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8/3/2019 Demand,Supply & Market
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DEMAND, SUPPLY ANDMARKET EQUILIBRIUM
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Contents of chapter
Introducing demand, supply andmarkets
Learning Outcome
At the end of the lesson, learnersshould be able to explain the meaning
of demand, supply and market
situations
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Market Defined
An institution ormechanismthat brings togetherbuyers(demanders) and sellers(suppliers) of goods & services
markets Local, national & international Highly personal or face-to-face exchange Impersonal or remote
Product market - goods & services(Output)
Resource market - factors of production(Input)
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Circular Flow
Resource
Market
Product
Market
Businesses Households
Both Flows Are Equal
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Basic Assumptions in Demand and SupplyAnalysis
Ceteris paribus
The word ceteris paribusis Latin forother things being held constant. or.
all other things being held equal
Economists often use this ceterisparibusassumption to draw theirdiagrams as well as isolate the effects of
specific changes in a market.
RationalityThe assumption stated that individuals
do not intentionally make decisions
that would leave them worse off.
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Demand And Supply Analysis
DemandThe demand schedule shows the
various amounts of a productconsumers are willing and able to
buy at each specific price in a seriesof possible prices during a specifictime period
Table 1 shows demand schedule forwheat
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Demand Analysis
Price ($ per ton
of wheat in
2005)
Quantity Demanded (tonnes of
wheat)
$5 9
$4 10
$3 12
$2 15
$1 20
Table 1
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Demand Analysis
The schedule shows how much buyersare willing and able to buy at five
possible prices
The market price depends on demandand supply
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Demand Analysis
The Law ofDemandFundamental characteristic of demand
behavior
Otherthings being constant, as price of aproductincreases, the correspondingquantity demanded falls & vice versa
Inverse relationship between P & Qdemanded
Its called theIts called the Law ofDemand.Law ofDemand.
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Quantity of wheat (tons of wheat in the year 2005)Quantity of wheat (tons of wheat in the year 2005)
Price
ofwheat(dollarsperton)
Price
ofwheat(dollarsperton)
DD
DD
AA
BB
CC
DD
EE
00 55 1010 1515 2020
11
22
33
44
55 Demand Curve
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Demand Analysis
Downward sloping Demand curve The inverse relationship between the
price & quantity causes movement
along the demand curve
Q2Q1
Price
A
B
P1
P2
D0
Qty
0
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Total and Marginal UtilityHamburgers
consumed
per meal
Total
Utility
Marginal
utility
(2)
0
1
2
3
4
56
7
0
10
0 1 2 3 4 5 6 7
Units consumed per meal
Units consumed per meal
30
20
10TotalUtility(utils)
MarginalUtility(utils)
10
8
6
4
2
0
-2
TU
MU1 2 3 4 5 6 7Copyright McGraw-Hill, Inc. 1999
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Hamburgers
consumed
per meal
Total
Utility
Marginal
utility
((2)
0
1
2
3
4
56
7
0
10 10
0 1 2 3 4 5 6 7
Units consumed per meal
Units consumed per meal
30
20
10TotalUtility(utils)
MarginalUtility(u
tils)
10
8
6
4
2
0
-2
TU
MU1 2 3 4 5 6 7Copyright McGraw-Hill, Inc. 1999
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Hamburgers
consumed
per meal
Total
Utility
Marginal
utility
((2)
0
1
2
3
4
56
7
0
10
18
10
8
0 1 2 3 4 5 6 7
Units consumed per meal
Units consumed per meal
30
20
10TotalUtility(utils)
MarginalUtility(u
tils)
10
8
6
4
2
0
-2
TU
MU1 2 3 4 5 6 7Copyright McGraw-Hill, Inc. 1999
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Hamburgers
consumed
per meal
Total
Utility
Marginal
utility
((2)
0
1
2
3
4
56
7
0
10
18
24
10
86
0 1 2 3 4 5 6 7
Units consumed per meal
Units consumed per meal
30
20
10TotalUtility(utils)
MarginalUtility(u
tils)
10
8
6
4
2
0
-2
TU
MU1 2 3 4 5 6 7
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Hamburgers
consumed
per meal
Total
Utility
Marginal
utility
((2)
0
1
2
3
4
56
7
0
10
18
24
28
10
86
4 0 1 2 3 4 5 6 7Units consumed per meal
Units consumed per meal
30
20
10TotalUtility(utils)
MarginalUtility(u
tils)
10
8
6
4
2
0
-2
TU
MU1 2 3 4 5 6 7
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Hamburgers
consumed
per meal
Total
Utility
Marginal
utility
((2)
0
1
2
3
4
56
7
0
10
18
24
28
30
10
86
4
2
0 1 2 3 4 5 6 7
Units consumed per meal
Units consumed per meal
30
20
10TotalUtility(utils)
MarginalUtility(u
tils)
10
8
6
4
2
0
-2
TU
MU1 2 3 4 5 6 7
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Hamburgers
consumed
per meal
Total
Utility
Marginal
utility
((2)
0
1
2
3
4
56
7
0
10
18
24
28
3030
10
86
4
20
0 1 2 3 4 5 6 7
Units consumed per meal
Units consumed per meal
30
20
10TotalUtility(utils)
MarginalUtility(u
tils)
10
8
6
4
2
0
-2
TU
MU1 2 3 4 5 6 7
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Hamburgers
consumed
per meal
Total
Utility
Marginal
utility
((2)
0
1
2
3
4
56
7
0
10
18
24
28
3030
28
10
86
4
20
-2
0 1 2 3 4 5 6 7
Units consumed per meal
Units consumed per meal
30
20
10TotalUtility(utils)
MarginalUtility(u
tils)
10
8
6
4
2
0
-2
TU
MU1 2 3 4 5 6 7
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Hamburgers
consumed
per meal
Total
Utility
Marginal
utility
((2)
0
1
2
3
4
56
7
0
10
18
24
28
3030
28
10
86
4
20
-2
0 1 2 3 4 5 6 7
Units consumed per meal
Units consumed per meal
30
20
10TotalUtility(utils)
MarginalUtility(u
tils)
10
8
6
4
2
0
-2
TU
MU
ObserveObserve
DiminishingDiminishing
MarginalMarginalUtilityUtility
1 2 3 4 5 6 7
Total and Marginal Utility
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DemandAnalysis
Otherthings being constantOtherthings being constantrefers torefers to Consumers incomeConsumers income tastestastes
Number of buyersNumber of buyersPrices of related goods &Prices of related goods &Other things beside priceOther things beside price
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Determinants of demand (Shift of thedemand curve)
To draw the demand curve in price andquantity space, we have to hold the other
things constant like income, taste and the
prices of other products.
