UNIT 3

Dr. Shreya Biswas

 SupplySchedule
Supply Scheduleand
andSupply
SupplyCurve
Curve
Market Schedule – A table showing quantity supplied of a
commodity for a given period of time.

Market Supply Curve – When the schedule is plotted on a

graph then we can obtain the market supply curve.
 Table 3.1

Market Supply Schedule for Brown Bread

Quantity Supplied per day
Price per Packet
(million packets)
20 14
15 10
10 6
7.5 4
5 2

4
Supply Schedule and Supply Curve

Market Supply Schedule for

Brown Bread
Quantity
Price per Supplied per
Packet day (million
packets)
20 14
15 10
10 6
7.5 4
5 2

5
 Prices of
Resources
C
o
n
Price of the Supply of a
s
Commodity Commodity Technology t
(Px) a
n
t
Favorable
Weather
Condition
Changes in Supply

7
What is increase in supply?

Shift from S to S’ is increase in supply. Thus if the entire

supply curve shifts to the right due to a positive externality
caused by the factors held constant.

What is increase in quantity supplied?

It is a movement on the same supplied curve.

 When is a Market in
Equilibrium?

A market is in equilibrium when demand is equal

to supply.
P(₹)
S
20 B H

Surplus
15 C K

10 E

7.5 N R

5 R G
Shortage
2.5 U
D
0
2 4 6 8 10 12 14 Q
 Table 3.2

Market Supply Schedule, Demand Schedule, and Equilibrium for Brown Bread
Quantity Supplied Quantity Demanded Surplus (+) or Pressure on Price
Price per Packet per day (million per day (million Shortage (-)
packets) packets)
20 14 2 12 Downward

15 10 4 6 Downward

10 6 6 0 Equilibrium

7.5 4 7 -3 Upward

5 2 8 -6 Upward

11
 Equilibriumisiswhen
Equilibrium whensupply
supplyisisequal
equaltotodemand
demand

ItItisisthe
thecondition
conditionthat
thatonce
onceachieved,
achieved,tends
tendstotopersist
persistinintime
time
providedbuyers
provided buyersandandsellers
sellersdodonot
notchange
changetheir
theirbehavior.
behavior.
 Adjustment to Changes in Demand and Supply: Comparative
Adjustment to Changes in Demand and Supply: Comparative
StaticAnalysis
Static Analysis
 Behaviorofofbuyers
Behavior buyersand
andsellers
sellersdoes
doeschange
changecasing
casinga achange
changeininthethe
demand and
demand and supply
supply curve
curve over
over time.
time. These
These shifts
shifts affect
affect the
the
equilibrium and the analysis of this equilibrium is called comparative
equilibrium and the analysis of this equilibrium is called comparative
staticanalysis.
static analysis.
 AdjustmenttotoChanges
Adjustment ChangesininDemand
Demand
P(₹) L
S
20 B

J
15 C

E
10 E’
F
7.5

5 G

D’
2.5 H
D
0
2 4 6 8 10 12 14 Q
 AdjustmenttotoChanges
Adjustment ChangesininSupply
Supply
P(₹)
S
20 B

S’
15 C

E
10
E’
F
7.5

5 G

2.5 H
M D
0
2 4 6 8 10 12 14 Q
Changes in Demand and Supply of Coffee Prices

19
 Panel A Panel B Panel C
Indian Market for Crude Oil International Trade in Crude Oil Rest of World Market in Crude Oil
PO PO PO
SO
40 40 40
Price of Crude Oil Per Barrel

E
30 30 30
S
Exports
SO
G F E
20 20 20
G' E'
Imports
F'
DO 10
D 10
10

DO
0 0
100 150 200 300 400 500 T 100 150 200 300 400 500 T 0 100 150 200 300 400 500
T

Million Barrels of Crude Oil (O)

 PriceElasticity
Price ElasticityofofDemand
Demand
 PriceElasticity
Price ElasticityofofDemand
Demand

