The Market Model

Demands

abilityto purchase a particular commodity

your willingness or
willing but not able not part of thedemand

The Law of Demand States that the higher the price the lowerthe
quantity that will be demanded there is an inverse relationship
between price and quantity demanded
Demand curve downward sloping

price vertical axis

quantity horizontal axis

P Price
clearly influences the quantity
C demanded
750 Ggg
Grue
t i
600 I
l fl
I i
50 770 Q

Other factors influencingdemand

I Income the higher your income thehigher you demand

2Tastes and preferences egDemand for buntcheese increases during Easter

3 prices of other commodities i This depends on whether the goods are

substitutes OR
compliments
Substitutes khat you consume instead of something else
Buller 1Margarine
Eg
Tea Coffee

If the Price of One goes upthe othergoesdown

complements goods that have to be consumed together

Eg left 1 right feet of shoes
Carrots t cabbage

If the price of one goes up the quantity ofthe

other down and that pulls the other one
goes
down

4 Population Themore mouths you have to feed the higher your

demand

5Expectations If you expect prices to go up nextweek you'll

buy the product now That means the demandgoes
up and next week when the price goes up
the demand will fall
 If there is a change in any of the other factorsthere will
be a shift in the demand curve i left or right

If there is a change in the price there will be a movement

in the demand curve
up or down

Increase in income
Shift to rightCnew curve

Distinction between quantity demanded t demand

change in price affects quantity demanded

Change in any other factor affects demand

Supply
The higher the price the higher the quantity that will be
available for sale
The higher the price the more incentivized the seller

Graph upwards sloping because there is a positive

relationship between quantity supplied and price
 ie They move in the same direction
P
supply
750 I curve

f
700
i
I
l l
l l
l l
t
40 to Q

Quantity supplied is affected only by price while supply is

changed by any other factor

Other Factors Influencing Supply

1 Technology Advancement Decline influences the level of supply

2 Nature in the event of a natural disaster

supply decreases
n
Female produces less her time of the month

3 Prices of Other commodities

Substitutes If price goesup demand goes up so the supply
will go down Price of A is relatively more
Valuable than B
Complements if price
goes up demand goes up so the
supply will go up
4 Institutions Eg In Muslim countries women can't drive Not
a part of labour supply
Supplygoes down Level of productivity decreases
Seventh doesn't worksunset tosunset
Day Adventists
Rastafarians

If there is a change in any of these factors there is a shift

to the left or the right of the supply

Decrease in Technology

Supply
Leftward Shift
curve Same as upward shift
K what if the curve was
flatter

Market Model

Any meeting of buyers and sellers

tr t
demand supply
to eliminate i
Prices
go
Shortage Up
Surplus Down
 Excess
supply
p

soo I Prices reflect

relative
600 C EQUILIBRIUM scarcity
yI
1

500
I
I y
l
l
r
li l
l
D
Q Demanded 1 Supplied
Excess Demand
shortage

Equilibrium price 1 Equilibrium quantity equates supply to demand

Disequilibrium when the demand is notequal to the supply

Demand f Supply

Effect of drought on carrots

P S2
S
price A
a I Demand A
l I
I 1 ta
Supply
I l

t l b
I t
Q
 Supply of carrots decrease
Supply curve i
Shift to left lapward or inward

Demand Supply Prices MUST go up

Fish Market in India

P s
a Fish lowers cholesterol
other meat prices 9
p Fish substitute to other meats
y
p i f other meats i Qty Dem f
t I Da Fish Qty Dem F
l
f l Dl
att ft Q
Demand Supply Shortage
prices
go up

Decriminalizing and legalising Ganja

p
5

Tp Sa
I
I k l l

l I
I f D Dz
Q Q Q
Decriminalize Increase demand for ganja small ant
People were using it before
Except People who were afraid to use it
Right
Price Up
shift Becomes More Valuable
Qty Ap

Legalize Supply goes upClarge anti

supply curve shift outward or to the right
Prices Go down

Licence Restrict Supply

Retain Price

Ganja Lucrative
one of best marijuana in the world

Effects of legalizing Effects of Decriminalizing

much
greater

There are three Special cases of markets

Vertical Supply fixed supply

84
om

Perfectly Inelastic
62om
Example Mona Lisa Painting Worth Year
620m US 2016
750M US 2017
51830M US 2018
90Om USft 2019
Quantity fixed at one
Increase in demand Prices are forced
up

Any changes in anything doesn't affect quantity only price

The quantity doesn't

change as price changes

P
unlimited
supply
i 1 horizontal curve
I l
l l
l I
i n l Be Perfectly Elastic
Q
Q Q2

Example The Release of a Movie

AS demand goes up supply can go upCoopies to matchthe

demand
 s
sa Demand is unlimited
horizontal curve
Demand
perfectly Elastic

People can demand as much of something that they want at

a particular price
price
Example World supply of Coffee
change supply level doesn't change price

Can demand be fixed NO If it is there isn't a market

thence there are only three cases

Welfare

CS Consumersurplus
g
p y PS producersurplus
PS f
I
I
d
Producer Surplus Difference between minimum price the seller is
Producer Rent Willing to accept for the product seller's
profit reservation price and the price heactually
receives

Minimum cost more than

likely the cost of production
usually determined by the supply curve where
it cuts the vertical axis

Producer surplus is the area above the supply curve but below
the price

Consumer Surplus Difference between the consumer's reservation

price and the price he actually pays It is
the maximum price he is willing to for
pay
a product
determined
by demand curve where demand
curve cuts the axis
y
TheTotal Welfare gained in an economy
Producer Surplus 1 Consumer surplus
What is the optimality of the equilibrium quantity
lost
D guarantees us the greatest
surplus
S possible welfare
M
CB
p t y
i
pg l
i Q Greatest possible
l
l l welfare
I I
I D
Q Q Qa
lost surplus not being earned consumer or producer
by
When we produce a quantity that is less than equilibrium qty
we lose welfare

If we produce lower than a we are lowering our welfare

Producers don't
get as much profit as they possibly can

The optimality of the Equilibrium suggests that consumers and producers

will achieve their greatest possible welfare

Units at Qa are not consumed

As long as the demand curve is above the supply curve

D
value Cost
S
 If the supply curve is above the demand curve then cost
S
Valve
L p

Price He Pays Equilibrium Vat

q S Price He's
willing to pay Dcuts y axis
PROD
Price He Sells for Equilibrium Ahh
qq.gg
S cuts axis foot
willing to
Price the's Accept
y
Transactions will take place where value cost
Transactions NEVER take place where cost Value

When Cost 7 Value

CUSTOMER Cost Actual cost
willing to pay
PRODUCER Cost Actual Cost
willing to accept

Optimal price Greatest Possible Welfare

END OF UNIT 3