Supply & Demand

Supply & DemandPresentation by: Hareem Rehan Ayesha Zafar

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Contents

MarketDefinition'sLawsHow each are plotted on graphsPrice mechanismEquilibriumA newly issued commodityelasticity

Because we are studying the concept of supply and demand according to the market requirement , we will consider QUANTITY demanded by consumers/buyers and QUANTITY supplied by producers/sellers.NOTE:

What is a Market?Any medium where buying and selling of anything ,be it a commodity or share, takes place. This may be a street market or even online shopping websites or stock exchanges.Consists of consumers/buyers and producers/sellers. In a goods market, money is the medium of exchange and prices are usually determined by the market forces of supply and demand.

Willingness {means desire to} and ability {means having resources to do so} of people4

Obviously where buying and selling takes place, a medium of exchange is required which is generally money. The price {amount of money to be paid} is set by the market forces of demand and supply.5

What is Demand?The willingness as well as the presence of ability to buy a commodity is DEMAND.

Quantity DemandedThe quantity of a certain commodity that buyers were willing and able to buy at a certain price is the QUANTITY DEMANDED.This type of demand is set by consumers. Consumers are the demanding force in a market. Measured after a fixed period of time.

The Law of DemandAccording to human phycology consumers buy more of a good when price decreases and less when price increases as they are concerned with SELF-GAIN.{ No factor influences our decision other than price}

The LAW OF DEMAND hence states thatConsumers demand more quantity of a commodity at a lower price and less of a commodity at a higher price.

DEMAND FOR PETROLPriceQuantity Demanded$106 liters$204 liters$302 liters

Determinants of DEMANDThere are certain factors other than price of a commodity that may influence the quantity demanded. They may cause it to increase or decrease respectively. Hence while drawing demand curves certain considerations as to what causes the quantity to change should be essential. These may influence our analytical graphs as we shall see later. bb

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Determinants of demand

What is supply?The willingness and ability combined of a producer/seller to sell his commodity is supply.

Quantity Supplied The quantity of a certain commodity that sellers were willing and able to buy at a certain price is the QUANTITY SUPPLIED.This type of supply is set by producers. Producers are the supplying force in a market. Measured after a fixed period of time.

The Law of SupplyAs we have discussed that humans are motivated by self-gain, hence people who supply their goods will sell more at an increased price and less at a reduced price. Keeping in mind that no other factor then price influences their decision.

The LAW OF SUPPLY hence states that Producers will supply more of their commodity at a higher price and less at a lower price.

SUPPLY FOR PETROLPriceQuantity Supplied$102 liters$204 liters$306 liters

There are certain factors other than price of a commodity that may influence the quantity supplied. They may cause it to increase or decrease respectively. Hence while drawing supply curves certain considerations as to what causes the quantity to change should be essential. These may influence our analytical graphs as we shall see later. Determinants of SUPPLY

Determinants of Supply

MOVEMENT along these Curves:The points A.B.C indicate a movement along these curves. Occurs only when there is a change in price.Strictly follows the law of demand/supplyThere are 2 kinds of movements: a} extension : when the quantity {demanded/supplied} increases due to respective change in price. b} contraction: when the quantity {demanded/supplied} decreases due to respective change in price.

SHIFTS in these curvesWhen any factory other than price causes the quantity demanded or the quantity supplied to change there is a shift in the curve . A new curve is drawn responding to the change. There is said to be a rise or fall in the quantity: 1. rise} when quantity increases, curve moves to right. 2. fall} when quantity decreases, curve moves to left.

PeDeterminantsTaxes and subsidiesHow is priced

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1. Shift due to Rise

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2. Shift due to Fall

EQUILIBRIUMMarket equilibriumis amarketstate where the supply in themarketis equal to the demand in themarket. Theequilibriumprice is the price of a good or service when the supply of it is equal to the demand for it in themarket. It is the market aim for suppliers and consumers.

Po = EQUILIBRIUM QUANTITYQo = EQUILIBRIUM QUANTUTY

DISEQUILIBRIUMA market situation in which the quantity supplied is unequal to quantity demanded.

QUANTITY SUPPLIED

QUANTITY DEMANDED

THERE ARE 2 DISEQUILIBRIUM SITUATIONS A SURPLUS OR A SHORTAGE.

Shortage can be defined as excessive demand or lack of supply.Surplus can be defined as excessive supply or lack of demand.

Price mechanismElastcity 1. define 2. deterinants 3. formula and calculations and graphsNew industry 33

THE PRICE MECHANISMPrice mechanism refers to the system where the forces of demand and supply determine the prices of commodities and the changes therein. It is the buyers and sellers who actually determine the price of a commodity.Many markets have used this as means of setting prices of commodities.

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ELASTICITY In economics, elasticity refers the degree to which individuals (consumers/producers) change their demand/amount supplied in response to price or income changes.It in general can also be referred to as the percentage change in demand/supply to 1% change in price.

CALCULATING PRICE ELASTICITYPrice Elasticity if DEMAND/SUPPLY {pE} :

pE = % CHANGE IN QUANTITY % CHANGE IN PRICE

% CHANGE IN QUANTITY / PRICE=

Q2 Q1 100 Q1

Types of ElasticityPerfectly inelasticPE = 0Inelastic CurvePE < 1Unitary Elastic CurvePE = 1Elastic CurvePE > 1Perfectly Inelastic CurvePE = ~

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Explaination requires at least 1 diagram

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THE END