9 10 1211
Price of Ice-Cream Cone
Quantity ofIce-Cream
Cones0
Decreasein demand
An increase
in income...
D1D
2
Consumer IncomeInferior Good
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Variables That Influence Buyers
Copyright2004 South-Western
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Supply
Quantity suppliedis the amount of agood that sellers are willing and able
to sell. Law of Supply
The law of supplystates that, other
things equal, the quantity supplied of agood rises when the price of the goodrises.
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Supply Schedule
Supply Schedule
The supply schedule is a table that
shows the relationship between theprice of the good and the quantitysupplied.
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Mihirs Supply Schedule
Price of Ice Cream Quantity Supplied
0.0 0
5.00 010.00 1
15.00 2
20.00 325.00 4
30.00 5
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Supply Surve
Supply Curve
The supplycurveis the graph of the
relationship between the price of agood and the quantity supplied.
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Mihirs Supply Curve
Copyright2003 Southwestern/Thomson Learning
Price ofIce-Cream
Cone
0
25.020.015.010.0
1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones
30.00
12
5.00
1. Anincreasein price ...
2. ... increases quantity of cones supplied.
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Market Supply versusIndividual Supply
Market supply refers to the sum ofall individual supplies for all sellers
of a particular good or service. Graphically, individual supply curves
are summed horizontally to obtain
the market supply curve.
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Shift in the Supply Curve
Input prices
Technology
Expectations
Number of sellers
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Shift in the Supply Curve
Change in Quantity Supplied
Movement along the supply curve.
Caused by a change in anything thatalters the quantity supplied at eachprice.
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1 5
Price of Ice-Cream
Quantity ofIce-Cream
0
S
10.00
A
C30.00
A rise in the priceof ice creamresults in a
movement alongthe supply curve.
Change in QuantitySupplied
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1 5
Price of Ice-Cream
Quantity ofIce-Cream
0
S
10.00
A
C30.00
A rise in the priceof ice creamresults in a
movement alongthe supply curve.
Change in QuantitySupplied
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Shift in the Supply Curve
Change in Supply
A shift in the supply curve, either to the
left or right. Caused by a change in a determinant
other than price.
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Supply and DemandTogether
Equilibrium refers to a situation inwhich the price has reached the
level where quantity supplied equalsquantity demanded.
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Supply and DemandTogether
Equilibrium Price The price that balances quantity supplied and
quantity demanded.
On a graph, it is the price at which the supplyand demand curves intersect.
Equilibrium Quantity The quantity supplied and the quantity
demanded at the equilibrium price. On a graph it is the quantity at which the
supply and demand curves intersect.
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The Equilibrium of Supply and Demand
Copyright2003 Southwestern/Thomson Learning
Price ofIce-Cream
Cone
0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream
13
Equilibriumquantity
Equilibrium price Equilibrium
Supply
Demand
20.00
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Markets Not in Equilibrium
Copyright2003 Southwestern/Thomson Learning
Price ofIce-Cream
Cone
0
Supply
Demand
(a) Excess Supply
Quantitydemanded Quantitysupplied
Surplus
Quantity ofIce-Cream
Cones4
25.0
10
20.0
7
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Equilibrium
Surplus
When price > equilibrium price, then
quantity supplied > quantitydemanded.
There is excess supply or a surplus.
Suppliers will lower the price to increase
sales, thereby moving toward equilibrium.
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Equilibrium
Shortage
When price < equilibrium price, then
quantity demanded > the quantitysupplied.
There is excess demand or a shortage.
Suppliers will raise the price due to too
many buyers chasing too few goods,thereby moving toward equilibrium.
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Law of supply and demand
The claim that the price of any goodadjusts to bring the quantity suppliedand the quantity demanded for thatgood into balance.
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Three Steps to Analyze thechange in the equilibrium
Decide whether the event shifts thesupply or demand curve (or both).
Decide whether the curve(s) shift(s)to the left or to the right.
Use the supply-and-demand
diagram to see how the shift affectsequilibrium price and quantity.
How an Increase in Demand Affects the
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How an Increase in Demand Affects theEquilibrium
Copyright2003 Southwestern/Thomson Learning
Price ofIce-Cream
Cone
0 Quantity ofIce-Cream Cones
Supply
Initialequilibrium
DD
3.. . . and a higherquantity sold.
2. . . . resultingin a higherprice . . .
1. Hot weather increasesthe demand for ice cream . . .
20.0
7
New equilibrium25.0
10
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Steps to Analyze changes inequilibrium
Shifts in Curves versus Movements alongCurves
A shift in the supply curve is called a changein supply.
A movement along a fixed supply curve iscalled a change in quantity supplied.
A shift in the demand curve is called a changein demand.
A movement along a fixed demand curve iscalled a change in quantity demanded.
How a Decrease in Supply Affects the
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How a Decrease in Supply Affects theEquilibrium
Price ofIce-Cream
Cone
0 Quantity ofIce-Cream Cones
Demand
Newequilibrium
Initial equilibrium
S1S2
2. . . . resultingin a higherprice of icecream . . .
1. An increase in theprice of sugar reducesthe supply of ice cream. . .
3.. . . and a lowertit ld
20.0
7
25.0
4