1. © KHALID AZIZ 2011 Demand, supply and the market

2. © KHALID AZIZ 2011 JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: 0322-3385752 0312-2302870 0300-2540827 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.

3. © KHALID AZIZ 2011 Join khalid aziz FRESH CLASSES ICMAP STAGE 1,2 & 3 FUNDAMENTALS OF FA,COST ACCOUNTING,APPRAISAL & FA INDIVIDUAL & GROUPS

4. © KHALID AZIZ 2011 3 Some key terms Market –a set of arrangements by which buyers and sellers are in contact to exchange goods or services Demand –the quantity of a good buyers wish to purchase at each conceivable price Supply –the quantity of a good sellers wish to sell at each conceivable price Equilibrium price –price at which quantity supplied = quantity demanded

5. © KHALID AZIZ 2011 Catherine’s Demand Schedule The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.

6. © KHALID AZIZ 2011 Figure 1 Catherine’s Demand Schedule and Demand Curve (The demand curve is a graph of the relationship between the price of a good and the quantity demanded.) Copyright © 2004 South-Western Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 0.50 1234567891011 Quantity of Ice-Cream Cones $3.00 12 1. A decrease in price... 2....increases quantity of cones demanded.

7. © KHALID AZIZ 2011 0 D Price of Ice- Cream Cones Quantity of Ice-Cream Cones A tax that raises the price of ice-cream cones results in a movement along the demand curve. A B 8 1.00 $2.00 4 Changes in Quantity Demanded Movement along the demand curve caused by a change in the price of the product.

8. © KHALID AZIZ 2011 Market Demand versus Individual Demand Market demand refers to the sum of all individual demands for a particular good or service. Graphically, individual demand curves are summed horizontally to obtain the market demand curve.

9. © KHALID AZIZ 2011 8 The Demand curve shows the relation between price and quantity demanded holding other things constant “Other things” include: –the price of related goods –consumer incomes –consumer preferences Changes in these other things affect the position of the demand curve D Quantity Price

10. © KHALID AZIZ 2011 9 Prices of related goods and Effect on Demand Substitute Goods: coffee for tea; train ride for driving your own auto; coal for natural gas If Price of coffee increases then Demand for tea increases Complimentary Goods: tea and sugar; coffee and milk; gas and car; coal and coal heaters If Price of gas increases, then Demand for automobiles decreases

11. © KHALID AZIZ 2011 10 Effect of Consumer Income on Demand: Normal Goods versus Inferior Goods Normal Goods: For normal goods, demand increases when consumer income increases. Most goods are normal goods. Inferior Goods: For inferior goods, demand decreases when consumer income increases. Second-hand cars, second-hand clothing, bus rides (versus driving your own auto or cab rides)

12. © KHALID AZIZ 2011 Ben’s Supply Schedule (The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied.)

13. © KHALID AZIZ 2011 Figure 5 Ben’s Supply Schedule and Supply Curve (The supply curve is the graph of the relationship between the price of a good and the quantity supplied.) Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 1234567891011 Quantity of Ice-Cream Cones $3.00 12 0.50 1. An increase in price... 2.... increases quantity of cones supplied.

14. © KHALID AZIZ 2011 Market Supply versus Individual Supply Market supply refers to the sum of all individual supplies for all sellers of a particular good or service. Graphically, individual supply curves are summed horizontally to obtain the market supply curve.

15. © KHALID AZIZ 2011 14 The Supply curve shows the relation between price and quantity supplied holding other things constant “Other things” include: –technology –input costs –government regulations Changes in these other things affect the position of the demand curve Quantity Price S

16. © KHALID AZIZ 2011 At $2.00, the quantity demanded is equal to the quantity supplied! SUPPLY AND DEMAND TOGETHER Demand ScheduleSupply Schedule

17. © KHALID AZIZ 2011 16 Market equilibrium (1) Market equilibrium is at E 0 where quantity demanded equals quantity supplied D0D0 D0D0 S S Price Quantity Q0Q0 P0P0 E0E0  –with price P 0 and quantity Q 0

18. © KHALID AZIZ 2011 17 Market equilibrium and disequilibrium If price were below P 0 there would be excess demand –consumers wish to purchase more than producers wish to supply D D S S Q0Q0 P0P0 E Price Quantity  P1P1  excess supply P2P2   excess demand If price were above P 0 there would be excess supply –producers wish to supply more than consumers wish to purchase

19. © KHALID AZIZ 2011 18 A shift in demand S S E1E1 Price Quantity If the price of a substitute good decreases... less will be demanded at each price. D0D0 D0D0 E0E0 Q0Q0 P0P0 The demand curve shifts from D 0 D 0 to D 1 D 1. D1D1 D1D1 Q1Q1 P1P1 So the market moves to a new equilibrium at E 1. If price stayed at P 0 there would be excess supply.

20. © KHALID AZIZ 2011 19 A shift in supply D D Q0Q0 P0P0 E0E0 Price Quantity Suppose safety regulations are tightened, increasing producers’ costs S0S0 S0S0 S1S1 S1S1 The supply curve shifts to S 1 S 1 If price stayed at P 0 there would be excess demand Q1Q1 P1P1 E2E2 So the market moves to a new equilibrium at E 2

21. © KHALID AZIZ 2011 20 Two ways in which demand may increase (1) (1) A movement along the demand curve from A to B represents consumer reaction to a price change could follow a supply shift A P0P0 Q0Q0 Quantity Price D B P1P1 Q1Q1

22. © KHALID AZIZ 2011 21 Two ways in which demand may increase (2) (2) A movement of the demand curve from D 0 to D 1 leads to an increase in demand at each price e.g. at P 0 quantity demanded increases from Q 0 to Q 2 : at P 1 quantity demanded increases from Q 1 to Q 3 A B P0P0 Q0Q0 Q1Q1 D0D0 Quantity Price P1P1 C D1D1 F Q2Q2 Q3Q3

23. © KHALID AZIZ 2011 22 A market in disequilibrium Suppose a disastrous harvest moves the supply curve to SS government may try to protect the poor, setting a price ceiling at P 1 which is below P 0, the equilibrium price level The result is excess demand Quantity Price P0P0 Q0Q0 QSQS D S P1P1 E AB P2P2 excess demand QDQD D S RATIONING is needed to cope with the resulting excess demand

24. © KHALID AZIZ 2011 23 Price and quantity changes In practice, we cannot plot ex ante demand curves and supply curves So we use historical data and the supposition that the observed values are equilibrium ones Since other things are often not constant, some detective work is required This is where our theory comes in useful

25. © KHALID AZIZ 2011 24 What, how and for whom The market: –decides how much of a good should be produced by finding the price at which the quantity demanded equals the quantity supplied –tells us for whom the goods are produced those consumers willing to pay the equilibrium price –determines what goods are being produced there may be goods for which no consumer is prepared to pay a price at which firms would be willing to supply

26. © KHALID AZIZ 2011 JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: 0322-3385752 0312-2302870 0300-2540827 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.