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SUPPLY , DEMAND AND THE MARKET PROCESS

Presented By :
Nilesh Gadge MS1112059 Sachin Methree MS1112072 Vicky Mhatre MS1112074 Neelakshi Kushwaha MS1112070

Overview :
Consumer Choice And The Law Of Demand Changes In Demand Versus Changes In Quantity Demanded Producer Choice And The Law Of Supply Changes In Supply Versus Changes In Quantity Demanded How Are Market Prices Determind The Invisible Hand Principle

Consumer Choice And The Law Of Demand

Law Of Demand :
is the inverse relationship between the price of a good and the quantity consumers are willing to purchase.

Market Demand Schedule :


is a table that shows the quantity of a good people will demand at varying prices.

Market Demand Schedule


Cell phone Cell phone service price subscribers
(monthly bill) (millions)

Price
140

(monthly bill)

$ 143 $ 92 $ 73 $ 58 $ 46 $ 41

2.1 7.6 16.0 33.7 55.3 69.2

120
100 80 60 40 0 10 20 30 40 5 0 6 0

Demand
Quantity 7 subscribers) 0
(millions of

Market Demand Schedule


The height of the demand curve shows the maximum price that consumers are willing to pay for that additional unit.
Price
140
(monthly bill)

120
100 80

The height of the curve reflects the consumers valuation of the marginal unit.

Eg : When 16 million units are consumed, the value of 60 the last unit is $73.
40 0 10 20 30 40

Demand
Quantity 5 0 6 0 7 subscribers) 0
(millions of

Consumer Surplus
Price Consumer surplus is the (monthly bill) difference between what the consumer is willing to pay and 140 what they have to pay. 120 The first 17 million subscribers are willing to pay more than $100 for cell phone 100 service. Consumer surplus

Market Price = $100

The area above the actual price paid and below the demand curve represents consumer surplus.

80

60

Demand
Quantity 5 10 15 20 25 30 subscribers)
(millions of

Demand Curve Shifters


The following will lead to a change in demand :
Changes In Consumer Income Change In The Number Of Consumers Change In The Price Of A Related Good Changes In Expectations Demographic Changes Changes In Consumer Tastes And Preferences

Producer Choice And The Law Of Supply

Opportunity Costs
Cost And The Output Of Producers
Producers purchases resources and use them

Economic Cost
The cost of all the resources used to produce goods

Accounting Cost
Often ignores the opportunity costs of the resources owned by the firm

Law of Supply
Market Supply Schedule:
Price
(monthly bill)

The law of supply is

120

Supply

reflected by the shape of the supply curve.


As the price of a

100

good rises producers supply more.

80

60

40 0 10 20 30 40 5 0 6 0

Quantity 7 subscribers) 0
(millions of

Market Supply Schedule


The height of the supply Price (monthly bill) curve at any quantity shows the minimum price 120 necessary to induce producers to supply that unit. The height of the supply 100 curve at any quantity also shows the 80 opportunity cost of producing that unit.

Supply

Here, producers require $73 to induce them to supply the 11 millionth unit while they would require $91 to supply the 18.2 millionth unit.

60

40 0 10 20 30 40 5 0 6 0

Quantity 7 subscribers) 0
(millions of

Producer Surplus
Producer surplus is the difference between the lowest price a supplier will accept to produce the good and the price they actually get .
Price
(monthly bill)

140

Supply

120

Producers are willing to supply the first 17 million units for less than $100.

100

Market price = $100

The area above the supply 80 curve but below the actual market price represents producer surplus. 60 Producer surplus represents the net gains to producers from market exchange.
5

Producer surplus

Quantity 10 15 20 25 30 subscribers)
(millions of

Supply Curve Shifters


The following will cause a change in supply :
Changes In Resource Prices Changes In Technology Elements Of Nature And Political Disruptions Changes In Taxes

How Market Prices Are Determined ?

