for economics students

1. By Dr. Sanchit Dagar
Market & demand

2. Concept of Market
A market is a mechanism by which buyers
and sellers interact to determine the price
and quantity of a good or service
Demand side of the market for a product
refers to all its consumers and the price
they are willing to pay for buying a certain
quantity of a product during a period of
time.

3. The Basic Decision-Making Units
 A firm is an organization that transforms
resources (inputs) into products (outputs). Firms
are the primary producing units in a market
economy.
 An entrepreneur is a person who organizes,
manages, and assumes the risks of a firm, taking
a new idea or a new product and turning it into a
successful business.
 Households are the consuming units in an
economy.

4. The circular flow
of economic
activity
shows the
connections
between firms
and households
in input and
output markets.

5. • Payments flow in the
opposite direction as
the physical flow of
resources, goods,
and services
(counterclockwise).
• Output, or product,
markets are the markets in
which goods and services
are exchanged.
• Input markets are the
markets in which
resources—labor, capital,
and land—used to produce
products, are exchanged.

6. Input Markets
Input markets include:
 The labor market, in which households supply work
for wages to firms that demand labor.
 The capital market, in which households supply
their savings, for interest or for claims to future
profits, to firms that demand funds to buy capital
goods.
 The land market, in which households supply land
or other real property in exchange for rent.

7. Determinants of Household Demand
 The price of the product in question.
 The income available to the household.
 The household’s amount of accumulated wealth.
 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.
A household’s decision about the quantity of a particular output to demand
depends on:

8. Concept of Market
 A market is a mechanism by which buyers and
sellers interact to determine the price and quantity
of a good or service
 Demand side of the market for a product refers to
all its consumers and the price they are willing to
pay for buying a certain quantity of a product during
a period of time.

9. What is Demand???
 Demand is the desire or want backed up by money
 Always related to price and time

10. Statement of Law of Demand
“All other things remaining constant, higher the price
of a commodity, smaller is the quantity demanded
and lower the price, larger the quantity demanded”
Dx = f (Px)

11. Reasons for Inverse Relationship
 Income effect- the decline in the price of a commodity leads to an
equivalent increase in the income of a consumer because he has
to spend less to buy the same quantity of goods. The part of the
money left can be used for buying some more units of commodity.
 For e.g.- suppose the price of mangoes falls from Rs.100/- per
dozen to 50/- per dozen. Then with the same amount of 100/-
you can buy one more dozen, i.e.,2 dozens at Rs. 50/-
 Substitution effect- When the price of a commodity falls, the
consumer tends to substitute that commodity for other commodity
which is relatively expensive.
 For e.g. – Suppose the price of the Urad falls, it will be used by
some people in place of other pulses. Thus the demand will
increase.

12. Assumptions Underlying the Law
 No change in Consumer’s Income
 No change in Consumer’s Preferences
 No change in Fashion
 No change in Price of related goods
 No Expectation of future price changes or
shortages

13. Individual Demand Schedule
Tabular representation of Quantity of a
commodity that an individual is willing and able
to purchase over a given period of time at each
price of the commodity, while holding constant all
other relevant economic variables on which
demand depends.

14. Individual Demand Schedule
Price of Com X
(Rs per kg)
Quantity demanded of
Com X (Qty in kg)
80 2
70 4
60 6
50 10

15. Determinants of Individual Demand
 Income
 Price of Substitute & Complementary products
 Taste & Preferences
 Advertisement
 Expectation regarding future price changes
 Climatic Conditions

16. Market demand Schedule
Tabular representation of Quantity of a
commodity that all individuals are willing and
able to purchase over a given period of time at
each price of the commodity, while holding
constant all other relevant economic variables on
which demand depends.

17. Market Demand Schedule
Price in (Rs) Units of Commodity X Market demanded
per day Demand
by Individuals Total
A B C
4 1 1 3 5
3 2 3 5 10
2 3 5 7 15
1 5 9 10 24

18. Determinants of Market Demand
 Price of Product
 Distribution of Income & wealth
 Community’s Common Habits and Scale of Preferences
 Spending Habits of People
 Growth of Population
 Age Structure and Sex ratio of Population
 Future Expectations
 Level of Taxation
 Fashions
 Climate Conditions
 Customs
 Advertisement

19. Multivariate Demand Function
 Dx = D (Px, Py, Pz, B, W, A, E, T, U)
 Here Dx, stands for demand for item x (say, a car)
 Px, its own price (of the car)
 Py, the price of its substitutes (other brands/models)
 Pz, the price of its complements (like petrol)
 B, the income (budget) of the purchaser (user/consumer)
 W, the wealth of the purchaser
 A, the advertisement for the product (car)
 E, the price expectation of the user
 T, taste or preferences of user
 U, all other factors.

