Ch- Market Forces of Supply & Demand

Demand and Supply

Demand and supply are the two words, used most by economists. Demand & supply are two forces that make the market economies work. Demand & supply forces determine the prices of goods & services in a market economy.

What is a market?

A market is a group of buyers & sellers for a particular good or service. Markets can unorganised. be organised or

Organised Markets

Products & Services follow a certain standard. There is generally a regulatory authority to look after the market. Eg: the stock market, the market of commercial banks, agricultural products.

Unorganised Markets

Products are not necessarily the same.

There is no regulatory authority.

Eg: market for ice creams in a town, fast food joints, clothes & apparels.

What is competition?

Competition are of many kinds, but for simplicity we assume that the markets are perfectly competitive. Perfect Competition:

There are large numbers of buyers & sellers. The product sold is homogenous.

What is competition?

No single buyer or seller can influence the price. Prices are always determined by market forces of demand & supply (price takers). Eg: the market of wheat

Demand and Demand Curve

Demand means the amount of good or service that buyers are willing and able to purchase.

Law of Demand: Other things being constant, when the price of a good rises its quantity demanded falls and vice-versa.

Demand and Demand Curve

Demand Curve:

Demand curve is a downward slopping line, relating the price & the quantity demanded of a particular product. The X-axis shows the quantity demanded The Y-axis shows the price. The negative slope of the curve shows the inverse relationship between demand and supply.

Market Demand

Market demand is the sum of individual demands for a particular good or service.
Market demand curve is obtained by adding the individual demand curves horizontally.

Market Demand

Market demand curve just as individual demand curve shows a inverse relationship between price and demand.

Shifts in Demand Curve

The law of demand holds good with the assumption of other factors remaining constant. Thus when a change in any other factor causes a change in demand of the product, then a shift in demand curve occurs.

Shifts in Demand Curve

If the demand rises at a given price the original demand curve shifts to the right.
If the demand falls at a given price, the original demand curve shifts to the left.

Factors that cause a shift in demand curve

Income:

For normal goods: Increase in income leads to increase in demand. For inferior goods: Increase in income leads to decrease in demand. Eg: maize & wheat

Cont

Price of related goods:

There are two types of related goods

1.) Substitutes: These are goods which are used in place of one another serving the same need.
Eg: tea & coffee, cold drinks & juices, hotdogs & ham burgers

Cont

Price of substitute
Price of substitute

Demand of product
Demand of product

Cont
2.) Complementary goods:

These are such goods which are often used in pairs together. Eg: shoes and socks, pen and ink, cars and petrol, computer and software. Price of Complementary Price of Complementary Demand of product Demand of product

Cont

Tastes:

Demand for a product can change with the change in taste & preference for the product.

Expectations:

Future expectations regarding change in price of a product also affects its demand.

Cont

Future price Future price

Demand of product Demand of product

Cont

Number of Buyers:

No. of Buyers No. of Buyers

Demand of product Demand of product

Supply and Supply Curve

Supply means the quantity of goods or services that the sellers are willing & able to sell.
Law of Supply: Other things being constant, when price of good rises, its quantity supplied also rises & vice-versa.

Supply and Supply Curve

Supply Curve:

Supply curve is an upward slopping line relating price & supply of a product. X-axis shows the supply Y-axis shows the price

Market Supply

Market supply is the sum of supply of all individual sellers.

Market supply curve is obtained by adding the individual supply curves horizontally.

Market Supply

Market supply curve also shows a positive relationship between price and supply.

Shifts in Supply Curve

The law of supply holds good with the assumption of other factors remaining constant.
Thus when a change in any other factor causes a change in supply of the product, then a shift in supply curve occurs.

Shifts in Supply Curve

If the supply rises at a given price the original supply curve shifts to the right. If the supply falls at a given price, the original supply curve shifts to the left.

Factors that cause shift in supply curve

Input prices:

With rise in input prices, the profitability of selling it goes down, the seller reduces the supply. Input prices Supply of product

Input prices

Supply of product

Cont.

Technology:

Use of technology either make a product more costly or less costly to make, hence affects the supply. Future expectations regarding price of the product also leads to change in quantity supplied by the seller.

Expectations:

Cont.

No. of sellers:

NO. OF Sellers NO. OF Sellers

Supply of product Supply of product

Supply & Demand Equilibrium

If we plot supply curve & demand curve together, the point at which they intersect is called market equilibrium. The price at this intersection is known as equilibrium price & the quantity is known as equilibrium quantity.

Supply & Demand Equilibrium

At equilibrium the quantity of goods that buyers are willing & able to buy exactly equal to the quantity of goods the sellers are willing & able to sell.
Law of demand & supply: the price of any good adjusts to bring the quantity supplied & demanded for that good into balance.

Change in Equilibrium

1)

2) 3)

Sometimes sudden events can cause changes in equilibrium. 3 steps to analyze this change: The event has shifted supply curve or demand curve or both. In which direction the shift is Use the DC and SC to find new equilibrium price & equilibrium quantity.