Demand, Supply, and

Equilibrium
 On 7th May newspapers The absolute peak crude oil price
reported a negative crude occurred with an average monthly price
future. Why did crude oil of $148.93 a barrel in June 2008. Why
future turn negative?Average onion prices did the average monthly price of
jumpThe country's foreign exchange
fivefold
crude oil reach a peak of $ 148.93 a
to ₹ 101 per kg on 13th reserves
December surged by a massive USD
barrel in June 2008?
According to the Forbes list, Virat 6.47 billion
2019 compared to the price last to touch an all-time high
After learning this chapter, you will be able
Kohli estimated earnings was USD of USD
year. Why did onion prices
21million from endorsements and
513.25 billion in the week
jump
fivefold? ended July 3, 2020 the latest data
to answer the following questions.
USD 4m from salary and winnings,
taking his total tally to USD25m for
from the Reserve Bank of India (RBI)
showed. Why are Indian foreign
the last 12 months. Why was Kohli exchange reserves surging?
paid so much?
To answer the above questions, economic theory helps us
understand the concepts of Demand and Supply systematically

Supply and Demand determine the quantity of each good

produced and and the price at which it is sold. If you want to
know how Covid-19 pandemic lockdown will affect the
economy, you must think first about how it will affect supply
and demand. Before discussing supply and demand, we need to
understand two terms: (a) markets; and (b) competition
 The market for ice creams is not
To an economist, A. Marketsorganized unlike agricultural
Even though it is not organized,
Bharatmatrimony.com, markets. Buyers of ice cream
the group of ice-cream buyers
www.shaadi.com, don’t meet together any one
www.flipkart.com,and areice-cream
markets sellers forms a
time. The sellers of ice cream
• A market is a group
too. of buyers andmarket.
sellers who are trading in a particular
good or service and the rules and arrangementare for
in different
trading. A locations
market mayand
offermarkets
have a specific physical location-like agricultural somewhatwheredifferent
buyers
products.
and sellers meet at specific place. or web based, like NSE and BSE where
buyers and sellers of shares operates during specific time wherever there’s
a computer and an Internet connection.
 B. Competitive Markets
In this chapter, we assume that markets are perfectly competitive. The
characteristics of perfectly competitive markets are as follows:
1. Sellers all sell an identical good or service
2. The buyers and sellers are so large that no single buyer or seller isn’t
powerful enough on his or her own to affect the market price. They are
called price takers.
Perfectly competitive markets are few and rarely exists in the world.
Although perfectly competitive markets are few, many markets are nearly
perfectly competitive.
 We will now explain three very
important concepts in Economics:
Law of Demand and Supply and
Equilibrium Price
 Demand
How do buyers behave?
• The quantity demanded of any good is the amount of the good that buyers
are willing and able to purchase at a given price. If the price of carrot is ₹
100 per kg, you would buy less carrots. You might buy other vegetables. If
the price of carrot falls to ₹ 10, you would buy more. Because the quantity
demanded falls as the price rises, and rises as the price falls. The law of
demand states that quantity demanded is negatively related to price,
other things being equal, when the price of a good rises, the quantity
demanded of the good falls, when the price falls, the quantity
demanded rises.
 Ram’s Demand Schedule Rahul’s Demand schedule Market
Rahul's DemandCurve
Ram's Demand Curve Demand
Price of Quantity Demanded of Quantity Demanded of Carrot in kg Total
120
Carrot Carrot in kg Quantity
Demanded
100 of carrot in
Let us have a demand schedule and demand curve depicting Ram’s and Rahul’s kg
10080
purchase of0 carrots each month at different
0 prices of carrots. The demand 0
Price of Carrot

