Class3ofEA Demand Supply2011

7/31/2019 Class3ofEA Demand Supply2011

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It can explain major parts of economics. Relevant to take production decisionsDD-SS determine price and allocate scarce

resourcesGovt. when does not know demand can mess up.Demand for public services not known hence

difficult to decide their prices


3/10

Law of demand- negative relationship between Pand Q ceteris peribus

True for most goods except Giffen good andsnobbish good.

Individual v/s market demand curveDemand function and other important factors-

income, prices of other goods, tastes &preferences, expectation, number of consumers inthe market.


4/10

Each point on the demand curve showswhat?

Why QD increases when P falls?

Increase or decrease in demand implies shiftin demand or movement off the initial curve.Demand shifters implies increase or

decrease in demand-off the curve movement


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Change in quantity demanded implies expansion orcontraction of demand at different prices i.e.movement on the curve.

Income and QD positive relation means normal goodsand negative relation means inferior goods.

Prices of related goods (PY) and QD of a given good.Positive relationship implies substitutes and negativerelationship implies complements.

Tastes and change in demand.

Expectations about income or prices or shortages and

change in demand.


6/10

Smoking reduction through two methods.Awareness advertisement or discussion of

studies etc. affect demand curve. It changesdemand. i.e.. Movement off the curve.

Another way is imposing tax-it will changeprice and contracts demand i.e. movementon the demand curve.


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Supply schedule and curveSupply function and shifters- tax, input

prices, technology, expectations, number of

suppliers in the market.Change in quantity supplied and movementon the supply curve.


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DD-SS equilibrium-stable Equilibrium price is market clearing price. Excess supply and excess demand. Law of SS and DD suggest that in any free market

system surplus and shortages are removedthrough price changes. Prices always adjust tobring DD-SS in to balance. Faith in markets.


9/10

Ask whether the policy or the event affect DD or SS or both. Whether the curve shifts to the right or the left. compare initial and new equilibrium points to observe changes

in P and Q. Subsidy on education by way of scholarships or loans to

students. Subsidy to educational institutions and tax benefits for thedonations to such places.

Opposite impact-demand encouraged but supply discouraged-impact on price and quantity uncertain.


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Class3ofEA Demand Supply2011