You are on page 1of 14

Don Bosco Institute of Technology, Kurla , MUMBAI Dept. of Electronics & Telecommunication Engg.

Lecture -1 Topic: Demand & Supply References:


Refr-4 (Page 66-84) Refr-5 (Page 45-84) http://en.wikipedia.org/wiki/Supply_and_demand http://www.peoi.org/Courses/mic/mic1.html

Topic Details: What is market? A public gathering held for buying and selling merchandise at any place is known as market.. The term market refers to the group of consumers or organizations that is interested in the product, has the resources to purchase the product, and is permitted by law and other regulations to acquire the product. So, we can say that market is consists of two groups, one is potential buyers & the second is potential sellers.

If there is a market there will be two things one is demand and second is supply. than one meaning, but in microeconomics we define it more carefully so that it has only one meaning. Here is the definition: In general use, "Demand" is a word that can have more Definition: Demand Demand is the relationship between price and quantity demanded for a particular good and service in particular circumstances. For each price the demand relationship tells the quantity the buyers want to buy I that corresponding P T N atA OE T L price. The quantity the buyers want to buy at a particular price B YR U is called the Quantity Demanded.E S Can we say that demand & need are two similar terms? No.. To say that a person has a demand for a particular product is to say that the person has money with which to buy and is

(D m n ) e ad

MR E S AKT

P TNI L O E TA SLES ELR (S p ly up )

Industrial Economics & Telecomm Regulation

Don Bosco Institute of Technology, Kurla , MUMBAI Dept. of Electronics & Telecommunication Engg.
willing to exchange the money for the good. People will not demand what they do not want or need, but a want or a need unbaked by purchasing power is not a demand. Most of us have experience living in the market economic system, and that makes economics seem like a common-sense field -- but sometimes that common-sense feel can be deceptive. People sometimes use the term "demand" ambiguously -- as if "demand" were the same thing as need. But it is not. Need without purchasing power will not create effective demand in the marketplace. Economists sometimes stress this point by using the term "effective demand" in place of simple "demand." Demand Relation: "Demand" can be ambiguous in another way. We should not think of "demand" as a particular quantity -- because the quantity that people are willing and able to purchase will change when the price changes. Economics assumes that there is a systematic relationship between the price in the marketplace and the quantity that people are willing and able to buy. This relationship is called "the demand relationship" or, simply "demand." The quantity that people buy at each price is called the "quantity demanded" at that price. We think of the "demand relationship" as a relationship between the price and the quantity demanded. Demand relationship could be described in two ways: 1. Demand Schedule 2. Demand Curve

Demand Schedule: A table that illustrates the alternative quantities of a commodity demanded at different prices. A demand schedule is a simple means of summarizing information about demand price and quantity demanded for a particular good. It is used to highlight the law of demand. It can also be used to derive a demand curve. Example of Demand Schedule:

Industrial Economics & Telecomm Regulation

Don Bosco Institute of Technology, Kurla , MUMBAI Dept. of Electronics & Telecommunication Engg.
The table in this exhibit displays the Shady Valley demand schedule for stuffed Yellow Tarantulas, a cute and cuddly stuffed creature from the Wacky Willy Stuffed Amigos line of collectibles. This table contains three columns. The first contains reference labels A, B, C, etc. for each price-quantity pair. The second is the demand price, ranging from $5 to $50. And the third is the quantity demanded, ranging from 0 to 90 Yellow Tarantulas. This schedule assumes other factors remain unchanged and that the quantities are those demanded during a one year time period.

Demand Curve: A graphical representation of the relation between the demand price and quantity demanded, holding all ceteris paribus demand determinants constant is known as demand curve. A demand curve is commonly derived from a simple demand schedule, such as the one for stuffed Yellow Tarantulas, a cute and cuddly stuffed creature from the Wacky Willy Stuffed Amigos line of collectibles, shown in the left half of the exhibit below. This schedule illustrates the law of demand relation between demand price and quantity demanded. As the demand price increases from $5 to $50, the quantity demanded decreases from 90 to 0 Yellow Tarantulas.

Demand Schedule Curve

Demand

Industrial Economics & Telecomm Regulation

Don Bosco Institute of Technology, Kurla , MUMBAI Dept. of Electronics & Telecommunication Engg.
Notice that, in this example, the demand curve is downward sloping. That's a common-sense point: the higher the price, the less people will want to buy. Economists call this the Law of Demand. Law of demand: The law of demand is an economic law that states that consumers buy more of a good when its price decreases and less when its price increases. Or in other words we can say that Law of demand states that, The amount demanded of a commodity and its price are inversely related, other things remaining constant. That is, if the income of the consumer, prices of the related goods, and tastes and preferences of the consumer remain unchanged, the consumers demand for the good will move opposite to the movement in the price of the good.

