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The Market ProcessThe Market Process

Concept of DemandConcept of Demand

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DemandDemand Desire backedDesire backed

by purchasingby purchasingpower npower n

willingness towillingness to

part with it atpart with it at

given price andgiven price andtime in thetime in the

market.market.

Axiom of utilityAxiom of utility

maximizationmaximization

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Determinants of DemandDeterminants of Demand

Price of the commodityPrice of the commodity

Income of the consumerIncome of the consumer

Price of related goodsPrice of related goodsa) substitutesa) substitutes

b) complementsb) complements

Consumer preferencesConsumer preferences Future price expectationFuture price expectation

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Law of DemandLaw of Demand

There is inverse relation betweenThere is inverse relation between

the quantity demanded and price ofthe quantity demanded and price of

the commodity given other asthe commodity given other asconstantconstant..

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Quantity Demanded

Price

A

B

02 8

10

20

Demand Curve

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Cause for downward slopingCause for downward sloping

demand curvedemand curve

Diminishing Marginal utilityDiminishing Marginal utility

New consumerNew consumer

Substitution effectSubstitution effect

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Factors that Influence Change inFactors that Influence Change in

DemandDemand

A change in the level of consumerA change in the level of consumerincome.income.

A change in tastes or preferences ofA change in tastes or preferences of

consumers.consumers.

A change in the prices of relatedA change in the prices of related

goods.goods.

A change in buyers expectationsA change in buyers expectations

about future prices.about future prices. A change in population: size and ageA change in population: size and age

composition.composition.

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Shift in Demand Curve

Increase in Demand Extension in Demand

2 8

Price

Price

10 10

5

2 8

A A

B

D1

D2

D1

Quantity Demanded

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Shift in Demand Curve

Decrease in Demand Contraction in Demand

2 8

Price

Price

10 10

5

2 8

A B

A

D2

D1

D1

Quantity Demanded

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SupplySupply

A schedule showing theA schedule showing the

relationship between price andrelationship between price and

quantity supplied, other thingsquantity supplied, other things

being equal, for a specified periodbeing equal, for a specified periodof time.of time.

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Law of SupplyLaw of Supply

At higher prices, a larger quantity willAt higher prices, a larger quantity will

generally be supplied than a lowergenerally be supplied than a lower

prices, all other things held constant.prices, all other things held constant.

Case Study Demand and Supply.docCase Study Demand and Supply.doc At lower prices, a smaller quantityAt lower prices, a smaller quantity

will generally be supplied than atwill generally be supplied than at

higher prices, all other things heldhigher prices, all other things held

constant.constant.

http://case%20study%20demand%20and%20supply.doc/http://case%20study%20demand%20and%20supply.doc/http://case%20study%20demand%20and%20supply.doc/

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Supply RelationshipSupply Relationship

There is a positive, or directThere is a positive, or direct

relationship between the price ofrelationship between the price of

any good or service and theany good or service and the

quantity supplied, holding otherquantity supplied, holding other

factors constant.factors constant.

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Price

02 8

10

20

Supply Curve

A

B

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Factors influencing supplyFactors influencing supply

Expectations of price changesExpectations of price changes

Prices of other goods (substitutesPrices of other goods (substitutes

n complementary)n complementary)

Cost of productionCost of production

Changes in technologyChanges in technology

Uncertain factorsUncertain factors

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Shift in Supply Curve

Increase in Supply Extension in Supply

2 8

Price

Price

10 10

5

2 8Quantity Supplied

A B

A

B

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EQUILIBRIUM PRICEEQUILIBRIUM PRICE

The price mechanism brings theThe price mechanism brings the

forces of demand and supply inforces of demand and supply in

equilibrium and the price atequilibrium and the price at

which these opposite forces arewhich these opposite forces are

at parity, is Equilibrium Price.at parity, is Equilibrium Price.

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Pric

e

Quantity

Q

P

P1

P2

S

D

E

MARKET EQUILIBRIUM

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Elasticity of DemandElasticity of Demand

Percentage change in quantityPercentage change in quantitydemanded due to percentage changedemanded due to percentage change

in determining factor.in determining factor.

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Price ElasticityPrice Elasticity

%% Change in Quantity DemandedChange in Quantity Demanded

% Change in Price of commodity% Change in Price of commodity

1.Point Elasticity=1.Point Elasticity= Lower SegmentLower Segment

Upper SegmentUpper Segment

2. Arc Elasticity=2. Arc Elasticity= Change in Q/ QChange in Q/ Q

Change in P/ PChange in P/ P

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Determinants Of Price ELDeterminants Of Price EL

Availability of substitutesAvailability of substitutes

Nature of need the commodityNature of need the commodity

satisfiessatisfies

Time periodTime period

No. of uses of commodityNo. of uses of commodity

Proportion of income spent onProportion of income spent oncommoditycommodity

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Ep=1

Ep>1

Ep

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ELASTICITYELASTICITY

E=1 Unitary Elastic DemandE=1 Unitary Elastic Demand

E>1 Highly Elastic DemandE>1 Highly Elastic Demand

E

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INCOME ELASTICITYINCOME ELASTICITY

Income elasticity of demandIncome elasticity of demand

%% Change in Quantity DemandedChange in Quantity Demanded% Change in income of household% Change in income of household

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CROSS ELASTICITYCROSS ELASTICITY

Cross elasticity of demandCross elasticity of demand

% C% Chg in quantity demanded of Ahg in quantity demanded of A% Change in price of B% Change in price of B

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ELASTICITY OF SUPPLYELASTICITY OF SUPPLY

The price elasticity of supplyThe price elasticity of supply

indicates the responsiveness ofindicates the responsiveness of

supply to a change in price.supply to a change in price.

%% Change in Quantity SuppliedChange in Quantity Supplied

% Change in Price of commodity% Change in Price of commodity

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Factors affecting El of SupplyFactors affecting El of Supply

Existence of stocks of finishedExistence of stocks of finished

goodsgoods

Availability of laborAvailability of labor

Availability of raw materialAvailability of raw material

Barriers to entry in marketBarriers to entry in market

Time scaleTime scale

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Elasticity of supply n TimeElasticity of supply n Time

Market periodMarket period

Long runLong run

Secular periodSecular period

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MS LS

SS

D1

D2

P1

P2P2

P3

P4

E

Quantity demanded n supplied