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LECTURE NUMBER 3 : MARKET STRUCTURE, DEMAND, SUPPLY AND

EQUILIBRIUM

Part A : DEMAND
Demand :
Demand is an economic principle that describes a consumer's desire and willingness to pay a
price for a specific good or service. An increase in the price of a good or service will
decrease demand, and vice versa. In economics, demand is the quantity of a product or service
that people are willing or able to buy at a certain price, per unit of time. The relationship between
price and quantity demanded is also known as demand curve. Demand is closely related to
supply. While consumers try to pay the lowest prices they can for goods and services, suppliers
try to maximize profits. If suppliers charge too much, demand drops and suppliers do not sell
enough product to earn sufficient profits. In economics, demand is the quantity of a commodity
or a service that people are willing or able to buy at a certain price, per unit of time. The
relationship between price and quantity demanded is also known as demand curve.
Law Of Demand :
When the price of a product increases, the demand for the same product will
fall. This is the natural consumer choice behavior. This happens because a consumer hesitates to
spend more for the good with the fear of going out of cash.

An increase in price will decrease the quantity demanded of most goods. A decrease in price will
increase the quantity demanded of most goods. The inverse relationship between price and
quantity demanded of a good is known as the law of demand and is typically represented by a
downward sloping line known as the demand curve.

In simple language, we can say that when the price of a good rises, people buy less of that good.
When the price falls, people buy more of it, with other things remaining the same.

There is an inverse relationship between the price of a good and demand.


1. As prices fall, we see an expansion of demand.
2. If price rises, there will be a contraction of demand.

Demand = Desire + Ability to pay (i.e., money or purchasing power) + will to spend. Supply and
demand should reach an equilibrium.

Demand Curve : Market

The demand curve is a graphical representation of the relationship between the price of a good or
service and the quantity demanded for a given period of time. In a typical representation, the
price will appear on the left vertical axis, the quantity demanded on the horizontal axis. The chart
below depicts the law of demand using a demand curve, which is always downward sloping.
Each point on the curve (A, B, C) reflects the quantity demanded (Q) at a given price (P). At
point A, for example, the quantity demanded is Q1 and the price is P1.

The law of demand is one of the most fundamental concepts in economics. It works with the law
of supply to explain how market economies allocate resources and determine the prices of goods
and services. The "curve" above is simplified as a straight line, but in fact, the shape of the
curve varies by product.
For example, if the price of corn rises, consumers will have an incentive to buy less corn and
substitute other foods, so the total quantity of corn consumer’s demand will fall. A demand curve
shows the relationship between the price of an item and the quantity demanded over a period.
There are two reasons why more is demanded as price falls :

In microeconomics, the law of demand states that, "conditional on all else being equal, as the
price of a good increases (↑), quantity demanded decreases (↓); conversely, as the price of a good
decreases (↓), quantity demanded increases (↑)". In other words, the law of demand describes
an inverse relationship between price and quantity demanded of a good. Alternatively, other
things being constant, quantity demanded of a commodity is inversely related to the price of the
commodity. The demand curve is delineated as sloping downward from left to right because
price and quantity demanded are inversely related (i.e., the lower the price of a product, the
higher the demand or number of
sales).

The constant "b" is the slope of the demand curve and shows how the price of the good affects
the quantity demanded. The demand curve usually slopes downwards from left to right; that is,
it has a negative association. The negative slope is often referred to as the "law of demand",
which means people will buy more of a service, product, or resource as its price falls.

 Changes In Quantity Demanded : ( Movement Along A Demand Curve )


Quantity demanded is a term used
in economics to describe the total amount of goods or services demanded at any given
point in time. It depends on the price of a good or service in the marketplace, regardless
of whether that market is in equilibrium. A movement along a given demand curve
caused by a change in demand price. The only factor that can cause a change in quantity
demanded is price. Change in quantity demanded refers to change in the quantity
purchased due to increase or decrease in the price of a product. The movement of demand
curve can measure changes in quantity demanded. In other words, Quantity demanded
represents exact quantity (how much) of a good or service is demanded by consumers at a
particular price.

 Factors ( Other ) Affecting Demand :


A shift in the demand curve occurs when the
curve moves from D to D₁, which can lead to a change in the quantity demanded and
price. A shift can be an increase in demand, moves towards the right or upwards, while a
decrease in demand is a shift downwards or to the left. In the diagram below, we see an
increase in Demand. This results in the demand curve shifting from D to D1. This shift
can occur because of any of the determinants of demand mentioned below. Due to this
demand shift, we see an increase in quantity demanded from Q1 to Q2 and an increase in
price from P1 to P2.

An increase or decrease in any of these factors affecting demand will result in a shift in the
demand curve. Depending on whether it is an inward or outward shift, there will be a change in
the quantity demanded and price. A change in price causes a Movement along the Demand
Curve.

Demand Shifter Diagram :


Shifters play an important role in shaping in world’s economy.

Slope Of A Demand Curve :


The demand curve generally slopes downward from left to right. It has a negative slope because
the two important variables price and quantity work in opposite direction. As the price of a
commodity decreases, the quantity demanded increases over a specified period of time, and vice
versa, other, things remaining constant.

