Supply and Demand

Input Markets and Output Markets

A firm is an organization that transforms resources (inputs)
into products (outputs). Firms are the primary producing
units in a market economy.

An entrepreneur is a person who organizes, manages, and

assumes the risks of a firm, taking a new idea or a new
product and turning it into a successful business.

Households are the consuming units in an economy.

Input Markets and Output Markets
Output, or product, markets are the markets in which goods and
services are exchanged.

Input markets are the markets in which resourceslabor, capital, and

landused to produce products, are exchanged
Input Markets
Input markets include:
The labor market, in which households supply work for wages to
firms that demand labor.
The capital market, in which households supply their savings, for
interest or for claims to future profits, to firms that demand funds to
buy capital goods.
The land market, in which households supply land or other real
property in exchange for rent.
Demand for good and services
Quantities of a good or services that people are ready to buy at various
prices within some given time period, other factors besides price held
constant.
Market demand for Dosai
Price ( per slice) QD
Rs
5.00 0
4.00 100
3.00 200
2.00 300
1.00 400
0 500
Market Demand Curve for Dosai
 Law of demand
The invers relationship between price and the quantity of demanded is
called law of demand.
Demand Function:

A demand function is a causal relationship between a

dependent variable (i.e., quantity demanded) and various
independent variables (i.e., factors which are believed to
influence quantity demanded)
Q = f(P)

Where Q= quantity and P = price of a good.

Ex: Q = 2 4P
Non price Determinants of Household
Demand
The income available to the household.
The households amount of accumulated wealth.
The prices of related products available to the
household.
The households tastes and preferences.
The households future expectations.
DEMAND : Determinants
NORMAL GOODS
Goods for which demand goes up when income is higher and
for which demand goes down when income is lower.

E.G. Cars

INFERIOR GOODS
Goods for which demand tends to fall when income rises.

E.G. Public Transportation

Shift of Demand VS Movement along a Demand Curve

Change in price of a good or service leads to Change in

quantity demanded (movement along the demand curve).

Change in income, preferences, or prices of other goods or

services leads to Change in demand (shift of the demand
curve).
Shift of Demand VS Movement along a Demand Curve
Shift of Demand VS Movement along a Demand Curve

When demand shifts

to the right, demand
increases. This causes
quantity demanded to
be greater than it was
prior to the shift, for
each and every price
level.
Supply and quantity supplied
SUPPLY
Refers to how much is produced at every price. Relationship bet.
Quantity supplied and the price of that good.

QUANTITY SUPPLIED
The amount of a particular product that a firm would be willing and able
to offer for sale at a particular price during a given time period.
Supply:LAW OF SUPPLY
LAW OF SUPPLY
The positive relationship between price and quantity of a good supplied:
An increase in market price will lead to an increase in quantity supplied,
and a decrease in market price will lead to a decrease in quantity
supplied.
SUPPLY CURVE
A graph illustrating how much of a product a firm will sell at different
prices.
SUPPLY SCHEDULE
A table showing how much of a product firms will sell at different
prices.
SUPPLY SCHEDULE

Market supply for Dosai

Price ( per slice)- Rs Qs

5 500
4 400
3 300
2 200
1 100
0 0
Market Supply Curve for Dosai
Supply curve:Shift of Supply VS Movement along a Supply
Curve

MOVEMENT ALONG A SUPPLY CURVE

The change in quantity supplied brought about by a change in price.

SHIFT OF A SUPPLY CURVE

The change that takes place in a supply curve corresponding to a new
relationship between quantity supplied of a good and the price of that
good. The shift is brought about by a change in the original conditions.

Change in income, preferences, or prices of other goods or

services leads to Change in supply (shift of a supply curve).
 Non price Determinants of Supply
Cost of production.
Technological progress.
Prices of other goods or services.
Future expectations among the sellers
Weather conditions.
Number of sellers.
Non price Determinants of Supply
All factors other than price cause a shift of the supply
curve and is called a change in supply
Market Equilibrium
EQUILIBRIUM
The condition that exists
when quantity supplied
and quantity demanded
are equal.
Supply and Demand Together
Demand Schedule Supply Schedule

Price Quantity Price Quantity

Rs 0 19 Rs 0 0
0.50 16 0.50 0
1.00 13 1.00 1
1.50 10 1.50 4
2.00 7 2.00 7
2.50 4 2.50 10
3.00 1 3.00 13

At Rs.2.00, the quantity demanded is

equal to the quantity supplied!
Supply and demand for Ice-cream Cones
P (Rs.) Qd Qs
7 0 600
6 100 500
5 200 400
4 300 300
3 400 200
2 500 100
1 600 0
0 700 0
Supply and Demand Curves for Ice-cream
Cones
 Three Steps To Analyzing Changes in
Equilibrium
Decide whether the event shifts the supply or
demand curve (or both).
Decide whether the curve(s) shift(s) to the left or to
the right.
Examine how the shift affects equilibrium price
and quantity.
How an Increase in Demand Affects the
Equilibrium
Price of 1. Hot weather increases
Ice-Cream the demand for ice cream...
Cone

Supply

Rs.2.50 New equilibrium

2.00
2. ...resulting Initial
in a higher equilibrium
price...
D2

D1
0 7 10 Quantity of
3. ...and a higher Ice-Cream Cones
quantity sold.
How a Decrease in Supply Affects the Equilibrium
Price of
Ice-Cream 1. Shortage of milk reduces
Cone the supply of ice cream...
S2
S1

New
Rs.2.50 equilibrium

2.00 Initial equilibrium

2. ...resulting
in a higher
price...
Demand

0 1 2 3 4 7 8 9 10 11 12 13 Quantity of
3. ...and a lower Ice-Cream Cones
quantity sold.
Important Definitions
Equilibrium Price: The price that equates the quantity demanded
with the quantity supplied.
Equilibrium quantity: The amount that people are willing to buy and
sellers are willing to offer at the equilibrium price level.
Shortage: A market situation in which the quantity demanded
exceeds the quantity supplied
Surplus: A market situation in which the quantity supplied exceeds
the quantity demanded.
Review Questions
01. Considering following supply and demand curves for a
certain product.
Qs= 25,000p
Qd= 50000-10,000p

What are the equilibrium price / output level ?

Review Questions
02. Considering following supply and demand curves for a
certain product.
Qs= -100+100p
Qd= 700-100p

What are the equilibrium price / output level ?