90schedule shows
1 the quantity 2 at each price. The demand curve,
demanded 3
80 60 2
which graphs the demand schedule, 4shows how the quantity demanded6 of the
70 3 6 9
good
60 40
changes
4
as its price varies. The8
demand curve slopes downward. 12
50 5 10 15
40 20 6 12 18
30 7 14 21
20 00 8 2 5 4 10 16 6 15 8 20 10 24 12
25
10 9 18 27
0 10 Quantity Demanded
20 of Carrot in kg 30
 Market Demand Curve
Market Demand as the Sum of Ram’s and Rahul’s Demands
120
As price of carrot increases the quantity
100 demanded for carrot decreases. As the price
decreases the quantity demand for carrot
Price of Carrot

80 increases. It is the movement along a demand

curve. Movement along the demand curve is
60
due to change in own price, holding all else
40 being held equal. (Ceteris paribus - “all other
things being unchanged or constant”). The term
20 ‘Ceteris Paribus’ is from the Latin language. It is
used in economics to rule out the possibility of
0
0 5 10 15 20 25 30 35 'other' factors changing, i.e. the specific causal
relation between two variables is focused, change
Quantity Demanded of Carrot in kg
in own price and quantity demanded.
 Shifts in the Demand Curve

The demand curve shifts when these factors change:

• Income and wealth
• Tastes and preferences
• Prices of related goods
• Number of buyers
• Expectations
 A. Income and wealth

• What happens to Ram’s and Rahul’s demand for carrot when Rahul and Ram lose their job due to
Covid-19? Their income is likely to fall.
• Lower income → less to spend → lower demand for carrot
• Lower income at given price shift, the demand curve to the left.
• Government provides income support to covid-19 affected families
• Higher income → more to spend → higher demand for carrot
• Higher income at a given price shift, the demand curve to the right
• If the demand for a good falls when income falls, the good is called a normal good. If the demand
for a good rises when income falls, the good is an inferior good. An example of an inferior good
might be a bus ride. As your income falls, you are less likely to buy a car or take a taxi and more
likely to ride a bus.
 B. Prices of related goods
• Suppose that the price of beetroot, close substitute for carrot, falls. The
law of demand says that you will buy more beetroot. At the same time,
you will buy less carrot
• When a fall in the price of one good reduces the demand for another
good, the two goods are called substitutes. Substitutes are often pairs
of goods that are used in place of each other, such as chicken and
mutton, and bus travel and train travel.
• Complements are often pairs of goods that are used together, such as
car and petrol, computers and software, and bread and butter. When
a fall in the price of one good raises the demand for another good, the
two goods are complements.
 C. Tastes and Preferences

• Suppose ICMR announces the research finding that eating carrots

improves the immunity to fight Covid-19. It will increase the demand for
carrot. Demand curve shifts to the right. The quantity demanded will be
more at every price.
 D. Number of Buyers

• When the number of buyers increases, the demand curve shifts right.
When the number of sellers decreases, the demand curve shifts left.
 E. Expectations

• Expectations about future may affect your demand for a good or service
today. If you are expecting carrot prices to go up tomorrow due to
lockdown, you will buy more carrots today it will cause the demand curve
for carrot to shift right now. Similarly, for income, if you are expecting
your income to go up next month, you will buy more good or service now.
The demand curve will shift to right.
 Demand isalong the
Answer
Shift
Prices the
Prices
in
Movement
of
Normalof
following
the demand
chicken
petrol good
goes
questions
up,
curveInferior
willingness
Market
Complementsdemand
Substitutes
demanddue curve and
duecurve
to
goes up, demand
good______________
demand for for
is good_____________
____________
sum of
_____________________
to________________
__________
______________
mutton ______________
cars_______________
 PART II: SUPPLY

• The quantity supplied rises as price rises and quantity supplied falls as
price falls, other things constant. This positive relationship between
price and quantity supplied is called the law of supply.
Gayatri’s Supply Schedule Hema’s Supply Market supply
Schedule
Gayatri's
Price of supply curveSupplied
Quantity of carrot of Hema'sSupplied
Quantity Supply Curve
of of carrot
Total Quantity
Carrot
120 Carrot in kg Carrot
120 in kg Supplied of
100 100 carrot in kg
100 10 20 30
Price of carrot