Part B : SUPPLY
Supply :
Supply is a fundamental economic concept that describes the total amount of a specific good or
service that is available to consumers.

For Example :
Supply refers to the amount of goods that are available. Demand refers to how many people
want those goods. When supply of a product goes up, the price of a product goes down and
demand for the product can rise because it costs loss.

The Law Of Supply :


It states that other factors remaining constant, price and quantity supplied of a good are directly
related to each other. In other words, when the price paid by buyers for a good rises, then
suppliers increase the supply of that good in the market. Law of supply depicts the producer
behavior at the time of changes in the prices of goods and services. When the price of a good
rises, the supplier increases the supply in order to earn a profit because of higher prices.

The above diagram shows the supply curve that is upward sloping (positive relation between the
price and the quantity supplied). When the price of the good was at P3, suppliers were supplying
Q3 quantity. As the price starts rising, the quantity supplied also starts rising.
For Examples :
When supply of a product goes up, the price of a product goes down and demand for the product
can rise because it costs loss.
Supply and demand should reach equilibrium.

Factors That Effect To The Supply :


Supply refers to the quantity of a good that the producer plans to sell in the market.
 As price increases firms have an incentive to supply more because they get extra revenue
(income) from selling the goods.

 If price changes, there is a movement along the supply curve, e.g. a higher price causes a
higher amount to be supplied.
Movement Along The Supply Curve :

Shifts In The Supply :


This occurs when firms supply more goods – even at the same price.
 Supply Curve :

The graphical representation of the relationship between product price and quantity of
product that a seller is willing and able to supply. Product price is measured on the
vertical axis of the graph and quantity of product supplied on the horizontal axis.

In mathematics, the quantity on the y-axis (vertical axis) is referred to as the dependent
variable and the quantity on the x-axis is referred to as the independent variable.
Supply Curve, is a graphical representation of the direct relationship between the price of
a product or service, and its quantity that producers are willing and able to supply at a
given price within a specific period provided other things such as number of suppliers,
resource prices, technology etc. remain constant. It is important to note that producers
must not only be willing to supply a certain quantity at a given price but they must have
the ability, in the form of production facility or other means, to supply that quantity. The
supply curve is upward sloped showing the direct relationship between the price and the
quantity supplied. Supply curve is used to understand a number of economic concepts
including price ceilings, price floors, consumer and producer surplus, market equilibrium
and market structures.
Best One Good Example :
The supply schedule of a hypothetical product is given below. It shows the quantities supplied
per day at various prices.
Quantity Price

393 8.0

368 7.0

339 6.0
305 5.0

262 4.0

210 3.0

133 2.0

0 1.0

We can already observe the direct relationship between price and quantity supplied. By plotting
the above points in a Cartesian coordinate system and fitting a trend line to the points, we get a
clear depiction of the relationship of price to quantity supplied, as shown below :

Symbols :
 The letter S symbolizes the curve itself (Supply).
 The letter Q symbolizes the X-axis (Quantity).
 The letter P symbolizes the Y-axis (Price).
In a market supply curve :
 The X-axis indicates the quantity of goods.
 The Y-axis indicates the price of goods.
The supply curve slopes upward from left to right.
Connection between the curve and the axes :
Every point on the curve stands for two numbers :
 Quantity (on the X-axis)
 Price (on the Y-axis).

Factors Determining Supply :


Determinants of supply (also known as factors affecting supply) are the factors, which influence
the quantity of a product or service supplied. We have already learned that price is a major factor
affecting the willingness and ability to supply. The price change of a product causes the price-
quantity combination to move along the supply curve. However when the other determinants
change, the supply curve is shifted. The determinants of supply are resource prices, technology,
taxes and subsidies, Government regulations, Expectations and the prices of other goods.
 Change In Quantity Supplied : ( Movement Along A Supply Curve )

A movement along a given supply curve caused by a change in supply price. The only
factor that can cause a change in quantity supplied is price. A related, but distinct,
concept is a change in supply. A change in quantity supplied is the change in the
quantity a company is willing to supply at every price when there has been a change in
the price of the good or service. A supply curve slopes upward because higher prices
result in higher profits and induce suppliers to increase production. Change in quantity
supplied is an increase or decrease for good or service that producers are willing to sell
because of a change in price.

Change In Supply : ( Shift in the Position of the Supply Curve )


A change in supply can occur because of new technologies such as
more efficient or less expensive production processes or a change in the number of competitors
in the market.
 Factors That Cause In Change Of Supply :
When production costs increase, supply decreases; when production costs decrease, supply
increases. Just like change in demand, change in supply actually shifts the supply curve. Six
factors cause a change in supply: input costs, labor productivity, technology, government actions,
producer expectations, and number of producers.

 Quantity Supply :

1. A firm’s quantity supplied of any good is the amount it would choose to produce and
sell at a particular price.
2. When a competitive firm comes to a market as a seller, it wants to make the highest
possible profit.
3. The firm can choose the level of output it wants to produce, but it faces three
constraints: (1) its production technology, (2) the prices it must pay for its inputs,
and (3) the market price of its output.