Determinants of demand: After having understood the nature of demand and law of demand, it is easy to ascertain the determinants of demand. We have mentioned above that an individual demand for a commodity depends on desire for the commodity and his capability to purchase it. The desire to purchase is revealed by tastes and preferences of the individuals. The capability to purchase depends upon his purchasing power, which in turn depends upon his income and price of the commodity. Since an individual purchases a number of commodities, the quantity of a particular commodity he chooses to purchase depends on the price of that particular commodity and prices of the other commodities, as well as the relative amount of his income, or purchasing power. So, the amount demanded (per unit of time) of a commodity depends upon: 1.) Tastes or preferences of consumers an increased taste in a product increases its demand a decreased taste in a product decreases its demand 2.) Number of consumers in the market (Market Size) more consumers increases a products demand

Industrial Economics & Telecomm Regulation

Don Bosco Institute of Technology, Kurla , MUMBAI Dept. of Electronics & Telecommunication Engg.
fewer consumers decreases a products demand 3.) The money incomes of consumers Superior goods or normal goods As income increases, a superior good's demand increases As income decreases, a superior good's demand decreases Superior goods are most common goods Inferior Goods As income increases, an inferior good's demand decreases As income decreases, an inferior good's demand increases 4.) Prices of related goods Substitute Goods As price of A increases, demand for B increases As price of A decreases, demand for B decreases Example: Nike's and Reeboks Complementary Goods As price of A increases, demand for B decreases As price of B decreases, demand for A increases Example: computers and computer games; gasoline and motor oil 5.) Consumer expectations about the future prices and incomes if consumers expect a price increase in near future, demand increases if consumers expect a price decrease in the near future, demand decreases Shifts in the demand curves: A shift in demand curve takes place when there is a change in any non-price determinants of demand, resulting in a new demand curve. Non-price determinants are those things that will cause demand to change even if price remain unchanged. Changes that increase demand: 1. Increase in price of a substituteD1 2. Increase in income
Price

D2

Shift in demand curve with increased demand: Industrial Economics & Telecomm Regulation
Quantity

Don Bosco Institute of Technology, Kurla , MUMBAI Dept. of Electronics & Telecommunication Engg.
When consumers increase the quantity demanded at a given price, it is referred to as an increase in demand. Increased demand can be represented on the graph as the curve being shifted to the right. At each price point, a greater quantity is demanded, as from the initial curve D1 to the new curve D2 Shift in demand curve with increased demand: If the demand decreases, then the opposite happens: a shift of the curve to the left. If the demand starts at D2, and decreases to D1.
Price

D 21

D2

Definition Supply: The willingness and ability to sell a range of quantities of a good at a range of prices, during a given time period is known as supply. Supply is one half of the market exchange process--the other is demand. This supply side of the market draws inspiration from the limited resources dimension of the scarcity problem. Supply Relation: We also treat supply as a relationship between price and the quantity supplied, & this relation can be explained with1. Supply Schedule 2. Supply Curve Supply Schedule: A table that illustrates the alternative quantities of a commodity supplied at different prices. A supply schedule is a simple means of summarizing information about supply price and quantity supplied for a particular good. It is used to highlight the law of supply. It can also be used to derive a supply curve. Example of supply schedule: The table in this exhibit displays supply schedule for stuffed Yellow Tarantulas, a cute and cuddly Stuffed creature from the Wacky Willy Stuffed Amigos line of collectibles. This table contains three columns. The first contains reference labels A, B, C, etc. for each
Quantity

Industrial Economics & Telecomm Regulation

Don Bosco Institute of Technology, Kurla , MUMBAI Dept. of Electronics & Telecommunication Engg.
price-quantity pair. The second is the supply price, ranging from $5 to $50. And the third is the quantity supplied, ranging from 0 to 9 00 Yellow Tarantulas. Supply Curve: A graphical representation of the relation between the supply price and quantity supplied, holding all supply determinants constant. A supply curve graphically illustrates the law of supply, the direct relation between supply price and quantity supplied for a particular good. It is one half of the standard market model. A demand curve is the other half.

