equilibrium price determination
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EQUILIBRIUM PRICE
DETERMINATION
PRESENTED BY :-
RAHUL SAHU ( 13DM048 )
DEBANSHU GHOSH ( 13DM013 )
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OVERVIEW
• DEMAND• SUPPLY• EQUILIBRIUM PRICE & ITS MARKET
EQUILIBRIUM• CHANGES IN MARKET PRICES• CASE STUDIES
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WHAT IS DEMAND?
Demand is defined as various quantities of a product
which a consumer purchases at different price, at a given time, other things being equal.
In economics, demand for a commodity or a service signifies the following -
• Desire for a commodity or a service• Willingness to purchase it• Ability to pay for it.
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LAW OF DEMAND
Statement of the law -“ Higher the price, lower the quantity demanded, lower
the price higher the quantity demanded, other things remaining the same.”
• The law states inverse relationship between price of a commodity & its quantity demanded.
• The law holds under the condition - ‘other things remain constant’
( ‘Other things’ include ‘determinants other than own price’ )
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TYPES OF DEMAND
• INDIVIDUAL DEMAND
• MARKET DEMAND
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DEMAND CURVE AND DEMAND SCHEDULE
Price ($) Quantity Demanded
800 200
1200 160
1600 120
1800 100
2000 80
2200 60
2400 40
2800 0
Monthly Demand of Sony VAIO Laptops in Noida, UP, India.
Demand Schedule
Pri
ce
Quantity Demanded
2800
2400
2000
1600
1200
800
400
40 60 80 100 120 140 160 180 200
Demand Curve
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MARKET DEMAND SCHEDULE
Price/Kg (in Rs.) of Mangoes
Quantity demanded per week (in units) of Individual A
Quantity demanded per week (in units) of Individual B
Quantity demanded per week (in units) of Individual C
Market demand per weekDM = DA+DB+DC
60 2 1 0 3
50 4 2 2 8
40 6 3 4 13
30 8 4 6 188
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MARKET DEMAND CURVE
12
Market demanded
Price
842 106
60
50
40
30
20
10
70
DA
DA
DB
DBDC
DC
14 16 18
DM = DA+DB+DC
DM
0
9
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WHAT IS SUPPLY?SUPPLY – Quantity of a commodity offered for sale by the producer at a
given price, in a given time.
STOCK – Total quantity of a commodity available with the producer at a
given time.• Stock is the basis or determinant of supply.• Without stock supply is not possible.
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LAW OF SUPPLY
Statement of the law - “ Higher the price higher the quantity supplied , lower the price
lower the quantity supplied, other things remaining the same ”.
• There is direct relationship between price of a commodity & its quantity supplied.
• The supply curve slopes upwards from left to right.
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SUPPLY CURVE AND SUPPLY SCHEDULE
Price ($) Quantity Supplied
800 0
1200 0
1600 40
1800 60
2000 80
2200 100
2400 120
2800 160
Monthly Supply of VAIO Laptops in Noida, UP, India by SONY
Supply Schedule
Pri
ce
Quantity Supplied
2800
2400
2000
1600
1200
800
400
40 60 80 100 120 140 160 180 200
Supply Curve
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EQUILIBRIUM
• MEANING OF EQUILIBRIUM –
State in which forces acting in opposite directions are perfectly in balance, so that there is no tendency to change.
• EQUILIBRIUM PRICE –
The price at which quantity demanded of a commodity is equal to its quantity supplied.
Qs = Qd
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MARKET EQUILIBRIUM
Price ($)
Qty. Demanded
Qty. Supplied
800 200 0
1200 160 0
1600 120 40
1800 100 60
2000 80 80
2200 60 100
2400 40 120
2800 0 160
The Market for VAIO Laptops in Noida, UP, India.
Pri
ce
Quantity
2800
2400
2000
1600
1200
800
400
40 60 80 100 120 140 160 180 200
Demand Curve
Supply Curve
Excess Supply
Excess Demand
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CHANGES IN MARKET CONDITIONS
I. Changes in demand or supply –• Effect of increase or decrease in demand (Demand changes
supply remaining the same)• Effect of increase or decrease in supply (Supply changes
demand remaining the same)
II. Simultaneous Changes in demand & supply -• Demand increases, supply increases• Demand increases, supply decreases• Demand decreases, supply increases• Demand decreases, supply decreases
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CHANGES IN MARKET PRICESThere are four “laws” of supply and demand.
1. An increase in demand causes an increase in both the equilibrium price and equilibrium quantity.
S
Pri
ce
D1D0
•
•
q0 q1
p1
p0
Quantity
2. A decrease in demand causes a decrease in both equilibrium price and equilibrium quantity.
E1
E0
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3. An increase in supply causes a decrease in the equilibrium price and an increase in the equilibrium quantity.
4. A decrease in supply causes an increase in the equilibrium price and a decrease in the equilibrium quantity.
S1
Pri
ce
S0D
•
q1q0
p0
p1
Quantity
•E1
E0
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CASE STUDIES...
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1. People come to believe that eating apples is good for them. The more apples they eat, the more likely they are to stay well. What is the effect on the market for apples?
P
Q
p0
q0
APPLE MARKET
supply
demand
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There is a change in preferences that affects demand. Here's the process.
P
Q
p0
q0
APPLE MARKET
supply
demand
new demand
p1
q1
Demand increases, so price and quantity are
higher.
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2. MSU agricultural scientists develop a new strain of corn that increases yields by about 15%. What is the effect of the improvement in technology on the market for corn?
P
Q
p0
q0
CORN MARKET
demand
supply
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P
Q
p0
q0
CORN MARKET
demand
supply
supply with improved technology
p1
q1
The improvement changes supply, creating an excess supply of corn. Here's the process.
Excess supply
In the new equilibrium price is lower and quantity higher.
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CONCLUSION
• Price changes in response to the existence of excess demand or excess supply.
• Changes in demand and changes in supply lead to changes in equilibrium prices and quantities.
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THANK YOU