20. Demand equation
 D= a – bP
 Where ‘a’ is constant parameter signifying initial
demand irrespective of price
 ‘b’ represents slope of demand curve
 functional relationship between price and demand,
having minus sign denotes negative function

21. Exceptions to Law of Demand
 Conspicuous consumption –
The goods which are purchased for ‘Snob appeal’ are called as
the conspicuous consumption. For e.g.- diamonds. They are the
prestige goods. They would like to hold it only when they are
costly and rare.
 Speculative market:
in this case the higher the price the higher will be the demand. It
happens because of the expectation to increase the price in the
future.
For e.g. shares, lotteries

22. Contd…
 Giffens goods:
It is a special type of inferior goods where the fall in the price
results into the decrease In the quantity demanded. This
happens because of people’s preference for superior
commodity
 Consumer’s Psychological bias:
Many a times consumer judges the quality of a good from its
price. Such consumers may purchase high price goods
because of the feeling of possessing a better quality.
The exceptional demand curve shows a positive relation
between the price and the quantity demanded.

23. The Law of Demand
 The law of demand
states that there is a
negative, or inverse,
relationship between
price and the quantity of
a good demanded and
its price.
• This means that
demand curves slope
downward.

24. Shifts in Demand Curve
 Extension and Contraction of Demand occurs due to
changes in price, other factors remaining constant
 When more of a commodity is purchased with a fall in
price then it is known as extension of Demand and vice
versa
 Refer to movement along same demand curve
 Increase and Decrease in Demand refers to changes in
demand due to factors other than price
 An increase in demand signifies that more will be
purchased at a given price than before .
 Refer to movement from one demand curve to another

25. Shift of Demand Versus Movement Along a
Demand Curve
• A change in demand is not the
same as a change in quantity
demanded.
• In this example, a higher price
causes lower quantity demanded.
• Changes in determinants of
demand, other than price, cause a
change in demand, or a shift of the
entire demand curve, from DA to DB.

26. • When demand shifts to the right,
demand increases. This causes
quantity demanded to be greater
than it was prior to the shift, for
each and every price level.
A Change in Demand Versus a Change in Quantity
Demanded

27. A Change in Demand Versus a Change in Quantity
Demanded
To summarize:
Change in price of a good or service
leads to
Change in quantity demanded
(Movement along the curve).
Change in income, preferences, or
prices of other goods or services
leads to
Change in demand
(Shift of curve).

28. The Impact of a Change in Income
• Higher income decreases the
demand for an inferior good
• Higher income increases the
demand for a normal good

29. The Impact of a Change in the Price
of Related Goods
• Price of hamburger rises
• Demand for complement good
(ketchup) shifts left
• Demand for substitute good (chicken)
shifts right
• Quantity of hamburger
demanded falls

30. Reasons for shifts (increase or decrease
in Demand)
 Changes in Income
 Changes in Taste, habits and Preferences
 Change in Fashions and Customs
 Change in Distribution of Wealth
 Change in Substitutes
 Change in demand for Complementary goods
 Advertisement and Publicity Persuasion
 Change in level of taxation

31. Supply Analysis
 Supply during a given period of time means the
quantities of goods which are offered for sale at
particular prices
 Supply is what seller is able and willing to offer for
sale
 Supply and Stock are related but distinct terms-
Supply comes out of Stock
 Stock determines potential supply
 Stock is outcome of production

32. Determinants of Supply
 Cost of factors of production
 State of Technology
 Factors outside Economic Sphere such as weather
conditions, natural calamities, etc
 Tax and Subsidy

33. Law of Supply
“Other things remaining same , supply of a
commodity rises with a rise in price and falls with a
fall in price”

34. Supply schedule

35. Assumptions :
 Cost of production is unchanged
 Technology is constant
 Govt policies are unchanged
 No change in Transport costs
 No speculation
 Prices of other goods constant

36. Positions: Supply Curve
 Extension and Contraction : refer to change in
supply due to price, other things remaining
same.
 Movement along the supply curve
 Increase and Decrease in Supply: refer to
change in supply due to determinants other
than price
 Shifts in Supply Curve

37. Causes for change in Supply
 Change in Cost of Production
 Supply also depends on Natural Factors
 Change in Technique of Production
 Policies of Government
 Business Combines

38. When market is in Equilibrium?
 Equilibrium price of a commodity is price at which
quantity demanded of commodity equals quantity
supplied and market clears
 Equilibrium is condition which once achieved tends
to persist in time.