Law of Supply: Law of supply states a direct relationship between supply price and the quantity supplied. This fundamental economic principle indicates that as the price of a commodity increases, then the quantity of the commodity that sellers are able and willing to sell in a given period of time, if other factors are held constant, also increases. This law, while not quite as iron-clad as the law of demand, is quite important to the study of markets. Determinates of Supply: The determinants of demand follow: 1. Income 2. Tastes and preferences 3. Prices of related goods and services: The supply for one good is based on the prices paid for other goods that use the same resources for production. A change in the price of a substitute good (or substitute-in-production) induces sellers to alter the mix of goods purchased. An increase in the price of a substitute motivates sellers to sell more of this good and less of the substitute good. 4. Sellers Expectations: The decision to sell a good today depends on expectations of future prices. Sellers seek to sell the good at the highest possible price. If sellers expect the price to decline in the future, they are inclined to sell more now. If they expect the price to rise in the future, they are inclined to sell less now. 5. Number of Sellers:

Industrial Economics & Telecomm Regulation

Don Bosco Institute of Technology, Kurla , MUMBAI Dept. of Electronics & Telecommunication Engg.
The number of sellers willing and able to sell a good affects the overall supply. With more sellers, there is more supply. With fewer sellers, there is less supply. 6. Production Technology: The information available concerning production techniques affects the ability to supply a good. Technology is what producers know about the ways to combine inputs into the production of outputs. An advance in technology makes it possible to

sell more of a good. A decline in technology means producers can sell less of a good. 7. Cost of production: The prices paid for the use of labor, capital, land, and entrepreneurship affect production cost and the ability to supply a good. If resource prices increase, then production cost is higher and the sellers are inclined to offer less of the good for sale. Shifts in Supply curve: A shift in supply curve takes place when there is a change in any nonprice determinants of supply, resulting in a new supply curve. Non-price determinants are those things that will cause supply to change even if price remains unchanged. Shift in supply curve with increased supply: An increase in supply is a rightward shift of the supply curve. An increase in supply means that for any price, for every price, sellers are willing and able to sell more of the good.

Shift in supply curve with decreased curve: A decrease in supply is a leftward shift of the supply curve. A decrease in supply means that for any price, for every price, sellers are willing and able to sell less of the good.

Industrial Economics & Telecomm Regulation

Don Bosco Institute of Technology, Kurla , MUMBAI Dept. of Electronics & Telecommunication Engg.

Lecture -2 Topic: Equilibrium of Demand & Supply References:


Refr-4 (Page 66-84) Refr-5 (Page 45-84) http://en.wikipedia.org/wiki/Supply_and_demand http://www.peoi.org/Courses/mic/mic1.html

Topic Details: Now that we have introduced the concepts of supply and demand separately -- with illustrative examples, now it is time to move on from analysis to synthesis, and put the two concepts together. What is Equilibrium? A state that exists when opposing forces are in balance, with each force exactly offsetting the other, such that there is no inherent tendency for change. Once achieved, equilibrium persists unless or until it is disrupted by an outside force. Equilibrium is a balance of opposing forces. In the physical world, the opposing forces might be something like positive and negative electrical charges or the north and south poles of a magnet. In the economic world, common forces include that of market demand and market supply. What is equilibrium of demand & supply? In economic theory, the interaction of supply and demand is understood as equilibrium. Price of Corn We may think of demand as a force tending to increase the 5 price of a good, and of supply as a force tending to reduce the price. 4 When the two forces balance one another, the price would neither rise nor fall, but would be stable. This analogy leads us to think of the 3 stable or natural price in a particular market as the "equilibrium" price. This sort of "equilibrium" exists when the
2 1

P $

S
Market Clearing Equilibrium

Industrial Economics & Telecomm Regulation

D Q

7 8

10 12 14 16

Quantity of Corn

Don Bosco Institute of Technology, Kurla , MUMBAI Dept. of Electronics & Telecommunication Engg.
price is just high enough so that the quantity supplied just equals the quantity demanded. If we superimpose the demand curve and the supply curve in the same diagram, we can easily visualize this "equilibrium" price. It is the price at which the two curves cross. The corresponding quantity is the quantity that would be traded in market equilibrium.

Equilibrium price (market-clearing price): the price where the intentions of buyers and sellers are balanced

Quantity Demanded (Qd) = Quantity Supplied (Qs). This is the most efficient allocation of resources. on a graph, it is the intersection of the supply and demand curves changes as a result of a shift in the supply or demand curve competition among buyers and sellers drive prices to the equilibrium price there is a surplus of products when the quantity supplied exceeds the quantity demanded (imagine an overflowing amount of goods on the shelves of stores) 1. occurs when producing above the equilibrium point 2. Often occurs as a result of a price floor, as long as the price floor is set above equilibrium price. there is a shortage of products when the quantity supplied is less than the quantity demanded (imagine that there's nothing on the shelves of stores) 1. Producing below the equilibrium point 2. Often occurs as a result of a price ceiling, as long as the price ceiling is set below equilibrium price.

Equilibrium quantity- the quantity demanded/supplied at the equilibrium price and there is no shortage or surplus of a product (Intersection of the demand and supply curves)

Industrial Economics & Telecomm Regulation

Don Bosco Institute of Technology, Kurla , MUMBAI Dept. of Electronics & Telecommunication Engg.