Theresponsiveness
The responsivenessofofthe thequantity
quantitydemanded
demandedofofa acommodity
commoditytotoa a
changeininitsitsprice
change priceisisknown
knownasasprice
priceelasticity
elasticityofofdemand.
demand.
Sometimes, lowering the price of the commodity increases
Sometimes, lowering the price of the commodity increases sales sales
sufficientlytotoincrease
sufficiently increasetotal
totalrevenues.
revenues.AtAtother
othertimes,
times,lowering
loweringthe
the
commodityprice
commodity pricereduces
reducesthe
thefirm’s
firm’stotal
totalrevenue.
revenue.
 Point Price Elasticity of Demand
Point Price Elasticity of Demand
 
 
PriceElasticity
Price ElasticityofofDemand
Demand(E(E P) is given by the percentage change in
P) is given by the percentage change in

quantitydemanded
quantity demandedofofthe thecommodity
commoditydivided
dividedbybythe
thepercentage
percentagechange
changeinin

itsitsprice,
price,holding
holdingconstant
constantallallother
othervariables
variablesininthe
thedemand
demandfunction.
function.

EE P= = .
P= = .

Here = Change in the quantity

Here = Change in the quantity
==Change
Changeininprice
price
/ isnegative
/ is negativebecause
becauseprice
priceand
andquantity
quantitymoves
movesininopposite
oppositedirection.
direction.
Point Price Elasticity of Demand

24
 
In the figure for DX, / = -100/₹1 at every point on DX (since
DX is linear). Therefore the price elasticity at point B is
EP = = . = . = -1() = -5
This means that the quantity
 -1() demanded declines by 5 percent

for every 1 percent increase in price, while holding constant all

other variables in the demand function.
∴ |EP| = 5.
 
Similarly elasticity at other point
Point C; EP = . = -1() = -2 |EP|= 2
Point F; EP = . = -1() = -1 |EP|=1
Point G; EP = . = -1() = -1/2 |EP|=1/2
Point H; EP = . = -1() = -1/2 |EP|=1/5
 ArcPrice
Arc PriceElasticity
ElasticityofofDemand
Demand

Morefrequent
More frequentand
andpopular
popularthan
thanpoint
pointprice
priceelasticity
elasticityofofdemand.
demand.

Why?
Why? InInpoint
pointprice
priceelasticity
elasticityofof
demandwe
demand wewill
willget
getdifferent
different
resultdepending
result dependingupon
uponwhether
whether
theprice
the pricerose
roseororfell.
fell.
 Example
Example
 
In the figure a movement from point C to point F i.e. for a price
decline on the demand curve DX we would obtain
EP = . = . = -2
On the other hand for an increase in price from point F to point
C, we would get
EP = . = . = -1
To avoid this arc price elasticity of demand is used.
 Formulafor
Formula forArc
ArcPrice
PriceElasticity
ElasticityofofDemand
Demand
   
EP = . =.

In the figure a movement from point C to point F i.e. for a price

decline on the demand curve DX we would obtain
   7
EP = . =
 
. = = - 1.4
−5

Similarly a movement from point F to point C i.e. for a price rise on

the demand curve DX we would obtain
     − 7
EP = . = . = 5 = - 1.4
 PriceElasticity,
Price Elasticity,Total
TotalRevenue
Revenueand
andMarginal
MarginalRevenue
Revenue

 
Total Revenue (TR) is equal to price (P) times quantity (Q) i.e.
TR = P.Q
Marginal Revenue (MR) is the change in total revenue per unit change
in output or sales (quantity demanded) i.e.
MR =
 Price Elasticity, Total Revenue and Marginal Revenue
Price Elasticity, Total Revenue and Marginal Revenue

 
With a decline in price, total revenue increases if demand is elastic (i.e.
if > 1); TR remains unchanged if demand is unitary elastic, and TR
declines if demand is inelastic.

Why?
 Price Elasticity, Total Revenue and Marginal Revenue
Price Elasticity, Total Revenue and Marginal Revenue

1. If demand is elastic, a price decline leads to a proportionately

larger increase in the quantity demanded, hence TR increases.
2. If demand is unitary elastic, a decline in price leads to an equal
proportionate increase in quantity demanded, hence TR remains
constant.
3. If demand is inelastic, a decline in price leads to a smaller
proportionate increase in quantity demanded, hence TR decreases.
 Price Elasticity, Total Revenue and Marginal Revenue
1 2 3 4 5
EP
P Q TR = P.Q MR= ΔTR/ΔQ

6 0 -∞ 0 __

5 100 -5 500 5

4 200 -2 800 3

3 300 -1 900 1

2 400 -1/2 800 -1

1 500 -1/5 500 -3

0 600 0 0 -5
33
DX

34
 Important Features

■ TR increases as long as │EP│>1and MR is positive

■ TR is maximum when │EP│=1 and MR is zero

■ TR decreases when │EP│<1 and MR is negative.