39. Equilibrium of Supply and Demand
S
D
E
D&S
Price
Excess
Supply
Excess
Demand

40. Effect of Shift in Supply or Demand
Demand & Supply
shifts
Effect on price
and quantity
If demand rises Demand curve
shifts to right
Both P & Q
increases
If demand falls Demand curve
shifts to left
Both P & Q falls
If supply rises Supply curve
shifts to right
P falls but Q
increases
If supply falls Supply curve
shifts to left
P increases & Q
decreases

41. Simultaneous shifts of Supply and Demand
 New equilibrium price and quantity may be greater
than, equal or even less than initial equilibrium
levels depending on the magnitude and direction of
two curves
 If both D & S shift to right by same amount , the
equilibrium point shifts to right by same amount
and hence equilibrium price remains same.

42. Impact of Excise tax on Price and
Quantity
 An excise is a tax on each unit of commodity
 If collected from sellers tax causes supply curve to
shift upward by the amount of tax
 Result is that consumers purchase a smaller
quantity at a higher price while sellers receive a
smaller net price after payment of tax

43. Impact of Excise tax on Price and
Quantity
D
S0
S1
E0
TaxE1
Q0Q1
T
Po
P1

44. Impact of Rent Control on Housing
Markets
 Rent control is a type of price ceiling or maximum
rent set below equilibrium price that government
use for making rented housing affordable, however
the effect has been opposite ie shortage of
apartments

45. Rent Control create shortages
Shortage
S
D
E
1.2 1.6 2
Millions of Apartments
$1400
Monthly Rent
$1000
$600

46. Quantity Demanded
 Quantity demanded is the amount
(number of units) of a product that a
household would buy in a given time
period if it could buy all it wanted at the
current market price.

47. Demand in Output Markets
 A demand schedule is
a table showing how
much of a given product
a household would be
willing to buy at different
prices.
 Demand curves are
usually derived from
demand schedules.
PRICE
(PER
CALL)
QUANTITY
DEMANDED
(CALLS PER
MONTH)
$ 0 30
0.50 25
3.50 7
7.00 3
10.00 1
15.00 0
ANNA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS

48. The Demand Curve
 The demand curve is a
graph illustrating how
much of a given product
a household would be
willing to buy at different
prices.
PRICE
(PER
CALL)
QUANTITY
DEMANDED
(CALLS PER
MONTH)
$ 0 30
0.50 25
3.50 7
7.00 3
10.00 1
15.00 0
ANNA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS

49. Other Properties of Demand Curves
 Demand curves intersect the
quantity (X)-axis, as a result of
time limitations and
diminishing marginal utility.
 Demand curves intersect the
(Y)-axis, as a result of limited
incomes and wealth.

50. Income and Wealth
 Income is the sum of all households
wages, salaries, profits, interest
payments, rents, and other forms of
earnings in a given period of time. It is a
flow measure.
 Wealth, or net worth, is the total value of
what a household owns minus what it
owes. It is a stock measure.

51. Related Goods and Services
 Normal Goods are goods for which
demand goes up when income is higher
and for which demand goes down when
income is lower.
 Inferior Goods are goods for which
demand falls when income rises.

52. Related Goods and Services
 Substitutes are goods that can serve as
replacements for one another; when the price
of one increases, demand for the other goes
up. Perfect substitutes are identical
products.
 Complements are goods that “go together”; a
decrease in the price of one results in an
increase in demand for the other, and vice
versa.

53. From Household to Market Demand
 Demand for a good or service can be
defined for an individual household, or
for a group of households that make up a
market.
 Market demand is the sum of all the
quantities of a good or service demanded
per period by all the households buying in
the market for that good or service.