Market Equilibrium
Demand And Supply Conditions :
Equilibrium will occur where the quantity demanded equals the quantity supplied. With an excess supply present, there will be downward pressure on price to clear the market.
Price ($) 13 12 11 10 9 8 7

D
Quantity

Quantity Quantity Condition Direction in the of pressure Price supplied demanded market on price (dollars) (per day) (per day) 12 10 8 600 550 500 450 550 650

450 500 550 600 650

Excess supply Downward

Quantity supplied = 600 Quantity demanded = 450

Market Equilibrium
With an excess demand present, there will be upward pressure on price to clear the market.
Price ($)

S
13 12 11 10 9 8 7

D
Quan -tity 450 500 550 600 650

Quantity Quantity Condition Direction in the of pressure Price supplied demanded market on price (dollars) (per day) (per day) 12 10 8 600 550 500

>

450 550 650

Excess supply Downward

Quantity supplied = 500 Quantity demanded = 650

Excess demand

Upward

Market Equilibrium
Price ($)

With market balance present, there will be an equilibrium present and the market will clear.

13 12 11 10 9 8 7

D
Quan tity 450 500 550 600 650

Quantity Quantity Condition Direction in the of pressure Price supplied demanded market on price (dollars) (per day) (per day) 12 10 8 600 550 500

> <

450 550 650

Excess supply Downward Balance Equilibrium Excess demand Upward

Quantity supplied = 550 Quantity demanded = 550

Market Equilibrium
Price ($)

S
Excess supply Equilibrium price Excess demand

Excess Supply Excess Demand Equilibrium Price

13 12 11 10 9 8 7

D
Quantity

Quantity Quantity Condition Direction 450 500 550 600 650 in the of pressure Price supplied demanded market on price (dollars) (per day) (per day) 12 10 8 600 550 500

> = <

450 550 650

Excess supply Downward Balance Equilibrium Excess demand


Upward

Net Gains To Buyers And Sellers


Consumer Surplus +
Producer Surplus = Net Gains To Buyers And Sellers
Price
140
(monthly bill)

Net gains to buyers and sellers

120

Supply
Market price = $100 Equilibrium

When Equilibrium Is
Present, All Of The Potential Gains From Production And Exchange Are Realized.
100

80

60

Demand
Quantity

(millions of 10 15 20 25 30 subscribers)

Equilibrium and Efficiency


Price
140
(monthly bill)

Price

(monthly bill)

Supply

140

Supply

120

120

100

100

80

80

60

60

Demand
Quantity

Demand
Quantity

(millions of 10 15 20 25 30 subscribers)

(millions of 10 15 20 25 30 subscribers)

Equilibrium and Efficiency


Price

All units valued more

(monthly bill)

than their costs are produced and The potential gains from production and exchange are maximized.

140

Supply

120

100

Outcome is economically efficient.

80

60

Demand
Quantity
5 10 15 20 25 30 subscribers)
(millions of

Effects Of A Change In Demand And Supply

Market Adjustment
Increase In Demand
Price
($ per doz)

Decrease In Supply
Price

S2

($ per lemon)

S1

1.2 0 1.0 0 0.8 0 0.6 0

0.4 0 0.3 0 0.2 D2 0

Q1

Q2

0.1 D1 0 Quantity (million doz


eggs per week)

D
Q2 Q1
Quantity (millions of lemons per week)

The Invisible Hand Principle

The Invisible Hand


Every individual is continually exerting himself to find out the most advantageous employment for whatever capital [income] he can command. It is his own advantage, indeed, and not that of the society which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society.He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention. Adam Smith, The Wealth of Nations (1776)

Invisible Hand Principle


The tendency of market prices to direct individuals pursuing their own self interests into productive activities .

Role Of Market Prices And The Invisible Hand


Communicating Information Converting Actions Of Market Participants ( Buyers And Suppliers ) Motivating Economic Particpants Managing Market Order Activities And Controlling Market Prices

Conclusion
The efficiency of market organization is dependent upon:
The presence of competitive markets. Well-defined and enforced private property rights.