 
Relationship between Marginal Revenue (MR), Price (P) and Price
Elasticity (EP)
MR = P (1 + )
 Factors Affecting Price Elasticity of Demand

Availability of
Substitutes

Price Elasticity of
Demand (EP) Response
Time

Narrow or Broad
Definition of the
Commodity
 IncomeElasticity
Income ElasticityofofDemand
Demand
 IncomeElasticity
Income ElasticityofofDemand
Demand(E(EI)I)
 
Income elasticity of demand is the percentage change in the demand for the
commodity divided by the percentage change in income, holding constant all
other variables in the demand function, including price. Like price here too we
have point elasticity of demand. Point income elasticity of demand is given by
EI = = .
Here ∆Q = Change in Quantity, ∆I = Change in Income
Income elasticity of demand measures the shift in demand curve at each price
level.
 ArcIncome
Arc IncomeElasticity
ElasticityofofDemand
Demand(E(EI)I)
 
Arc income elasticity of demand uses the average of the original and the new
incomes and the average of the original and the new quantities. By doing this
the results is the same whether the income rises or falls.
Formula for arc income elasticity of demand:
EI = . = .
Here the subscripts 1 and 2 refer to the original and new levels of income
respectively.
  For essentials
is low. is
between 0
and 1

  ∆Q/ ∆I is
Normal
positive
Goods

  For l is high. is
above 1
 As income
  ∆Q/ ∆I is increases
Inferior negative people buy
Goods less of these
goods
 SoWhere
So WhereisisIncome
IncomeElasticity
ElasticityUsed?
Used?

It is used for demand forecasting.

So the demand of which type of companies/commodities are

impacted by recession and boom?

Companies/Commodities with high income elasticity are more

impacted by recession and boom.
 CrossElasticity
Cross ElasticityofofDemand
Demand
 Cross-PriceElasticity
Cross-Price ElasticityofofDemand
Demand(E(EXYXY) )
 
Cross-price elasticity of demand (EXY) is the responsiveness in the demand for
commodity X to a change in the price for commodity Y, provided commodity Y
is related (complement or substitute) to commodity X. Point cross-price
elasticity of demand is given by
EXY = = .
Here ∆ = Change in Quantity of Commodity X,
∆ = Change in Price of Commodity Y.
 ArcCross-Price
Arc Cross-PriceElasticity
ElasticityofofDemand
Demand(E(EXYXY) )
 
Point cross-price elasticity of demand (EXY) can give different results ,
depending about whether the price of the related commodity (P Y) rises or falls.
The formula for arc price elasticity of demand is:
EXY = . = .
Where subscript 1 and 2 refer to the original and new levels of income
respectively.
 Cross-PriceElasticity
Cross-Price ElasticityofofDemand
Demand(E(EXYXY) )- -Substitutes
Substitutes

If the value of EXY is positive, commodities X and Y are substitutes.

Why
?

An increase in PY leads to an increase in QX as X is substituted for Y in

consumption.
 Cross-PriceElasticity
Cross-Price ElasticityofofDemand
Demand(E(EXYXY) )- -Complements
Complements

If the value of EXY is negative, commodities X and Y are complementary.

Why
?

An increase in PY leads to an increase in QX as X is substituted for Y in

consumption.
 Some Facts about Cross Price Elasticity of Demand

■ The absolute value of EXY measures the degree of substitutability and

complementarity between X and Y.
– Example – If cross price elasticity of demand between coffee and tea is
found to be larger than between coffee and cocoa then this means tea is a
better substitute than cocoa.

■ If EXY is close to zero, X and Y are independent commodities.

■ A high positive cross – price elasticity of demand is used to define an industry,

since it indicates that the commodities are very similar to each other.
Thank You