DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name : A.Satya Vani Kumari
Designation : Lecturer
Branch : Commercial & Computer Practice
Institute : Govt. Poly. For Women, SURYAPET
Year/Semester :III Year / V Semester
Subject : Business Economics –I
Subject Code : CCP-502
Topic : Markets
Duration : 50 Mts
Sub Topic : Effect of Price determination
Teaching Aids : Graphical Representation

CCP-502.63 1
 Objectives

On completion of this period you would be

able to :
 Explain How demand affects equilibrium price.

 Distinguish between Market Price and Normal

Price.

 Explain how equilibrium price changes, with

changes in supply and demand.
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Review

In the previous class we have discussed

about

 Price determination under Perfect Competition.

 How supply affects / influences price?

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Influence of Demand on Price

 Changes in demand changes the equilibrium price

A) Increase in demand
 When demand increases & supply remains the
same, price will rise.
 Increase in price will be more or less depending on
the elasticity of supply curve.
 If the supply curve is elastic, increase in price will be
less & vice versa.

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(B) Decrease in Demand:

 When demand decreases & supply remains the

same, the price would fall.

 The extent of fall in price depends on the elasticity

of supply curve.

 If the supply curve is elastic , fall in price will be

less & vice versa.

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Effect of Simultaneous Change in
Demand and Supply on Price:

There can be three situations

6. If the increase or decrease in demand and

supply are in equal proportion then equilibrium
price will remain unchanged

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(2) When the proportionate increase in demand is
more than the proportionate increase in supply,
then the equilibrium price would increase and
vice versa.

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3) When the proportionate decrease in demand
is more than the proportionate decrease in
supply, then the equilibrium price would fall
and vice versa.

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Distinction Between
Market Price & Normal Price
Market Price Normal Price

1. It is a market period 1. It is the long period

/ very short period price.
price.
2. Determined by day- 3. Determined by long
to-day demand and run demand and
supply. supply.
3. Supply tends to be 4. Supply tends to be
fixed and perfectly fairly elastic.
inelastic.

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4. Demand factor has 4.. Supply factor has
greater influence on relatively greater
price. influence on price.

5. It is an unstable 5. It is a stable
phenomenon. phenomenon.

6. It is a temporary 6. It is a permanent
equilibrium price. equilibrium price.

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Relationship of Normal Price & Market Price

Y
Market
Price
PRICE

Normal
Price

TIME
Fig. 5

So, The relation is that Market Price moves

around Normal Price.

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 Changes in Equilibrium Price
Equilibrium price tends to change in the following cases.

Case 1 : When supply is fixed and demand increases

or decreases:
e) When demand increases, equilibrium price tends to
rise
f) When demand decreases, price tends to fall
(Represented in Fig 6)

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When supply is fixed and demands increases or
decreases.

PRICE

Quantity demanded / supplied

Fig.2
‘SS’ is equal to ‘DD’ at ‘P’ ,’P’ is equilibrium price
,when ‘DD’ shifts to ‘D1D1’,Price rises to ‘P’ ‘P2’
corresponding with ‘D2D2’.
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 Case 2 : When demand is fixed and supply
increases or decreases.

d. When supply increases, the equilibrium price

tends to fall.

f. When supply decreases, the equilibrium price

tends to rise.
(Represented in Fig. 3)

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Changes in Supply and the Price

PRICE

Quantity Demanded / Supplied

Fig.3

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Case 3 :
When supply and demand increase or
decrease in the same proportion, the equilibrium
price unchanged.
( Represented in Fig.8)

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Proportional change in Demand & Supply
PRICE

Quantity Demanded/Supplied
Fig.2

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Summary

 Influence of Demand on price.

 Influence of simultaneous changes in demand &

supply on price.

 Possible causes for change in equilibrium price.

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 Examination Questions
1.Explain how equilibrium price changes under perfect
competition with graphical representation.

2. Write a short note about how changes in demand

changes equilibrium price under perfect competition.

3. Distinguish Market price & Normal price and explain

their relationship with a graph.

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