Demand Supply Market

Demand Curve

Higher the price charged for a good, less of

it people will be willing to buy.
Consequently, the lower its market prices,
the more units will be demanded.
A graphical representation of relationship
between price and quantity demanded,
holding constant all other variables that
influence demand, is called as Demand
curve.
 Price per
Bottle

When the price is 4.00

per bottle, 40,000 bottles
are demanded (point A).
A
4.00
At 2.00 per bottle,
60,000 bottles are
B demanded (point B).
2.00

40,000 60,000 Number of Bottles

per Month
3
Demand schedule for luxury suites in
the hospital

Price per Suite Quantity of

per night suites
demanded
4000 1
3500 3
3000 4
2000 6
Downward slope means quantity and price are
inversely related: Law of downward sloping
demand.
Substitution effect: switching over to general
ward
Income of consumers: As income rises you tend
to buy more of everything
Price & availability of related good: demand for
non-qualified doctor will be lower if qualified
doctors reduce their fee.
Tastes and preferences: shaped by convenience,
customs and social attitude.
 Shift in Demand Curve

When factors other than price changes.

If price of medical remains same, demand
may increase due to:
Increase in average income of people
Increase in population
Peoples growing dependence on medical
care
Increase burden of disease
 Price per
Bottle An increase in income
shifts the demand curve for
syrup from D1 to D2.

At each price, more bottles

are demanded after the
shift

B C
2.00

D1 D2

60,000 80,000 Number of Bottles

per Month
7
 Movements along & shifts of Demand
Curve
Price
Entire demand curve shifts
rightward when:
income or wealth
price of substitute
price of complement
population
expected price
tastes shift toward good

D2
D1

Quantity
8
 Movements along & shifts of
Demand Curve
Price
Entire demand curve shifts
leftward when:
income or wealth
price of substitute
price of complement
population
expected price
tastes shift toward good

D1
D2

Quantity
9
 Supply Curve

Quantity of a good that businesses are

willing to produce and sell at each
conceivable price is Supply.
The relationship between the market price
of a commodity and the amount that
producers are willing to produce and sell is
Supply curve.
 Price per When the price is 2.00
Bottle per bottle, 40,000 bottles S
are supplied (point F).

4.00 G

At 4.00 per bottle,

2.00 F quantity supplied is
60,000 bottles (point G).

40,000 60,000 Number of Bottles

per Month
11
Supply Curve for luxury suites in
hospital
Price per suite per Quantity of suites
night hospital will supply
4000 7
3500 5
3000 4
2000 2
1000 0
Direct relationship between price and
quantity supplied.
Producer will be willing to sell more only at a
higher price. Why ?
Law of diminishing returns: Given all other input
fixed, if one input is increased the total output
will increase.
Cost of production: When production costs are
very high relative to price, producers will
produce little or may quit producing.
Cost of production depends on 2 factors:
technological advance and prices of input.
Technological advance reduces the per unit
production costs and thus increases the supply.
Pricesof production substitutes: Hospitals
produce luxury as well as ordinary service. If
 A Shift of The Supply Curve

Price per A decrease in transportation

Bottle costs shifts the supply curve for
maple syrup from S1 to S2. S1 S2
At each price, more bottles
are supplied after the shift
4.00 J
G

60,000 80,000 Number of Bottles

per Month
14
Supply of private hospitals might increase
because government removed some
regulatory burden on the market, or
because new diagnostic machines have
become cheaper.
Hence, supply of private hospital care
would tend to increase.
As a result, at each price, producers will
supply more hospital care and supply curve
shifts to right.
 Market Equilibrium
What happens when suppliers and demanders meet ?
Supply and demand forces in the market will produce
market equilibrium, which comes at that price and
quantity where supply and demand forces are in
balance
When a market is in equilibrium
Both price of good and quantity bought and sold
have settled into a state of rest
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
 Price per 2. causes the price 3. shrinking the
Bottle to rise . . . excess demand . . .

E
3.00 4. until price reaches its
equilibrium value of 3.00
.
H
1.00 J
Excess Demand
D
25,000 50,000 75,000 Number of Bottles
1. At a price of 1.00 per
bottle an excess demand per Month
of 50,000 bottles . . .
17
 Excess Supply and Price Adjustment

1. At a price of 5.00 per

Price per bottle an excess supply
Bottle of 30,000 bottles . . .

Excess Supply at 5.00 S 3. shrinking the

excess supply . . .
5.00 L
K
2. causes the
price to drop, E
3.00 4. until price reaches its
equilibrium value of
3.00.

