Presented by

Amrendra kumar
V



 uman Wants
 Goods are priced because of their usefulness;
Usefulness leads to the demand while scarcity leads to
its supply. Therefore the interaction of demand and
supply is the point where the prices of goods is
determined.

 Human Wants : The basis of all economic activities is

the existence of human wants and the process of
fulfillment of this want is where all economic activities
start.

 Definition of Human Want :

 Desire is the wish to have something. But µwant¶ is an
effective desire for a particular thing, which can be
satisfied by making an effort to acquire it.

÷
 uman Wants
 Three elements that make a desire, an effective
desire or a want
 (i) willingness
 (ii) resources for fulfilling the desire and
 (iii) willingness to part with the resource to
fulfill that desire

 In other words it is the want-effort-satisfaction

which forms the subject matter of economics

Ô
 eatures of uman Wants
Slassification of Human Wants : Necessities, Somfort and
Luxuries.

Features :
 ¯. Unlimited Wants
 2. Some wants are complementary
 3. A single want is satiable
 4. Substitutability of Wants
 5. Wants are competitive
 6. Wants multiply
 7. Wants re-occur
 8. Some wants can be postponed
 9. Wants differ in urgency and intensity
u
 emand
˜eaning and Definition of Demand
 According to Benham: ³The demand for anything, at a
given price, is the amount of it, which will be bought per
unit of time, at that price.´

 According to Bobber, ³By demand we mean the various

quantities of a given commodity or service which
consumers would buy in one market in a given period of
time at various prices.´

 Requisites:
a. esire for specific commodity.
b. Sufficient resources to purchase the desired commodity.
c. Willingness to spend the resources.
d. Availability of the commodity at
e. (i) Certain price (ii) Certain place (iii) Certain time.
ô
 inds of emand
1. Individual demand
2. Market demand
÷. Income demand
- emand for normal goods ( income +ve)
- emand for inferior goods (eg, coarse grain)
Ô. Cross demand
- emand for substitutes or competitive goods (eg. tea & coffee,
bread and rice)
- emand for complementary goods (e.g. pen & ink)
u. Joint demand (same as complementary, eg, pen & ink)
ô. Composite demand (eg, coal & electricity)
. irect demand (eg, ice-creams)
8. erived demand (eg, TV & TV mechanics)
9. Competitive demand (eg, desi ghee and vegetable oils)
10. emand of unrelated goods

 actors etermining emand
‡ rice of the commodity ± Normally there is an inverse
relationship between the price of the commodity and
the quantity demanded. (x)
‡ (ii) Income of the Sonsumer ± Determines the
purchasing power of the consumer. Generally, there is
a direct relationship between the income of the
consumer and demand. (Y)
‡ (iii) Sonsumer¶s taste and preference (T)
‡ (iv) rice of related commodities (r)
‡ (v) Sonsumer Expectation (expected change in price)
‡ (v) Distribution of income
‡ (vi) Size and composition of population
‡ (vii) Other Factors e.g., natural calamities

‡ Qdx = f (x, r ,Y , T, D)
8
 Quantity emanded
 Implies a choice
± ow much households would like to buy when they take into
account the opportunity cost of their decisions?
 Is hypothetical
± Makes no assumptions about availability of the good
± ow much would households want to buy, at a specific price,
given real-world limits on their spending power?
 Stresses price
± Price of the good is one variable among many that influences
quantity demanded
± We„ll assume that all other influences on demand are held constant,
so we can explore the relationship between price and quantity
demanded
9
 emand

Relationship between price and

quantity demanded at a given price

î Quantity demanded is the specific

amount of a good that all buyers in the
market would choose to buy over a
given period of time, all other things
remaining the same.
10
The Law of emand

Law of demand states that the

effective demand for a good or
services varies in an inverse
relationship to price. i.e. rices rise
and demand reduces and vice versa
The characteristic shape of the
demand curve is that it normally
falls to the right.