6 5 4

Surplus

Equilibrium3Price
2 1

Shortage

2 3 4 5 Equilibrium quantity

Changes in Supply, Demand, and Equilibrium Changes in Demand an increase in demand raises both equilibrium price and equilibrium quantity. a decrease in demand reduces both equilibrium price and equilibrium quantity.

Changes in Supply o an increase in supply reduces equilibrium price but increases equilibrium quantity, o a decrease in supply raises equilibrium price, but decreases equilibrium quantity. Supply Increase, Demand Decrease o price drop is even greater than if there was only one change o increase in supply > decrease in demand results in equilibrium quantity increase o increase in supply < decrease in demand results in equilibrium quantity decrease Supply Decrease, Demand Increase o price rise is even greater than if there was only one change o decrease in supply > increase in demand results in equilibrium quantity decrease o decrease in supply < increase in demand results in equilibrium quantity increase Both Supply and Demand Increase Industrial Economics & Telecomm Regulation

Don Bosco Institute of Technology, Kurla , MUMBAI Dept. of Electronics & Telecommunication Engg.
increase in supply > increase in demand results in equilibrium price decrease o increase in supply < increase in demand results in equilibrium price increase o rise in equilibrium quantity is greater than caused by either change alone Both Supply and Demand Decrease o decrease in supply > decrease in demand results in rise of equilibrium price o decrease in supply < decrease in demand results in fall of equilibrium price o fall in equilibrium quantity is greater than caused by either change alone
o

Application: Government-Set Prices Price Ceilings: A price ceiling is the HIGHEST legal price a seller may charge for a product or service Rationale: A price ceiling allows consumers to obtain some "essential" good or service that they could not afford at the equilibrium price because it was too high before. a price above the ceiling is illegal; a price below is not. The government puts a price ceiling on gasoline to keep it affordable to households unable to afford gasoline at the equilibrium price Problems: a price ceiling is below the equilibrium therefore it creates a shortage. An unregulated shortage would mean inequitable distribution of gasoline. Gas Stations must decide how to distribute the short supply of gasoline (first come first serve) rise of a black market prevents usual market adjustment in which competition among buyers bids up price, inducing more production ad rationing some buyers out of market market disequilibrium Solutions: Ration coupons (fixed amounts for every family). Governments can also give subsidies to the producers, shifting supply curve right, and meeting the Qd at the price of the price ceiling. Price Floors: Industrial Economics & Telecomm Regulation

Don Bosco Institute of Technology, Kurla , MUMBAI Dept. of Electronics & Telecommunication Engg.
Price floor - MINIMUM price of a good fixed by the government. Price greater than to the price floor is legal, while a price that is lower than the price floor is illegal. Rationale: Governments set price floors to protect the welfare of certain suppliers by maintaining a higher price and thus maintain a sufficient income. In addition to agricultural price supports, another form of price floor is minimum wage regulations According to the laws of supply and demand. A higher price = more quantity supplied and less quantity demanded, thus creates a surplus in goods How the government deals with the surplus from the price floor o They could restrict supply or increase demand, thereby closing the gap of surplus. o Or they could purchase all the surplus output at market price (i.e. subsidies) Side Effects: Distorted resource allocation/ Inefficiency - too many resources are devoted into the product that could otherwise have satisfied another market of higher demand. Retaliative tariffs - as the government imposes tariffs to keep out imports in order to reduce competition and protect the domestic price floor, foreign countries will impose retaliative tariffs on American imports The government has to manage the surplus of wheat which is not demanded by the consumers; the government has to export wheat to other countries that is short of it or dispose the leftovers. higher taxes to pay for subsidies The government then has to keep getting involved in the economy to right a mistake, and thus lassaizfaire economics will be destroyed. There will always be a surplus because the producers are unable to lower the price to reach equilibrium. Example of Price Floor Wheat farmers have very low incomes So the government decides to intervene and raise the price of wheat, from the market price of $1 per bushel to $3 per bushel Hooray! Now the wheat farmers incomes have rose! Unfortunately, some consumers are no longer willing to buy wheat, and turn to cheaper substitutes Additionally, other farmers attempt to cash in on the increased price of wheat and invest in the wheat growing business

Industrial Economics & Telecomm Regulation

Don Bosco Institute of Technology, Kurla , MUMBAI Dept. of Electronics & Telecommunication Engg.
There is now a surplus of wheat that goes unsold, and some farmers go out of business (although other farmers do benefit) The BEST way to increase wheat farmers' wages is for the government to introduce subsidies to the industry so that the wheat market may be efficient while farmers' incomes increase.

Industrial Economics & Telecomm Regulation

You might also like