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Price and Quantity Determination
Price and Quantity Determination
DETERMINATION
Dr MONIKA JAIN
THE MARKET FORCES OF
SUPPLY AND DEMAND
2
MARKET
3
DEMAND
Demand indicates how much of a product
consumers are both willing and able to buy
at each possible price during a given
period, other things remaining constant.
4
THE CONCEPT OF DEMAND. . .
P
Quantity Demanded
refers to the amount
(quantity) of a good
that buyers are willing
to purchase at various
prices for a given
period.
Q
DEMAND CURVE FOR
PIZZA a
$15
b
12
c
Price
9
d
6
e
3
D
0
8 14 20 26 32
6
Quantity demanded
DETERMINANTS OF
HOUSEHOLD DEMAND
• The price of the product in question.
• The income available to the household.
• The prices of related products
available to the household.
• The household’s tastes and
preferences.
• The household’s expectations about
future income, wealth, and prices.
• The number and composition of
consumers
7
LAW OF DEMAND
An inverse relationship exists between the
price of a good and the quantity demanded
in a given time period, ceteris paribus.
Reasons:
substitutioneffect
income effect
DEMAND SCHEDULE
DEMAND CURVE
DEMAND CURVE
Modern Approach :
Market demand
13
DEMAND SCHEDULE
14
DEMAND SCHEDULE
Price Quantity Demanded
per Pizza per Week (millions)
a $15 8
b 12 14
c 9 20
d 6 26
e 3 32
15
DEMAND CURVE FOR
PIZZA a
$15
b
Price per pizza
12
c
9
d
6
e
3
D
0
8 14 20 26 32
Millions of pizzas per week
16
MARKET DEMAND CURVE
18
CHANGES IN QUANTITY DEMANDED
Price
$2.00
D
Quantity
7
19
EXTENSION OF DEMAND
Price
$2.00
$1.00
D
Quantity
7 13
20
EXTENSION OF DEMAND
Price
Caused by
a change
$2.00 in Price
$1.00
D
Quantity
7 13
21
CHANGES IN CONSUMER
INCOME
If income ↑, consumers willing and able to
buy more which ↑ demand
Demand curve shifts to the right
Two categories of goods:
Normal goods – demand increases as money
income increases
Inferior goods – demand decreases as money
income increases
Examples: used clothing, bus rides, etc.
22
(SHIFT) INCREASE IN DEMAND
Price
$2.00
D’
D
7 10 Quantity
23
(SHIFT) CHANGE IN DEMAND
Price Caused by
Non-Price
Factors:
$2.00 Income,
Tastes...
D’
D
7 10 Quantity
24
THE IMPACT OF A CHANGE IN INCOME
• Higher income decreases the • Higher income increases the
demand for an inferior good demand for a normal good
EXCEPTION TO LAW OF
DEMAND
Veblen Goods- Goods like diamond etc. where
with an increase in price of the good, Quantity
demanded increases.
Giffen goods
Conspicuous Necessities
Future changes in price
Emergencies
Change in fashion/Brand loyalty
EXCEPTIONS TO THE LAW OF
DEMAND
Quantity
Demanded
VEBLEN GOODS
Goods that some people prefer to buy more
of as their prices increase, as they confer
higher status.
Luxury cars, high-end wines, designer clothes
Quantity
Demanded
SUPPLY
Q
DETERMINANTS OF SUPPLY
Market price
Input prices
Technology
Expectations
Number of producers
CHANGE IN QUANTITY SUPPLIED
VS. CHANGE IN SUPPLY
$2.00
Quantity
3
CHANGES IN QUANTITY SUPPLIED
S
Price
$2.00
$1.00
Quantity
1 3
CHANGES IN QUANTITY SUPPLIED
S
Price
Caused by
a change
$2.00 in Price
$1.00
Quantity
1 3
CHANGE (SHIFT) IN SUPPLY
S S’
Price
$2.00
Quantity
3 6
CHANGE IN SUPPLY
S S’
Price
Caused by
Non-Price
$2.00
Factors:
Technology,
Input Prices
3 6 Quantity
CHANGE IN SUPPLY
Price of S
Ice-
Cream
S S
3
Cone
1
2
Decrease
in Supply
Increase
in Supply
Quantity
0 of Ice-
Cream
SUPPLY AND DEMAND TOGETHER
Equilibrium Price
The price at which the supply and demand curve
intersect.
The state in which market supply and demand balance
each other and, as a result, prices become stable.
Equilibrium Quantity
The quantity at which the supply and demand curve
intersect; that is, Quantity Supplied and Quantity
Demanded are equal.
FORCES OF DEMAND. . .
Price
Quantity
FORCES OF DEMAND AND
SUPPLY. . .
Price
Quantity
FORCES OF DEMAND AND SUPPLY
AT REST
MARKET EQUILIBRIUM
Price
S
$2.00
D
Quantity
7
EQUILIBRIUM VS. DISEQUILIBRIUM CONT’D..
Disequilibrium- if the price or supply of the good is
anywhere but at equilibrium.
2.00
1.50
1.00
0.50 Demand
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
EXCESS SUPPLY
Price of
Ice-Cream
Cone
Supply
Surplus
$3.00
2.50
2.00
1.50
1.00
0.50 Demand
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
EXCESS DEMAND
Price of
Ice-Cream
Cone
Supply
$2.00
$1.50
Shortage Demand
0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of
Ice-Cream Cones