Demand, Supply, and Market Equilibrium

Demand Demand is a schedule or curve showing the amounts of a product that buyers are ready to purchase at each of a series of possible prices during a specific period. The Law of Demand states that, all else equal, as price rises, the quantity demanded declines, and vice versa.

Supply Supply is a schedule or curve showing the amounts of a product that producers will make available for sale at each of a series of possible prices during a specific period. The Law of Supply states that, all else equal, as price rises, the quantity supplied rises, and vice versa.

Supply A curve illustrating the positive, or direct relationship between the price of a product and the quantity supplied of it, other things equal, is the supply curve. It slopes downward to the left (upward to the right) reflect the Demand.

Supply

Market supply is derived from adding the individual supply by the individual producers. Determinants of supply are those factors that cause supply to change. The basic determinants of supply are (1) resources prices, (2) technology, (3) taxes and subsidies, (4) price of other goods, (5) expected prices, and (6) the number of sellers in the market.

Market Equilibrium In competitive markets, buyers and sellers have no control over prices. When buyers and sellers interact in a free competitive market, the equilibrium price and equilibrium quantity is determined by the intersection of the demand and supply curves.

Market Equilibrium The equilibrium price, or market-clearing price, is the price at which the intentions of buyers and sellers match. The equilibrium quantity is the quantity demanded and quantity supplied that occurs at the equilibrium price in a competitive market.

Market Equilibrium Any price above the equilibrium price would create a surplus, or excess supply; quantity supplied exceeds quantity demanded. Surpluses drive prices down to equilibrium. As prices fall, the incentive to produce declines and the incentive for consumers to buy increases.

Market Equilibrium Any price below the equilibrium price would create a shortage, or excess demand; quantity demanded exceeds quantity supplied. Shortages push prices up equilibrium. As prices rise, the incentive to produce increases and the incentive for consumers to buy decreases.

Market Equilibrium

Changes in Demand, Supply, and Equilibrium Changes in Demand When supply is constant, an increase in demand will result in a higher equilibrium price and quantity. If demand falls, equilibrium price and quantity decrease.

Changes in Demand, Supply, and Equilibrium Changes in Supply With a constant demand, if supply increases, equilibrium price falls while equilibrium quantity rises. If supply decreases, equilibrium price rises, and equilibrium quantity falls.

Changes in Demand, Supply, and Equilibrium

Demand and Supply Equilibrium

I want to sell few things, how many of you are willing to purchase

What's wrong with this picture? Sunset is a non-excludable good, in this case non-payers can't be prevented from enjoying them. Other examples of non-excludable goods are national defense, fireworks, and air..

what you see in the pictures Reliance petrol pumps

Reason to shut down Reliance sold petrol at a rate of around Rs.4 costlier than what was available at other petrol pumps.. This is because the other petrol pumps are government subsidized and hence their prices are less. Also, even after selling it Rs.4 costly, Reliance was having a loss of Rs.3 per liter(approximately) on the petrol.

Changes in Demand, Supply, and Equilibrium Complex Cases When both supply and demand change, the effect is a combination of the individual effects. The relative degrees of the change in demand and supply will determine the effect on equilibrium price and quantity. In some cases, the effect is certain; in others the effect depends on the size of the shifts.

Changes in Demand, Supply, and Equilibrium Example: Supply Increases, Demand Decreases CASE 1 CASE 2 S1S1 D1D1 D2D2 S1S1 S2S2 S2S2 D1D1 D2D2 P1P1 P2P2 P1P1 P2P2 Q 1 Q 2 Q 2 Q 1 Price decreases, quantity decreasesPrice decreases, quantity increases

Changes in Demand, Supply, and Equilibrium Change in Supply Change in Demand Change in Price Change in Quantity IncreasesDecreases↓ ↑, ↓, or no change DecreasesIncreases↑ ↑, ↓, or no change Increases ↑, ↓, or no change ↑ Decreases ↑, ↓, or no change ↓

Government-Set Prices In most markets, prices are free to rise or fall with changes in demand and supply. However, sometimes the resulting price in a market is “too high” or “too low”. Government may place legal limits on how high or how low a price or prices may go. High prices may be unfair to buyers whereas low prices may be unfair to sellers.

Price Ceiling If the price of a product is unfairly high, the government can set a price ceiling, or a legal maximum price a seller may charge for a product. This purportedly enables consumers to obtain some “essential” good or service that they could not afford at the equilibrium price; however, it also creates a shortage of the good.

Price Ceiling Example

Example of price ceiling Drug price control order (DPCO) Impact: Pharma cos growth suffers for drugs under price ceiling AIOCD-AWACS analysis shows industry has de-grown 2.2% in DPCO category of drugs during July Article from business standard.

Price Floor When the price of a good or service is “too low”, the government can set a price floor, or a minimum fixed price that sellers can charge. The goal is to provide a sufficient income for certain groups of resource suppliers, or producers who would otherwise receive very low incomes at the equilibrium price. However, a surplus of the good is created. Ex. Agriculture products

Price Floor Example

Consumer Surplus: The value consumers get from a good but do not have to pay for.

I got a great deal! That company offers a lot of bang for the buck! Total value greatly exceeds total amount paid. Consumer surplus is large.

I got a lousy deal! That car dealer drives a hard bargain! I almost decided not to buy it! They tried to squeeze the very last cent from me! Total amount paid is close to total value. Consumer surplus is low.

Q.- Examine the effects of following on demand and supply curves and on equilibrium price and output of agricultural sector. (Draw Diagrams) 1. Bumper crops 2. Subsidy on fertilizers 3. Crop restriction program

Case 1

Case 2 The subsidy on fertilizer will not bring any subsequent effect on the prices of the final produce, as the quantity of produce will be decided by the weather, and if it affects, it will only affect the price by very less %. The prices will be reduced slightly, like for example may by less than 1%.

Case 3- Solution How can crop restriction help farmers? We can use the paradox of the bumper crop to explain this. Suppose the government requires every farmer to reduce the particular production. This will move the supply curve up and towards the left. Because the demand for food is inelastic, crop restrictions not only raise the price of crops, but also tend to raise the farmers revenues. As opposite to the case of bumper harvest, (as it hurts the farmers incomes) crop restrictions raise the farmers incomes. Ofcourse customers are hurt by the crop restrictions and higher prices. (as in case of flood)

Effect of crop restriction

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