Part C : EQUILIBRIUM
Market Equilibrium :
Market equilibrium is a market state where the supply in the market is equal to the demand in
the market. The equilibrium price is the price of a good or service when the supply of it is
equal to the demand for it in the market. The intersection of the demand and supply curves is
the equilibrium price. Changes in supply or demand affect the equilibrium price. Equilibrium is
defined as a state of balance or a stable situation where opposing forces cancel each other out
and where no changes are occurring. An example of equilibrium is in economics when supply
and demand are equal. Economic equilibrium is a condition or state in which economic forces
are balanced.

Market equilibrium can be shown using supply and demand diagrams.

In the diagram below, the equilibrium price is Pe. The equilibrium quantity is Qe.
Market equilibrium is a market state where the supply in the market is equal to the demand in
the market. The equilibrium price is the price of a good or service when the supply of it is equal
to the demand for it in the market. If a market is at equilibrium, the price will not change unless
an external factor changes the supply or demand, which results in a disruption of the equilibrium.
Equilibrium is a state of balance in an economy.

In the above figure, DD represents a negatively sloped demand curve and SS denotes a positively
sloped supply curve. The equilibrium occurs at point E. At this point, the supply and demand are
in balance; the equilibrium price OP and the equilibrium quantity OQ are determined. It is a
classic example of stable equilibrium in economics.
Market Structure :
Market :
A market economy is an economic system in which economic decisions and the pricing of
goods and services are guided solely by the aggregate interactions of a country's individual
citizens and businesses. There is little government intervention or central planning. A market is
a location where buyers and sellers meet to exchange goods and services at prices determined by
the forces of supply and demand. Prices in a market are determined by changes in supply and
demand. If market demand is steady, an increase in market supply results in a decline in market
prices and vice versa. If market supply is steady, a rise in demand results in a rise in market
prices and vice versa. These relationships are demonstrated in the following graphs :

Example :
Prices in a market are determined by changes in supply and demand. Producers advertise goods
and services to consumers in a market in order to generate demand. In addition, the term
"market" is closely associated with financial assets and securities prices (for example, the
stock market or the bond market). A market facilitates transactions between buyers and sellers
(financial markets) and producers and consumers (consumer goods and services market).
Markets experience fluctuations and price shifts resulting from changes in supply and demand.

Market Structure :
The Market Structure refers to the characteristics of the market either organizational or
competitive, that describes the nature of competition and the pricing policy followed in the
market. Thus, the market structure can be defined as, the number of firms producing the identical
goods and services in the market and whose structure is determined based on the competition
prevailing in that market. The term “market” refers to a place where sellers and buyers meet and
facilitate the selling and buying of goods and services.

Two basic types are given below :


1. Perfect Competition :

The Perfect Competition is a market structure where a large number of buyers and
sellers are present, and all are engaged in the buying and selling of the identical products
at a single price prevailing in the market.
 Characteristics / Features Of Perfect Competition :

Large number of buyers and sellers : In perfect competition, the buyers and
sellers are large enough, that no individual can influence the price and the
output of the industry.

Free Entry and Exit: Under the perfect competition, the firms are free to enter
or exit the industry. This implies, If a firm suffers from a huge loss due to the
intense competition in the industry, then it is free to leave that industry and
begin its business operations in any of the industry, it wants. Thus, there is no
restriction on the mobility of sellers.

Perfect knowledge of prices and technology: This implies that both the
buyers and sellers have complete knowledge of the market conditions such as
the prices of products and the latest technology being used to produce it.
Hence, they can buy or sell the products anywhere and anytime they want.

Absence of Government and Artificial Restrictions: Under the perfect


competition, both the buyers and sellers are free to buy and sell the goods and
services. This means any customer can buy from any seller and any seller can
sell to any buyer. Thus, no restriction is imposed on either party.
2. Monopoly :

Monopoly is a condition where there is a single seller and many buyers at the market
place. In such a condition, the seller has a monopoly with no competition from others and
has complete control over the products and services. In a monopoly market, the seller
decides the price of the product or service and can change it on his own.

 Characteristics / Features Of Monopoly :

i. Under monopoly, the firm has full control over the supply of a product.

ii. There is a single seller or a producer of a particular product, and there is


no difference between the firm and the industry. The firm is itself an
industry.

iii. The firms can influence the price of a product and hence, these are price
makers, not the price takers.

iv. The demand curve under monopoly market is downward sloping, which
means the firm can earn more profits only by increasing the sales, which
are possible by decreasing the price of a product.
Under a monopoly market, new firms cannot enter the market freely due
to any of the reasons such as Government license and regulations, huge
capital requirement, complex technology and economies of scale. These
economic barriers restrict the entry of new firms.

Important Note :
For These, Please Refer To The Lecture Slides.

 Monopoly Goals And Constraints :


 Profit Maximization And Price Determination :
 Monopoly Profit And Loss :

 Goals And Constraints To Competitive Firms :


 Profit Maximization :
 Profit And Loss :