1. D B   Shortage  P B  until D B = S B D B > S B  S B   D B  Goods market D L   Shortage  P L  until D L = S L D L > S L  S L   D L  Factor market where ‘B’ stands for bicycles where ‘L’ stands for labor

2. Introductory Economics Lecture 3

3. Summing UP

4. Factor market S c   Surplus  P c  until D c = S c D c < S c  D c   S c  Goods market S i   Surplus  P i  until D i = S i D i < S i  D i   S i  where ‘i’ stands for iron where ‘c’ stands for cars

5. LAW OF DEMAND As the price of a good increases, its quantity demanded falls; as the price of a good falls, its quantity demanded increases In other words: The “price effect” on quantity demanded is negative (i.e. Q d moves in the opposite direction of the price change) As the price of a good increases, its quantity demanded falls; as the price of a good falls, its quantity demanded increases In other words: The “price effect” on quantity demanded is negative (i.e. Q d moves in the opposite direction of the price change)

6. Price effect = Income effect The effect of a change in price on quantity demanded arising from the consumer becoming better or worse off as a result of the price change The effect of a change in price on quantity demanded arising from the consumer switching to or from alternative products (substitutes) + Substitution effect

7.  6.6 kg of wheat OR  20 kg of rice Price of wheat is Rs. 15 / kg Price of rice is Rs. 5 / kg Price of wheat is Rs. 20 / kg Price of rice is Rs. 5 / kg Rs. 100  5 kg of wheat OR  20 kg of rice Rs. 100 If he wants to consume 4 kg of wheat, can he maintain the 1:2?  No. This is known as Income Effect. Price of wheat rises to Rs. 20 per kg One Scenario: He buys4 kg of wheat  Rs 60 8 kg of rice  Rs. 40 Ratio of wheat consumption to rice consumption = 1:2 Given Income Rs. 100

8. Normal and inferior goods Normal goods are those goods where the relationship between income and consumption or Q d is positive. Inferior goods are those goods where the relationship between income and consumption Qd is negative. Example Inferior Good: Margarine Normal Good: Butter As the person becomes richer i.e. his Income goes up he might reduce his expenditure on margarine and spend more on a better quality substitute i.e. butter.

9. One Scenario: He buys3 kg of wheat  Rs 60 8 kg of rice  Rs. 40 Ratio of wheat consumption to rice consumption = 3:8 If expenditure is kept constant, loses 1 kg of wheat. Price of wheat is Rs. 20 / kg Price of rice is Rs. 5 / kg The ratio of wheat consumption to rice consumption has changed from 1:2 to 3:8 This is known as Substitution Effect Given Income Rs. 100

10. Price effect = Income effect + Substitution effect Normal goods : I.E is negative, S.E is negative. Hence P.E is also negative. Inferior goods : If I.E is sufficiently positive, it can overturn the negative S.E to give a positive P.E. In this case increase in Price will also increase the Quantity Demanded (Giffen Goods).

11. Individual and market demand schedules Price (P) $ per Bushel Quantity Demanded by one individual (q) Bushels per month Quantity Demanded in the market* (Q) (Bushels per month) 53.53,500 44.54,500 36.06,000 28.08,000 111.011,000 * There are 1000 identical individuals in the market.

12. Graphical illustration P q d1d1 P q d2d2 P q d3d3 P q d 1000 P D Q P Q D D = d 1 + d 2 + d 3 + d 4 … … … d 1000

13. IncomePrice Qd D PG Shift due to increase in income Movement along demand curve due to fall in price Movement along demand curve due to rise in income Shift due to decrease in price D pG Graphical illustration

14. Factors causing shift in demand curve in PQ space Income Tastes Price of Complimentary Goods Price of Substitutes Income Distribution Future Prices

15. Qd = f ( Pg, T, Ps i … Ps n, Pc i … Pc m, Y, B, Pg e t+1 ) Pg = Price of the good. T = Tastes Ps i … Ps n = Prices of substitute goods. Pc i … Pc m = Prices of complimentary goods. Y = Income B = Income Distribution Pg e t+1 = Future prices. Equation 1 Q d = a – b P Demand function

16. In Q - P space Equation 2B : Q d = 10,000 – 200 P Equation 2A : Q d = 8,000 – 40 P Equation 2C : Q d = 12,000 – 60 P Qd P 40 12000 10000 8000 5060 A`A` B` C`

17. Task for students Graph the income - Q d relationship in QY space and YQ space.