11
 The Law of emand
 If the price of a good rises and everything
else remains the same, the quantity of the
good demanded will fall.
± The words, geverything else remains the
same are important
‡ In the real world many variables change
simultaneously
‡ However, in order to understand the economy we
must first understand each variable separately
‡ Thus we assume that, geverything else remains
the same, in order to understand how demand
reacts to price

12
 The emand Schedule
 emand schedule
± A list showing the quantity of a good that
consumers would choose to purchase at different
prices, with all other variables held constant
 emand vs Quantities demanded
- demand is the entire relationship between price and
quantity
- quantities demanded are specific amount of goods
buyers want to buy

1÷
 emand Schedule
 emand Schedule: a tabular presentation showing different
quantities of a commodity that would be demanded at different
prices.
Types of emand Schedules

Individual Demand Schedule ˜arket Demand Schedule

Shows the various commodities

Shows various that would be purchased at
quantities of a different prices by all the
commodity that buyers of that commodity. It is
would be purchased composed of the demand
at different prices by schedules of all the individuals
a household purchasing that commodity

1Ô
 emand Schedule
 The demand curve slopes downwards from left to right
which indicates that there is an inverse relationship
between price and quantity demanded.

emand Schedules for Apples

Price/kg emand-A emand-B Market(A+B)

î ÷0 Ô ÷ 
î 2u ô u 11
î 20 9 8 1
î 1u 1÷ 12 2u
î 10 1 1u ÷2

1u
 emand Curve
Demand Surves ± A demand curve is
a graphical depiction of the law of
demand. The plotting of the demand
schedule is called the demand curve.
It is the curve showing different
quantities demanded at alternative
prices.

1ô
 The emand Curve

 The market demand curve (or just demand

curve) shows the relationship between the
price of a good and the quantity demanded ,
holding constant all other variables that
influence demand
± Each point on the curve shows the total buyers
would choose to buy at a specific price
 Law of demand tells us that demand curves
virtually always slope downward
1
 igure : The emand Curve





  
Ô


 Ô




 



Ô


 


 




  




Ô







j



  

18
 gShifts vs. gMovements Along
The emand Curve
 Movement along the demand curve
± rom a change in the price of the good we analyze
 In the igure
± A fall in price would cause a movement to the right along the
demand curve (point A to B)

19
 igure : Movements Along and
Shifts of The emand Curve

   
Y
 


   
Y
 






 ©   

20
 igure : A Shift of The emand
Curve


  
 

 !

 



  
















j



  

21
 gShifts vs. gMovements Along
The emand Curve
 Shift of demand curve
± a change in other things than price of the good causes a
shift in the demand curve itself, for example, income
 In the igure
± emand curve has shifted to the right of the old curve
(from igure 1) as income has risen
± A change in any variable that affects demand3except
for the good„s price3causes the demand curve to shift

22
 igure : Movements Along and
Shifts of The emand Curve

d  
"
# a
#
  $
#

%
#

$
# &

$
#    



©   

2÷
 gChange in Quantity emanded vs.
gChange in emand
 Language is important when discussing demand
6 gQuantity demanded means
‡ A particular amount that buyers would choose to buy at a
specific price
‡ It is a number represented by a ë

 on a demand curve
‡ When a change in the price of a good moves us along a
demand curve, it is a change in quantity demand
± The term demand means
‡ The entire relationship between price and quantity
demanded3and represented by the 
 


  
‡ When something other than price changes, causing the entire
demand curve to shift, it is a change in demand

2Ô
 Income: actors That Shift The
emand Curve
 An increase in income has effect of shifting
demand for normal goods to the right
± owever, a rise in income shifts demand for
inferior goods to the left
 A rise in income will increase the demand
for a normal good, and decrease the demand
for an inferior good
 Normal good and inferior good are defined
by the relation between demand and income
2u
 Prices of Related Goods: actors
that Shift the emand Curve
 Substitute3good that can be used in place of
some other good and that fulfills more or less the
same purpose
± Example
± A rise in the price of a substitute increases the demand
for a good, shifting the demand curve to the right
 Complement3used together with the good we are
interested in
± Example
± A rise in the price of a complement decreases the
demand for a good, shifting the demand curve to the
left
2ô

ther actors That Shift the
emand Curve
 Population
± As the population increases in an area
‡ Number of buyers will ordinarily increase
‡ emand for a good will increase
 Expected Price
± An expectation that price will rise (fall) in the future shifts the
current demand curve rightward (leftward)
 Tastes
± Combination of all the personal factors that go into determining
how a buyer feels about a good
± When tastes change toward a good, demand increases, and the
demand curve shifts to the right
± When tastes change away from a good, demand decreases, and the
demand curve shifts to the left

