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Mani Govil
The equation explains that the demand is a function of the price of the product.
DEMAND FUNCTION
LAW OF DEMAND
Law of Demand-The consumer buys more unit of the good when the price is low
and fewer units when the price increases. In other words, demand is a negative
function of the price. Graphically, demand is a downward sloping curve labeled
as “D”
Assumptions of the law of demand :
The law is valid only when the following assumptions hold:
(a) The price of the related goods remains the same.
(b) The income of the consumers remains unchanged.
(c) Tastes and preferences of the consumers remain the same. (d) All the units of the goods are
homogeneous.
(e) Commodity should be a normal good..
DEMAND CURVE
The graphical representation of the demand function is called a demand curve. The demand curve
also represents the average revenue function for the product. It is because average revenue is the
same as the price of a product.
The demand curve usually slopes downward from left to the right.
The independent variable (price) is measured along the y-axis and dependent variable (quantity)
is measured along the x-axis. T
If the income of the buyer increases, the consumer will buy more of the same commodity even at
the same price.
A change in the price of a related good or a change in the tastes and preferences of buyers is
likely to have the same effect.
Factors other than price are conceived as demand curve shifters — forces that move the price-
quantity relationship, left or right. Changes in demand imply such shifts of demand curves.
REASONS BEHIND
DOWNWARD SLOPE OF THE
DEMAND CURVE
a)Law of Diminishing Marginal Utility.
b)Substitution Effect.
Substitution effect means with fall in the price of a good, consumer feels a rise in
relative price of other goods, which in turn leads to more demand for the good.
(c) *Income Effect.
(d) New Consumers Creating Demand.
INDIVIDUAL AND MARKET DEMAND CURVE
The individual demand curve for good X is the quantities of good X demanded by one
participant in the market for good X.
The market demand curve for good X includes the quantities of good X demanded by all
participants in the market for good X. The market demand curve is found by taking the horizontal
summation of all individual demand curves.
CHANGE IN QUANTITY DEMANDED (MOVEMENT) VS.
CHANGE IN DEMAND (SHIFT) OF DEMAND CURVE
80 d2
A SHIFT OF DEMAND CURVE VERSUS MOVEMENT
ALONG THE DEMAND CURVE
The shift in the demand curve is caused by factors other than price. This is referred as the change
in demand.
In contrast, change in quantity demanded, is shown by a movement along the curve due to price
changes (keeping other factors constant).
DEMAND EQUATION
Qd = a – b(P)
a = all factors affecting demand other than price (e.g. income, fashion)
1/b = slope of the demand curve. P
P = Price of the good. (an independent variable)
Q P
40 0 Q-ve `Q
38 1
36 2
34 3
32 4
Q=60- 2P
30 5 Q=20-2P
28 6
26 7 60
20
0 20
15
10
D2
D1
Q2 Q1 Q3
Q= 40-2P or P=20-0.5Q
What is the quantity demanded at Rs. 8?
How does the demand curve change when a increases from 40 to 50?
How does the demand curve change when b decreases from 2 to 1?
What happens at b=0 and b= infinity?
What is P intercept?
What is Q intercept?
What is the slope of the equation? 40
What happens to the linear demand curve if income increases/ decreases?
SUPPLY ANALYSIS
Supply of a good in economics means the quantity produced and supplied of the
good per period by its producer-firm(s) at any particular price of the good.
However, supply depends on many things other than the price of the good.
Po
FACTORS AFFECTING SUPPLY CURVE
Just like demand which is effected by internal and external Factors. So is the Supply.
1.Costs of Production
•Cost of Production
Labor
Capital
Raw Materials
Lower costs of production allow a firm to produce more at each price and vice versa i.e the supply curve shifts.
2. Technology
3. Subsidies/ Taxes
Shift of the curve caused by a change in something other than the price of the good would result in a change in Supply. Just like we
described Technology and cost of Production that effect Supply Curve other than Price.
60
SUPPLY EQUATION
-60
60 80
Example of linear supply curve
15
P = 30+ 0.5(Qs) or Q=-60+2P
Shift in slope of supply curve `P Q
Qs P 30
P = 30+ 1.2(Qs) 0 30 35
10 35 40
20 40 45
50
30 45
40 50
50 55
60 60
LAW OF SUPPLY
There is a positive relation between price and quantity supplied.
ASSUMPTIONS
Competitive market
Increase in marginal cost due to diminishing returns
Aim at maximum profits or sales revenue
Technology remains constant
Input prices are constant
QUESTIONS
What happens to the supply curve if non price determinants of supply change?
Show the effect on supply curve if supply equation changes from Qs= -40+30P to
Qs= -20+30P
What will be the new c and d? will the slope change?
If supply equation becomes Qs=-40+50P, what will happen to the slope of the new
curve?
Can you draw the new supply curve?
-40 -20
SHIFT IN THE SUPPLY CURVE
20
MARKET EQUILIBRIUM
When the demand for good X equals the supply of good X, the market for good X is
said to be in equilibrium.
The determination of equilibrium quantity and price, known as equilibrium
analysis
Equilibrium quantity of good X.
The equilibrium price for good X- clearing price
At the higher price P1, a surplus develops, so price falls. (Role of price as an
invisible hand).
At the lower price P2, there is a shortage, so price is bid up.
SHIFTS IN DEMAND AND
SUPPLY CURVES
How to determine the effect of any event:
Q1 D1
Q2 D2
Q2
Q1
S
S2
S
P2
E2 S1
40 E
P1 E1
Q2 5000 Q1
DETERMINATION OF EQUILIBRIUM
PRICE AND QUANTITY
Let us suppose we have two simple supply and demand equations
Qd = 20 – 2P ii.) Suppose a subsidy of Rs.2.
Qs = -10 + 2P new supply eqn: P=0.5Qs+5, P=0.5(20-2P)+3, P=6.5 , Q=7
To find where QS = Qd we put the two equations together
20-2P = -10 + 2P
20+10= 4P
30/4=P
P = 7.5
To find Q, we just put this value of P into one of the equations
Q = 20 – (2×7.5)
Q= 5
Qd = 20 – 2P Qs = -10 + 2P
P Qd QS
0 20 -10
1 18 -8
2 16 -6
3 14 -4
4 12 -2
5 10 0
6 8 2
7 6 4
7.5 5 5
8 4 6
9 2 8
10 0 10
11 -2 12
12 -4 14
PRICE CEILING & PRICE
FLOOR
A price ceiling keeps a price from rising above a certain level (the “ceiling”), while
a price floor keeps a price from falling below a certain level (the “floor”).