Economics For Managers GTU MBA sem 1 Chapter 3 Market Forces of Demand and Supply

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


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


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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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


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


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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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


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


Price ofIce-Cream

Cone

0

Supply

Demand

(a) Excess Supply

Quantitydemanded Quantitysupplied

Surplus


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


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

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Economics For Managers GTU MBA sem 1 Chapter 3 Market Forces of Demand and Supply