Download Economics demand-supply equilibrium analysis

INTRODUCTION TO ECONOMICS:
DEMAND, SUPPLY, EQUILIBRIUM
PRESENTATION FOR ECONOMICS HONOURS
STUDENTS, SEMESTER I
CONCEPTS:
NATURE OF ECONOMICS



Traditional economic theory has developed along
two concepts; (1) Normative and (2) Positive.
Normative economics focuses on prescriptive
statements, and help establish rules aimed at
attaining the specified goals of business.
Positive economics focuses on description it aims
at describing the manner in which the economic
system operates without staffing how they should
operate.
CONCEPTS:
SCOPE OF ECONOMICS
1.
2.
3.
4.
5.
6.
7.
8.
Microeconomics
Macroeconomics:
International economics
Public finance
Development economics
Health economics
Environmental economics
Urban and rural economics
DEMAND



In economics, demand is the utility for a good or
service of an economic agent, relative to his/her
income.
Demand is a buyer's willingness and ability to
pay a price for a specific quantity of a good or
service.
Demand refers to how much (quantity) of a
product or service is desired by buyers at
various prices.
DETERMINANTS OF DEMAND
1. Income:

Income is one of the factors that affect the
demand for a given product.

Normally, we expect that as one's income rises
(falls), the demand for a product will rise (fall).
This statement is true in case of normal good.

Occasionally, this statement is not true for
some goods. These goods are called inferior
goods; for these goods, as income rises (falls),
the demand for the product falls (rises).
DETERMINANT OF DEMAND (CONTD.)
2. Price of the good:

If the price of a good increases, its demand falls
and if price decreases, demand increases.

So, there is inverse relationship between price
of a commodity and its demand

However, this statement does not hold in case
of Giffen good. In this case, the relationship is
positive.
DETERMINANT OF DEMAND (CONTD.)
3. Price
of
Substitute
Good
and
Complementary good:

Substitutes are different goods that compete
with the one under consideration. Tea and
Coffee are substitutes.

As the price of the substitute rises (falls), the
demand for the product rises (falls).

Complements are goods that are consumed
together. Tea & Sugar are complements.

As the price of the complement rises (falls), the
demand for the product falls (rises).
DETERMINANT OF DEMAND (CONTD.)
4. Tastes or Preferences:
 Tastes or Preferences involves the fact that
there are certain psychological reasons for
liking or disliking a particular good.
 Our principle is: the more (less) we like a good
or service, the greater (less) is our demand for it
DETERMINANT OF DEMAND (CONTD.)
5. Expectations
 The buyer expects the price to rise. If buyers expect
the price to rise (fall), the demand rises (falls) today.
 If one expects that the product will soon be out of
market, the demand will rise.
 If one expects that his income will fall, the demand
for most products will fall.
6. Population
 The last of the factors affecting demand is the
population (number of buyers).
 Therefore, if there are more buyers, there must be
more market demand.
MEANING OF SUPPLY

In economics, supply refers to the amount of a
product that producers and firms are willing to
sell at a given price when all other factors being
held constant.
DETERMINANT OF SUPPLY
1. Number of Sellers
 Greater the number of sellers, greater will be the
quantity of a product or service supplied in a
market and vice versa.

Increase in number of sellers increases supply
and shift the supply curve rightwards whereas
decrease in number of sellers decrease the supply
and shift the supply curve leftwards.
DETERMINANT OF SUPPLY (CONTD.)
2. Technology
 Improvement
in technology enables more
efficient production of goods and services.
 Reducing the production costs and increasing the
profits.
 As a result supply is increased and supply curve
is shifted rightwards.
DETERMINANT OF SUPPLY (CONTD.)
3. Suppliers' Expectations
 Change in expectations of suppliers about future
price of a product or service may affect their
current supply.
 When farmers suspect the future price of a crop
to increase, they will withhold their agricultural
produce to benefit from higher price thus
reducing the supply.
 When manufacturers expect the future price to
increase, they will employ more resources to
increase their output and this may increase
current supply as well.
DETERMINANT OF SUPPLY (CONTD.)
4. Selling Price:
 Selling price is decided after adding certain amount of
profit in the cost. If selling price is increased, the profit
will also increases.
 This increase the profit of the seller, which motivates
to supply more quality .So, increase in selling price
increase the supply of good.
5. Price of Raw Material:
 Price of raw materials directly effects the quality
supplied in the market.
If the prices of raw materials increases, the seller will
produce less amount of goods and consequently, the
quantity of supply gets reduced.
LAW OF DEMAND
 The law of demand states that, all other factors
determining demand remaining constant, as the
price of a product increases, quantity demanded falls
and as the price of a product decreases, quantity
demanded increases.
LAW OF SUPPLY
 The law states that, all other factors determining
supply remaining constant, as the price of a product
increases, quantity demanded falls and as the price
of a product decreases, quantity demanded increases.
EQUILIBRIUM
 When supply and demand are equal (i.e. when the
supply function and demand function intersect) the
economy is said to be at equilibrium.
 At this point, the allocation of goods is at its most
efficient because the amount of goods being supplied
is exactly the same as the amount of goods being
demanded.
EQUILIBRIUM (CONTD.)
 Equilibrium occurs at the point of intersection of
demand and supply curves.
EQUILIBRIUM (CONTD.)



At this point, the price of the goods will be P* and
the quantity will be Q*. These are known as
equilibrium price (P*) and quantity (Q*).
Even if there is deviation from equilibrium, with
time equilibrium will be re-attained.
However, in real markets, equilibrium can never
be reached, so the prices of goods and services are
constantly changing in relation to fluctuations in
demand and supply.