DEMAND AND SUPPLY

TEAM-C PHANI SIRISHA SUDARSHAN REDDY POOJA MANGAL BHAVESH MOR KAILASH NADEKAR

CONTENTS
A) Introduction Supply and Demand B) Detailed study of Demand Demand Schedule Law of Demand Demand Schedule Demand Curve C) Detailed study of Supply Supply Schedule Law of Supply Supply Curve E) Shifts Vs Movements

F) Effect of Demand and Supply on Price and Quantity

G) Shifts in Demand Curve Causes of Shifts in Demand Curve Demand Shifters Others Factors affecting market demand Substitute and complementary goods H) Shifts in Supply Curve Causes of Shifts in Supply Curve Movements along Supply Curve Effects of changes in Demand on Market Price

D) Markets Equilibrium Changes in Market Equilibrium Excess Demand Excess Supply

SUPPLY AND DEMAND

Supply and demand is an Economic Model of price determination

in a market. The four basic laws of supply and demand are: If demand increases and supply remains unchanged, then it leads to higher equilibrium price and higher quantity If demand decreases and supply remains unchanged, then it leads to lower equilibrium price and lower quantity. If supply increases and demand remains unchanged, the n it leads to lower equilibrium price and higher quantity. If supply decreases and demand remains unchanged, then it leads to higher equilibrium price and lower quantity.

WHAT DOES SUPPLY AND DEMAND ACTUALLY MEAN?

Supply and Demand is perhaps one of the most fundamental

concepts of economics and it is the backbone of a market economy. Demand refers to the amount of a particular economic good or service that a consumer or group of consumers will want to purchase at a given price. The relationship between price and quantity demanded is known as the Demand relationship. Supply represents the total amount of a good or service available for purchase; along with demand, one of the two key determinants of price. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price

LAW OF DEMAND
The law of demand states that, if

all other factors (such as income, tastes and preferences, the price of substitute goods, and the price of complementary goods) remain equal, the higher the price of a good, the less people will demand that good or lower the quantity demanded. The demand relationship curve illustrates the negative relationship between price and quantity demanded and shows Downward Slope.

DEMAND SCHEDULE
The demand schedule is a table which contains values for the price

of a good and the quantity that would be demanded at that price Demand curves are determined by Marginal Utility curves. Two different hypothetical types of goods with upward-sloping demand curves are Giffen goods (an inferior but staple good) and Veblen goods (goods made more fashionable by a higher price). The determinants of demand follow: 1. Income 2. Tastes and preferences 3. Prices of related goods and services 4. Consumers' expectations about future prices and incomes 5. Number of potential consumers

LAW OF SUPPLY
The law of supply

demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied.

SUPPLY SCHEDULE
A supply schedule is a table that shows the relationship between the

price of a good and the quantity supplied. A supply curve is a graph that illustrates that relationship. Supply is determined by Marginal Cost The determinants of supply follow: 1. Production costs, how much a good costs to be produced 2. The technology used in production, and/or technological advances 3. The price of related goods 4. Firms' expectations about future prices 5. Number of suppliers

EQUILIBRIUM
When supply and demand are equal

(i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity.

MARKET EQUILIBRIUM
A situation in a market when the price is such that the quantity that consumers wish to demand is correctly balanced by the quantity that firms wish to supply.

CHANGES IN MARKET EQUILIBRIUM

Excess Supply If the price is set too high, excess supply will be created within the economy and there will be allocative inefficiency. At price P1 the quantity of goods that the producers wish to supply is indicated by Q2. At P1, however, the quantity that the consumers want to consume is at Q1, a quantity much less than Q2.

OTHER CHANGES
Excess Demand Excess demand is created when price is set below the equilibrium price. At price P1, the quantity of goods demanded by consumers at this price is Q2. Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus, there are too few goods being produced to satisfy the wants (demand) of the consumers.

SHIFTS Vs MOVEMENTS
Movements
A movement refers to a

Shifts
A shift in a demand or supply

change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. A movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa.

curve occurs when a good's quantity demanded or supplied changes even though price remains the same. Like a shift in the demand curve, a shift in the supply curve implies that the original supply curve has changed, meaning that the quantity supplied is effected by a factor other than price.

