04_DemandSupply.pdf

DEMAND AND SUPPLY - Part 2 Dr. Rama Pal Department of Economics, IITB Email: [email protected] SUPPLY 2 SUPPLY Quantity supplied is the amount of a good that sellers are willing and able to sell. Law of Supply ○ The law of supply states that, other things equal, the quantity su...

DEMAND AND SUPPLY - Part 2 Dr. Rama Pal Department of Economics, IITB Email: [email protected] SUPPLY 2 SUPPLY Quantity supplied is the amount of a good that sellers are willing and able to sell. Law of Supply ○ The law of supply states that, other things equal, the quantity supplied of a good rises when the price of the good rises. Dr. Rama Pal, Dept of Econ EC 101 3  THE SUPPLY SCHEDULE FOR ICE-CREAM CONE The supply schedule for a commodity shows the relationship between its market price and the amount of that commodity that producers are willing to produce and sell, other things held constant Price Quantity Supplied 5 18 4 16 3 12 2 7 1 0 Dr. Rama Pal, Dept of Econ EC 101 4 THE SUPPLY CURVE Price SS Quantity Dr. Rama Pal, Dept of Econ EC 101 5 MARKET SUPPLY VERSUS INDIVIDUAL SUPPLY Market supply refers to the sum of all individual supplies for all sellers of a particular good or service. Graphically, individual supply curves are summed horizontally to obtain the market supply curve. (Graph) Dr. Rama Pal, Dept of Econ EC 101 6  WHAT ARE ‘OTHER THINGS’? Technology Input prices Expectations Government policy Number of sellers Dr. Rama Pal, Dept of Econ EC 101 7 SHIFTS IN THE SUPPLY CURVE Change in Supply ○ A shift in the supply curve, either to the left or right. ○ Caused by a change in a determinant other than price. Dr. Rama Pal, Dept of Econ EC 101 8 SHIFTS IN SUPPLY When changes in factors other than a good’s own price affect the quantity supplied, we call these changes shifts in supply. Price SS SS2 1 Quantit y Dr. Rama Pal, Dept of Econ EC 101 9 MARKET EQUILIBRIUM 10 SUPPLY AND DEMAND TOGETHER Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded. Dr. Rama Pal, Dept of Econ EC 101 11 SUPPLY AND DEMAND TOGETHER Equilibrium Price ○ The price that balances quantity supplied and quantity demanded. ○ On a graph, it is the price at which the supply and demand curves intersect. Equilibrium Quantity ○ The quantity supplied and the quantity demanded at the equilibrium price. ○ On a graph it is the quantity at which the supply and demand curves intersect. Dr. Rama Pal, Dept of Econ EC 101 12 EQUILIBRIUM OF SUPPLY AND DEMAND A market equilibrium comes at the price at which quantity demanded equals quantity supplied. Price SS P* D D Quantity Q* Dr. Rama Pal, Dept of Econ EC 101 13 EQUILIBRIUM Surplus ○ When price > equilibrium price, then quantity supplied > quantity demanded. There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby moving toward equilibrium. Dr. Rama Pal, Dept of Econ EC 101 14 EQUILIBRIUM Shortage ○ When price < equilibrium price, then quantity demanded > the quantity supplied. There is excess demand or a shortage. Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium. Dr. Rama Pal, Dept of Econ EC 101 15 EQUILIBRIUM Law of supply and demand ○ The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance. Dr. Rama Pal, Dept of Econ EC 101 16 ANALYSING CHANGES IN EQUILIBRIUM 17 INCREASE IN DEMAND Shift in DD outwards Price SS E2 P** E1 P* DD DD 2 1 Quantity Q* Q** Q1 Dr. Rama Pal, Dept of Econ EC 101 18 INCREASE IN SUPPLY Shift in SS outwards Price SS1 SS2 E1 P* P** E2 D D Quantity Q* Q** Q1 Dr. Rama Pal, Dept of Econ EC 101 19