54. From Household Demand to Market
Demand
 Assuming there are only two households in the
market, market demand is derived as follows:

55. Supply in Output Markets
• A supply schedule is a table showing how
much of a product firms will supply at
different prices.
• Quantity supplied represents the number of
units of a product that a firm would be willing
and able to offer for sale at a particular price
during a given time period.
PRICE
(PER
BUSHEL)
QUANTITY
SUPPLIED
(THOUSANDS
OF BUSHELS
PER YEAR)
$ 2 0
1.75 10
2.25 20
3.00 30
4.00 45
5.00 45
CLARENCE BROWN'S
SUPPLY SCHEDULE
FOR SOYBEANS

56. The Supply Curve and
the Supply Schedule
• A supply curve is a graph illustrating how much
of a product a firm will supply at different prices.
0
1
2
3
4
5
6
0 10 20 30 40 50
Thousands of bushels of soybeans
produced per year
Priceofsoybeansperbushel($)
PRICE
(PER
BUSHEL)
QUANTITY
SUPPLIED
(THOUSANDS
OF BUSHELS
PER YEAR)
$ 2 0
1.75 10
2.25 20
3.00 30
4.00 45
5.00 45
CLARENCE BROWN'S
SUPPLY SCHEDULE
FOR SOYBEANS

57. The Law of Supply
 The law of supply
states that there is a
positive relationship
between price and
quantity of a good
supplied.
 This means that
supply curves typically
have a positive slope.
0
1
2
3
4
5
6
0 10 20 30 40 50
Thousands of bushels of soybeans
produced per year
Priceofsoybeansperbushel($)

58. Determinants of Supply
 The price of the good or service.
 The cost of producing the good, which in turn
depends on:
 The price of required inputs (labor,
capital, and land),
 The technologies that can be used to
produce the product,
 The prices of related products.

59. A Change in Supply Versus
a Change in Quantity Supplied
• A change in supply is not the
same as a change in quantity
supplied.
• In this example, a higher price
causes higher quantity
supplied, and a move along
the demand curve.
• In this example, changes in determinants of supply, other than price, cause an
increase in supply, or a shift of the entire supply curve, from SA to SB.

60. • When supply shifts to the
right, supply increases. This
causes quantity supplied to
be greater than it was prior to
the shift, for each and every
price level.
A Change in Supply Versus
a Change in Quantity Supplied

61. A Change in Supply Versus
a Change in Quantity Supplied
To summarize:
Change in price of a good or service
leads to
Change in quantity supplied
(Movement along the curve).
Change in costs, input prices, technology, or prices of related goods and
services
leads to
Change in supply
(Shift of curve).

62. From Individual Supply
to Market Supply
 The supply of a good or service can be defined for
an individual firm, or for a group of firms that make
up a market or an industry.
 Market supply is the sum of all the quantities of a
good or service supplied per period by all the firms
selling in the market for that good or service.

63. Market Supply
 As with market demand, market supply is the
horizontal summation of individual firms’ supply
curves.

64. Market Equilibrium
 The operation of the market depends
on the interaction between buyers and
sellers.
 An equilibrium is the condition that
exists when quantity supplied and
quantity demanded are equal.
 At equilibrium, there is no tendency
for the market price to change.

65. Market Equilibrium
 Only in equilibrium is
quantity supplied equal
to quantity demanded.
• At any price level
other than P0, the
wishes of buyers
and sellers do not
coincide.

66. Market Disequilibria
 Excess demand, or
shortage, is the condition
that exists when quantity
demanded exceeds
quantity supplied at the
current price.
• When quantity demanded
exceeds quantity supplied, price
tends to rise until equilibrium is
restored.

67. Market Disequilibria
 Excess supply, or
surplus, is the condition
that exists when quantity
supplied exceeds quantity
demanded at the current
price.
• When quantity supplied exceeds
quantity demanded, price tends to
fall until equilibrium is restored.

68. Increases in Demand and Supply
 Higher demand leads to
higher equilibrium price and
higher equilibrium quantity.
 Higher supply leads to
lower equilibrium price and
higher equilibrium quantity.

69. Decreases in Demand and
Supply
 Lower demand leads to
lower price and lower
quantity exchanged.
 Lower supply leads to
higher price and lower
quantity exchanged.

70. Relative Magnitudes of Change
• The relative magnitudes of change in supply and demand determine the
outcome of market equilibrium.

71. Relative Magnitudes of Change
• When supply and demand both increase, quantity will increase, but
price may go up or down.