MOVEMENTS
A movement along the Demand curve implies that the demand relationship remains consistent. A movement along the supply curve means that the supply relationship remains consistent.

SHIFTS
A shift in the demand relationship would occur if, for instance, beer suddenly became the only type of alcohol available for consumption. A shift in the supply curve would occur if, for instance, a natural disaster caused a mass shortage of hops; beer manufacturers would be forced to supply less beer for the same price.

EFFECT OF DEMAND AND SUPPLY ON PRICE AND QUANTITY

SHIFTS IN DEMAND CURVE

WHAT IS DEMAND CURVE?

In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity and the amount of it that consumers are willing and able to purchase at that given price.

Demand curves are used to estimate behaviors in competitive markets, and are often combined with supply curves to estimate the equilibrium price (the price at which sellers together are willing to sell the same amount as buyers together are willing to buy, also known as market clearing price) and the equilibrium quantity (the amount of that good or service that will be produced and bought without surplus/excess supply or shortage/excess demand) of that market.

Shift of a demand curve

The shift of a demand curve takes place when there is a change in any nonprice determinant of demand, resulting in a new demand curve. Non-price determinants of demand are those things that will cause demand to change even if prices remain the samein other words, the things whose changes might cause a consumer to buy more or less of a good even if the good's own price remained unchanged. So any circumstance that affects the consumer's willingness or ability to buy the good or service in question can be a non-price determinant of demand. As an example, weather could be a factor in the demand for beer at a baseball game.

Demand shifters
Changes in disposable income Changes in tastes and preferences - tastes and preferences are assumed to be fixed in the short-run. This assumption of fixed preferences is a necessary condition for aggregation of individual demand curves to derive market demand. Changes in expectations.

Changes in the prices of related goods (substitutes and complements)

Population size and composition

Other factors affecting market demand

Some circumstances which can cause the demand curve to shift in include: decrease in price of a substitute increase in price of a complement decrease in income if good is normal goods increase in income if good is inferior goods

SUBSTITUTE AND COMPLEMENTARY GOODS

A substitute is something that can be used INSTEAD of a particular good or service. For example, for dinner, you can substitute beef for chicken and still have a protein component. Theoretically, if price of chicken increases relative to the price of beef, people will buy more beef. Complements are items which are used in conjunction with one another. Peanut butter and jelly are complementary items. Theoretically, if the price of peanut butter goes up, people will buy less peanut butter and less jelly because peanut butter and jelly are typically purchased together.

Some examples illustrating shifts in the Supply and Demand curve

World Wide Shortage of Sugar

WHY DEMAND CURVE GOES FROM LEFT SIDE TO RIGHT SIDE??

1.

2.
3. 4.

5.

Diminishing marginal utility New buyers Income effect Substitution effect Low income groups

EXCEPTION TO THE LAW OF DEMAND

1.

2.
3. 4.

5.
6.

War Depression Giffen paradox Demonstration effect Speculation effect Income demand

Shifts in Supply Curve

The position of a supply curve will change following

a change in one or more of the underlying determinants of supply. For example, a change in costs, such as a change in labour or raw material costs, will shift the position of the supply curve. Any change in an underlying determinant of supply, such as a change in the availability of factors, or changes in weather, taxes, and subsidies, will shift the supply curve to the left or right.

Rising Costs
If costs rise, less can be produced at any given price, and the supply curve will shift to the left.

Falling costs
If costs fall, more can be produced, and the supply curve will shift to the right.

Exception to the law of supply

1.

The law of supply does not apply to the agricultural products whose supply is governed by natural factors.eg.if due to natural calamities the production of wheat is very less , then its supply will not increase inspite of high price.

2.

Sellers will be willing to sell more units of perishable goods although their price may be falling

Factors affecting supply of commodities

1.

2.
3. 4.

5.

Commodity price Prices of related goods Prices of all other goods Number of firms Change in technology