2
 Summary
-- actors Affecting emand
 à
(depends on good„s nature: normal
or inferior)
  ë ëë ë (positively related)
  ë 
ë (negatively related)
  
(positively related)
 d  
  (positively related)
 Vëë (positively related)

28
 Supply
 A firm„s ²
 ë 
of a good is the specific
amount its managers would choose to sell over
some time period, given
± A particular price for the good
± All other constraints on the firm
î ˜arket quantity supplied (or quantity supplied) is
the specific amount of a good that all sellers in the
market would choose to sell over some time
period, given
± A particular price for the good
± All other constraints on firms
29
 Quantity Supplied
 Implies a choice
± Quantity that gives firms the highest possible profits when they
take account of the constraints presented to them by the real world
 Is hypothetical
± oes not make assumptions about firms„ ability to sell the good
± ow much would firms„ managers want to sell, given the price of
the good and all other constraints they must consider?
 Stresses price
± The price of the good is just one variable among many that
influences quantity supplied
± We„ll assume that all other influences on supply are held constant,
so we can explore the relationship between price and quantity
supplied

÷0
 The Law of Supply

 States that when the price of a good rises

and everything else remains the same, the
quantity of the good supplied will rise
± The words, geverything else remains the same
are important
‡ In the real world many variables change
simultaneously
‡ owever, in order to understand the economy we
must first understand each variable separately
‡ We assume geverything else remains the same in
order to understand how supply reacts to price
÷1
The Supply Schedule and The Supply
Curve
 Supply schedule3shows quantities of a
good or service firms would choose to
produce and sell at different prices, with all
other variables held constant
 Supply curve3graphical depiction of a
supply schedule
± Shows quantity of a good or service supplied at
various prices, with all other variables held
constant
÷2
 igure : The Supply Curve
 
 '




 Ô



  
Ý
 


%

'Ô

'Ô


 


% (! 

 




  
 

Ô







j



  

÷÷
Shifts vs. Movements Along the Supply
Curve
 A change in the price of a good causes a
movement along the supply curve
± In igure Ô
‡ A rise (fall) in price would cause a rightward (leftward)
movement along the supply curve
 A drop in transportation costs will cause a shift in
the supply curve itself
± In igure u
‡ Supply curve has shifted to the right of the old curve (from
igure Ô) as transportation costs have dropped
‡ A change in any variable that affects supply3except for the
good„s price3causes the supply curve to shift

÷Ô
 igure u: A Shift of The Supply Curve

  



      

!

 !
Ý Ý 
Ý Ý

  
 

 

 Ô









j



  

÷u
 actors That Shift the Supply Curve
 Input prices
± A fall (rise) in the price of an input causes an increase
(decrease) in supply, shifting the supply curve to the
right (left)
 Price of Related Goods
± When the price of an alternate good rises (falls), the
supply curve for the good in question shifts leftward
(rightward)
 Technology
± Cost-saving technological advances increase the supply
of a good, shifting the supply curve to the right
÷ô
 actors That Shift the Supply Curve

 Number of irms
± An increase (decrease) in the number of
sellers3with no other changes3shifts the
supply curve to the right (left)
 Expected Price
± An expectation of a future price increase
(decrease) shifts the current supply curve to the
left (right)

÷
 actors That Shift the Supply Curve

 Changes in weather
± avorable weather
‡ Increases crop yields
‡ Causes a rightward shift of the supply curve for that crop
± Unfavorable weather
‡ estroys crops
‡ Shrinks yields
‡ Shifts the supply curve leftward

ther unfavorable natural events may effect all
firms in an area
± Causing a leftward shift in the supply curve
÷8
 igure ô(a): Changes in Supply
and in Quantity Supplied
    Ý
 Y



!


  
 Y

 

!