Price of carrot
80 80
90 9 18 27
80 60 8 16 60 24
70 40 7 14 40 21
60 6 12 18
20 20
50 5 10 15
40 0
0 24 4 6 8 10 12 8 0
0 5 10 15 1220 25
30 3 6 9
Quantity supply of carrot in kg Quantity supply of carrot in kg
20 2 4 6
10 1 2 3
0 0 0 0
Market supply of carrot is the horizontal sum of Gayatri’s and Hema’s
supply of carrot. As price increases the quantity supplied increases.
  120
The movement along the supply curve
100 due to change in own price holding all
else equal. (Ceteris paribus - “all other
Price of carrot

80
things being unchanged or constant”) It
60 is used in economics to rule out the
40
possibility of 'other' factors changing,
i.e. the specific causal relation between
20 two variables is focused, change in own
0
price and quantity supplied.
0 5 10 15 20 25 30 35

Quantity supply of carrot in kg

 Shifts in the Supply Curve

The supply curve shifts when these factors change: 

• Input prices
• Technology
• Number of sellers
• Expectations
 A. Input prices B. Technology
To produce carrots, sellers use Suppose Tamil Nadu Agricultural
various inputs like fertilizer, University develops high yielding carrot
pesticide, labor and hire tractors. seeds; it doubles the carrot output per
When the price of one or more of acre without increase in input cost. By
reducing famers’ production costs per kg,
these inputs falls, producing carrot is
the high yielding carrot technology shifts
more profitable and farmers will
the supply curve of carrot to right. For the
supply more carrot for a given same price farmers will supply more
price. carrot now.
What happens when the price of What happen when Tamil Nadu
one or more input rises? Give your Agricultural University charges a
answer­ higher price for their high yielding
carrot seeds? Give your answer­
 C. Number of sellers D. Technology
More farmers switching from other The amount of carrot a farmer supplies
crops to carrot cultivation will today may depend on its expectations of
increase the number of sellers and the future price of carrot. If a farmer
will cause the supply curve to shift expects the price of carrot to rise in the
next week, he will put some of the
right and more carrot will be
current production in storage and supply
supplied at given price.
less to the market today.
What happens when the number What happens when a farmer expects
of carrot cultivators decline? Give the price of carrot to fall in the
your answer­ following week? Give your answer­­
 Price ofQuantity
Carrot demanded Market
is 21 kgDemand of Market supply of
Quantity supplied is 9 kg
Carrot carrot
0
Shortage of 12 kg of30carrots. 0
Part III Equilibrium Price
Sellers
10
will respond to shortage by increasing
 
27 3
Quantity demanded
their carrot is 15 kglosing sales
prices without
20 24 6
Quantity supplied is 15
quantity demanded kg
30 • The Supply and Demand 21 foriscarrot
6 kg will determine the equilibrium price.
9
MarketAtfor carrot is in equilibrium
quantity supplied
the equilibrium is 24
price, the kg of the good that buyers are willing
quantity
40 18
Excess
and able supply
to buy of 18
exactly the quantity that sellers12are willing and
kg of carrots.
balances
This will
50 force
ablethe suppliers
to sell. to cut the
The equilibrium 15 price.
priceFalling prices, called
is sometimes in turn,the
15 market-clearing
increase
60 theprice
quantity demanded
because, at thisand decrease
price,
12 everyonethe in
quantity supplied.
the market has been
18 satisfied:
Prices continue
Buyerstohave
fall bought
until theallmarket
they reaches
want to the equilibrium
buy, and sellers have sold all they
70 9 21
want to sell.
80 6 24
90 3 27
100 0 30
 Market - Demand and Supply of carrot
120

100
Price of carrot

80

60

40

20

0
0 5 10 15 20 25 30 35

Demand and Supply of Carrot in kg

 Due to technological
Suppose because
progressofthea supply of
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carrot ?
End of PPT