D
35,000 50,000 65,000 Number of Bottles
per Month
18
Price Quantit Quantit State of Pressur
(per y of y of Market e on
suite/ suites suites price
night) demand supplie
ed d
4000 1 7 Surplus
3500 3 5 Surplus
3000 4 4 Equilibri Neutral
um
2000 6 2 Shortag
e
Demand shift

Suppose there is a change in disease

profile of the population.
More and more have become vulnerable to
diseases, which need hospital care. As
result, the demand curve shifts up and a
new equilibrium is reached at point.
 4. Equilibrium 3. to a new
Price per price equilibrium.
Bottle increases
2. moves us along
S the supply
curve . . .
4.00 F'
1. An increase in
3.00 E demand . . .

D2

D1

50,000 60,000 Number of Bottles of

5. and equilibrium quantity Maple Syrup per Period
increases too.
21
Supply Shift
Suppose government relaxes some regulatory
burden on the growth of private hospitals.
As a result, more hospitals enter into the
market leading to an upward shift of supply
curve, generating new equilibrium at a lower
price.
Price goes down when supply shifts upwards,
due to increase in number of hospitals there is
now surplus of hospital care at the old price.
Hospitals are forced to reduce price.
 Chained Market
When prices are determined purely by the forces
of supply and demand: Free Market
But non-market forces may shift demand and
supply making no attempt to regulate prices
directly, getting the market chained.
It is sometimes good for the society to chain a
free dog when it has a potential to be a monster.
When society perceives that the price of private
hospital care is too high for the needy but poor
people, the govt may want to control the price
by imposing some regulation on price.
Immediately there would be an artificial
shortage in the market, because now the
 Its true that lower price allows some poor to buy
private hospital care they could not otherwise
have afforded. But the restriction would also
encourage the providers reserve supplies for
elected people.
Supplier may even accept bribes from those who
can afford to pay extra to jump the queue.
Example: Drugs market in government hospitals.
Drugs are free / cheap, as prices are kept
artificially low for poor.
Then why there are so many private pharmacies
outside hospital ?
Because artificial restriction creates shortage
and provides an incentive to establish a free
parallel market for drugs. Also poor are not
 Elasticity
How sensitive demand or supply is to factors
like change in price.
We know that if price rises then people will
buy less but how much less ?
Price elasticity of demand: how sensitive is
the quantity demanded to a change in the
price of the good.
Price elasticity of supply: how sensitive is the
quantity supplied to a change in the price of
the good.
 Price elasticity of Demand

PED = % change in quantity demanded

djrfhrfhj% change in price of the good

PED is always negative, reflecting inverse

relationship between price and quantity
demanded.
Demand is price inelastic when PED values
between 0 and -1; elastic when PED values
between -1 and infinity.
If price of osteopathy rose by 10%, and quantity
bought fell by 5 %, then PED would be -0.5,
which tells us that demand for osteopathy is not
particularly sensitive to changes in price.
Price inelastic.
People spend more on osteopathy after the
price rise because the percentage increase in
price is greater than the percentage fall in sales
volume. Therefore, although osteopath sell
fewer treatments, the higher price of each
treatment more than offsets the lost quantity of
treatments sold.
If PED is inelastic, a rise in price will lead to
people spending more while a fall in price
will lead to people spending less.
If PED is elastic, a rise in price will lead to
people spending less while a fall in price
will lead to people spending more.
If price of eye tests fell by 20 % and quantity of
eye tests bought rose by 30% the PED would be
?
Price elastic / inelastic

When the price of gasoline rises by 1% the

quantity demanded falls by 0.2%, so PED is ?.
Price elastic / inelastic

When the price of gold jewelry rises by 1% the

quantity demanded falls by 2.6%, so PED would
be ?
Price elastic / inelastic
 Price elasticity of Supply
How sensitive quantity supplied is to a change
in the price of the good.
PES = % change in quantity supplied
bdkjdjjjjjjjdjjhbj njjjjjjjjjjjjjjjj % change in price
of the good
PES is always positive reflecting positive
relationship between price and quantity
supplied.
PES becomes more elastic over time.
In healthcare, PES is likely to be fairly inelastic
in the short run but much more elastic in long
run. Even if price rises significantly it will take
time for firms to react and to produce more
healthcare.
When the price of DaVinci paintings increases
by 1% the quantity supplied doesnt change
at all, so the quantity supplied of DaVinci
paintings is completely insensitive to the
price.
Price elasticity of supply is ?.

When the price of beef increases by 1% the

quantity supplied increases by 5%, so PES of
beef supply ?
Sensitivity?