©   
÷9
 igure ô(b): Changes in Supply
and in Quantity Supplied
 d 

!   Ý
" Ý
#

%
#
%
#   $
# &

$
# 
#  

©   
Ô0
 igure ô(c): Changes in Supply
and in Quantity Supplied

d 

!   Ý
" Ý
#

$
#
$
#   %
# &

$
#  

©   
Ô1
 Summary: actors That Shift
The Supply Curve
 The short list of shift-variables for supply that we
have discussed is far from exhaustive
 In some cases, even the threat of such events can
cause serious effects on production
 Basic principle is always the same
± Anything that makes sellers want to sell more or less of
a good at any given price will shift supply curve

Ô2
 Equilibrium: Putting Supply and
emand Together
 When a market is in equilibrium
± Both price of good and quantity bought and sold have
settled into ë ë
± The equilibrium price and equilibrium quantity are
values for price and quantity in the market but, once
achieved, will remain constant
‡ Unless and until supply curve or demand curve shifts
 The equilibrium price and equilibrium quantity
can be found on the vertical and horizontal axes,
respectively
± At point where supply and demand curves cross

Ô÷
 igure : Market Equilibrium
    
 ) -

     &   

d
Ô 
  
 )


( 
 )

¯



d& ,


*


*



+*


j


¯ 
 ¯



  
& 
*



    
ÔÔ
 Excess emand

 Excess demand
± At a given price, the excess of quantity
demanded over quantity supplied
 Price of the good will rise as buyers
compete with each other to get more of the
good than is available

Ôu
 igure 8: Excess Supply and
Price Adjustment
¯ 
'*



 &  

!

 )



    

d& .

!'*

Ý ) -
&  

!  
'*


<
   


 d
)

Ô 
  
( 
')

)*


*



*


j



  
Ôô
 Excess Supply

 Excess Supply
± At a given price, the excess of quantity supplied
over quantity demanded
 Price of the good will fall as sellers compete
with each other to sell more of the good
than buyers want

Ô
 Solve for Equilibrium
Algebraically
 Suppose that demand is given by the
 
equation
1Ô0 ¦ 10  ,where
is
quantity demanded, P is the price of the
good. Supply is given by
 80 Ô u 
where
ë is quantity supplied.
 What is the equilibrium price and quantity?

Ô8
 Income Rises: What appens
When Things Change
 Income rises, causing an increase in demand
± Rightward shift in the demand curve causes
rightward movement along the supply curve
± Equilibrium price and equilibrium quantity both
rise
 Shift of one curve causes a movement along
the other curve to new equilibrium point

Ô9
 igure 9
Ô d(  ) 

 ( 

  
   
Ý  

!
  
'Ô

%
¯  
)

d   


j


* ( (! *








 
  
u0
 An Ice Storm its: What appens
When Things Change

 An ice storm causes a decrease in supply

± Weather is a shift variable for supply curve
‡ Any change that shifts the supply curve leftward in a
market will increase the equilibrium price
± And decrease the equilibrium quantity in that market

u1
 igure 10: A Shift of Supply and
A New Equilibrium


 Ý Ý

'*

d

)

d

)*


*



j




u2
 Using Supply and emand: The
Invasion of uwait
 Why did Iraq„s invasion of uwait cause the
price of oil to rise?
± Immediately after the invasion, United States
led a worldwide embargo on oil from both Iraq
and uwait
± A significant decrease in the oil industry„s
productive capacity caused a shift in the supply
curve to the left
‡ Price of oil increased

u÷
 igure 12: The Market or

il



Ý
Ý

d


 d

 


uÔ
 Using Supply and emand: The
Invasion of uwait
 Why did the price of natural gas rise as well?
±
il is a substitute for natural gas
± Rise in the price of a substitute increases
demand for a good
± Rise in price of oil caused demand curve for
natural gas to shift to the right
‡ Thus, the price of natural gas rose

uu
 igure 1÷: The Market or
Natural Gas
S 
 j 

 Ý

%

%





 S  
j 


uô
 igure 11: Changes in the
Market for andheld PCs
 ) -

 ( 
S
  
  
Ô 
    Ý 
Ý 

'*

¯  


!  
'Ô

* (!