These other factors are called "shiftfactors" because if one of these factors
changes, the demand curve will shiftinwards or outwards.
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Determinants of demand
Tastes favourable change shifts thedemand curve up
Number of buyers more buyers lead to
shift the demand curve upward Income I D for normal goods but forinferior goods (used furniture) I D
Prices of related goods -
Substitute goods PEPSI & COCA-COLAare substitute goods.
Ifprice of PEPSI Demand forCOCA-
COLA (+)
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Determinants of demand
Complementary goods -Film and Camera are complementarygoods.If the price of camera , the demand
for camera and thus the demandfor film also (-)Expectations about the future prices, product availability &
income shift the demand curve.
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Figure 6: Shifts of theDemand Curve
Qty
D1
Price
D0D2
Determinants of demand
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Supply Analysis
Supply
Shows the amount of a product aproducer is willing & able to produce &
sell at each specific price in a series of
possible prices during a specified time
period
The schedule shows quantities that willbe offered at various prices
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Price
($ per tonne in 2005)
Quantity Supplied
(tonnes of wheat)
1 52 20
3 35
4 50
5 60
Supply Analysis
Table 2
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Supply Analysis
Law of supply
It shows direct or positive relationshipbetween price and quantity supplied
Higher price increases production & sale
direct relationship between price andquantity supplied Given production costs, a higher price
means greater profit, thus an incentive to
increase the quantity supplied. As shown in Figure 6
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Qty
P
P1
P2
S0
Figure 6: The Supply Curve, and
MovementsAlong it
Qty
P
Figure 7: Shifts of the Supply
Curve
S0
S1
S2
Supply Analysis
C
D
Q1 Q2
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Supply Analysis
The supply curve
The supply curve is an upward slopingcurve implyingthatthe lowerthe price,
other things constant, the less units firms
will produce and vice versa.
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Determinants of supply
Taxes and subsidies business tax is treated as a cost, so decreases
supply
A subsidy lowers cost of production, so increasessupply
Prices of related goods - price of substitutegoods , production of higher priced goodsrises & supply of the original good decreases
Expectations - future price of a product currentsupply to increase or decrease
Number of sellers large number of sellergreater supply
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Q
P S0
D0
PE
QE
Figure 8: Demand andSu l E uilibrium
Equilibrium Analysis
0
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Price ($ per
tonne)
Quantity
Demanded
Quantity
Supplied
1 2000 120002 4000 10000
3 7000 7000
4 11000 4000
5 16000 1000
Table 3: The Demand and Supply Schedule
Combined
Equilibrium Analysis
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Equilibrium Analysis
When both supply and demand curvesshift
If S
D P , but new equilibrium qtydepends on relative sizes of shifts in
demand and supply
If S D P , but new equilibrium qtydepends again on relative sizes of shifts
in demand and supply
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Disequilibrium
The Dynamic Laws of Supply andDemand
If quantity demanded is greater than
quantity supplied (excess demand),
prices tend to rise. If quantity supplied is greater than
quantity demanded (excess supply),
prices tend to fall.
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SS
SS
CC
SurplusSurplusBBAA
DD
PP
55
44
33
22
11
00
55 99 1010 1515 1818 2020
A Surplus
1313
Supply more
than Demand
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SS
SSDD
DD
CC
ShortageShortage
PP
55
44
33
22
11
0055 77 1010 1515 2020
A Shortage
Demand isgreater
thansupply
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Simultaneous Changes in
Both Demand and Supply
1. Increase in Demand and Supply
2. Increase in Demand and Decreased in
Supply
3. Decreased in Demand and Increased in
Supply
4. Decreased in Demand and Supply
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P
Q0
D
D1
D1
D
S
S1
S1
S
P1
Q2Q1
P2
Situation 1 : Increase in demand is
less than increase in supply
Price
decreases
Quantity
Increases
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P
Q0
D
D1
D1
D
S
S1
S1
S
P1
Q2Q1
Situation 2 :
Increase in demand = increase in supply
Quantity
Increases
Price
Unchanged
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P
Q0
D
D1
D1
D
S
S1
S1
S
P1
Q2Q1
P2
Situation 3 :
Increase in demand is greater
than increase in supply
Quantity
Increases
Price
Increases
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2. Increase in Demand and Decrease2. Increase in Demand and Decrease
in Supplyin Supply
Atthe new equilibrium point, price alwaysincrease, lets look atthe 3 different
conditions
Quantity decreased ifincrease in demand< decrease insupply
Quantity remainthe same ifincrease indemand = decrease insupply
Quantityincreased ifincrease in demand> decrease insupply
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4. Decrease in Demand and Supply
Atthe new equilibrium point, quantityalways decreased, lets look atthe 3
different conditions
Price decreased if decreased in demand> decreased insupply
Price remainthe same if decreased indemand = decreased insupply Price increased if decreased in demand