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I. INTRODUCTION
and Supply is one of the most fundamental concepts of economics and it is the backbone of a market economy. The relationship between demand and supply underlie the forces behind the allocation of resources. In market economy, demand and supply theory will allocate resources in the most efficient way possible.
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Demand
It refers to both the ability to pay and a willingness to buy by the consumer (s). Demand is sometimes called effective demand. Demand can be shown by a demand schedule which shows the maximum quantity demanded (willing & able to buy) at all prices.
THE DETERMINANTS
1. Price of the good 2. Tastes 3. Income of the buyer 4.Prices of related products 5. Future expectations: 6.The number of buyers in the market
A demand schedule is a table showing the quantities of a good that a consumer would buy at all different prices within a time period, ceteris paribus.
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Quantity Demanded
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LAW OF DEMAND
The relationship between prices and quantity demanded is called the law of demand in economics. The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded.
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It refers to both the ability to sell (produce) and the willingness to sell by the producer (s). Supply implies an effective supply. Supply can be shown by a supply schedule which shows the maximum quantity supplied at all different prices.
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SUPPLY SCHEDULE
Price (Rs. per unit)
10 18 28 40
Quantity Supplied
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LAW OF SUPPLY
The law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at higher price increases Profit for the Suppliers.
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1) Prices of Related Goods 2) Prices of Factors of Production 3) State of Technology 4) Objectives of firms 5) Weather 6) Expectation on future prices 7) Number of producers or suppliers
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With demand & supply in a market, the interaction between market demand & supply together will determine the market price of a good.
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EQUILIBRIUM
When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded.
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EQUILIBRIUM DIAGRAM
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CHANGES IN EQUILIBRIUM
In many cases, there are factors leading to both a change in demand and a change in supply. Whenever both demand & supply increase, the quantity transacted (quantity exchanged between buyers & sellers) must be greater than before. The new equilibrium price is uncertain because it depends on the magnitude of shift of the 2 curves. Disequilibrium occurs whenever the price or quantity is not equal to P* or Q*.
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1. EXCESS SUPPLY
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2. EXCESS DEMAND
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RELATIVE PRICE
Nominal Price refers to the price of a good (or service) expressed in terms of money. Relative price refers to the price of a good (or service) expressed in terms of another good.
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D.B.Naidu
92480-05303 dbnaidu@hotmail.com
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