  


 Ô* ) )) 


S
©  
u
 Both Curves Shift

 When just one curve shifts (and we know the

direction of the shift) we can determine the
direction that both equilibrium price and quantity
will move
 When both curves shift (and we know the
direction of the shifts) we can determine the
direction for either price or quantity3but not both
± irection of the other will depend on which curve shifts
by more

u8
 The Three Step Process
 ey Step 13Characterize the Market
± ecide which market or markets best suit problem
being analyzed and identify decision makers (buyers
and sellers) who interact there
 ey Step 23 ind the Equilibrium
± escribe conditions necessary for equilibrium in the
market, and a method for determining that equilibrium
 ey Step ÷3What appens When Things Change
± Explore how events or government polices change
market equilibrium

u9
 Example: rental apartment
quantity quantity
 Example: problem Ô, rent($) demanded supplied
chapter ÷ in textbook.
800 ÷0 10
 emand & Supply
iagram 1000 2u 1Ô

 Equilibrium P & Q 1200 22 1

 Why $1000 can not be
1Ô00 19 19
equilibrium?
 Effects from a tornado 1ô00 1 21

destroying some 1800 1u 22

apartments.
ô0
 emand for two bedroom
rental apartment

ô1
 Summaries
 Through the study of the chapter, you will be able to
 Characterize a market.
 Use a demand schedule and a demand curve to demonstrate the law of
demand.
 Explain the difference between a 




(shift of the curve)
and a 

²
 



(movement along the curve).
 List the factors that will lead to a change in demand, and give
examples of each.
 Similar analysis for supply side.
 Explain how equilibrium price and quantity are determined in a
competitive market.
 Explain what will happen in a competitive market after a shift in the
supply curve, the demand curve, or both.
 escribe the three steps economists take to answer almost any
question about the economy.

ô2
 ’
 

 Market (who, what, how)
 Supply and demand is an economic model
± esigned to explain how prices are determined in
certain types of markets
 What you will learn in this chapter
± ow the model of supply and demand works and
how to use it
1. The law of demand
2. The law of supply
÷. The determination of market equilibrium
Ô. actors shifting demand or supply curves

ô÷
 Markets
 In economics, a market is not a place but rather a
group of buyers and sellers with the potential to
trade with each other
± Market is defined not by its location but by its
participants
± irst step in an economic analysis is to define and
characterize the market or collection of markets to
analyze
 Economists think of the economy as a collection
of individual markets

ôÔ
 ow Broadly Should We efine The
Market

 efining the market often requires economists to

group things together
± Aggregation is the combining of a group of distinct
things into a single whole
 Markets can be defined broadly or narrowly,
depending on our purpose
± ow broadly or narrowly markets are defined is one of
the most important differences between
Macroeconomics and Microeconomics

ôu
 efining ˜icroeconomic
Markets
 Markets are defined narrowly
± ocus on models that define much more
specific commodities
 Always involves some aggregation
± But stops it reaches the highest level of
generality that macroeconomics investigates

ôô
 efining ˜acroeconomic
Markets
 Goods and services are aggregated to the
 ëlevels
± Macro models lump all consumer goods into
the single category gconsumption goods
± Macro models will also analyze all capital
goods as one market
± Macroeconomists take an overall view of the
economy without getting bogged down in
details
ô
 Buyers and Sellers
 Buyers and sellers in a market can be
± ouseholds
± Business firms
± Government agencies
‡ All three can be both buyers and sellers in the same market, but
are not always
 or purposes of simplification this text will
usually follow these guidelines
± In markets for consumer goods, we„ll view business
firms as the only sellers, and households as only buyers
± In most of our discussions, we„ll be leaving out the
gmiddleman

ô8
 Competition in Markets
 In imperfectly competitive markets, individual buyers or
sellers can influence the price of the product
 In perfectly competitive markets (or just competitive
markets), each buyer and seller takes the market price as a
given
 What makes some markets imperfectly competitive and
others perfectly competitive?
± Perfectly competitive markets have many small buyers and sellers
‡ Each is a small part of the market, and the product is standardized
± Imperfectly competitive markets have just a few large buyers and
sellers
‡
r else the product of each seller is unique in some way

ô9
 Using Supply and emand
 Supply and demand model is designed to explain
how  ë 
 

in      
markets
± Perfect competition is rare but many markets come
reasonably close
± Perfect competition is a matter of degree rather than an
all or nothing characteristic

 Supply and demand is one of the most versatile

and widely used models in the economist„s tool kit

0
 emand

 A household„s quantity demanded of a good

± Specific amount household would choose to buy over
some time period, given
‡ A particular price that must be paid for the good
‡ All other constraints on the household
î ˜arket quantity demanded (or quantity
demanded) is the specific amount of a good that
all buyers in the market would choose to buy over
some time period, given
± A particular price they must pay for the good
± All other constraints on households
1