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Demand-supply Analysis
A market consists of the buyers and
sellers of a good or service: abstraction
from any concept of specific time and
Demand and Supply location of a market.
McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All Rights Reserved.
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Demand Schedule and Demand Curve The downward sloping demand curve obeys
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1. A decrease
The slope is negative (but may not be
2.00
in price ...
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Decrease
A in demand
1.00 Demand
curve, D2
Demand
curve, D1
D Demand curve, D3
0
4 8 Quantity of Ice-Cream Cones 0 Quantity of
Ice-Cream Cones
Copyright2003 Southwestern/Thomson Learning
0.50
D2
D1 Quantity of
Ice-Cream
0 1 2 3 4 5 6 7 8 9 10 11 12 Cones
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0.50
D2 D1 Quantity of
Ice-Cream
0 1 2 3 4 5 6 7 8 9 10 11 12 Cones
Demographic changes
If T (tastes and If population comes to consist of larger proportion of
older people, this will affect pattern of demand.
preferences) change such
that buyers like a New Information
Dissemination of the information on harmful side-
commodity more, again effects of drugs can lead to a fall in demand for these
the same thing will drugs.
happen.
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Complements
The dramatic fall in the price of computers
Substitutes
over the past twenty years has significantly movies (in theaters) and sporting
increased the demand for printers, monitors events
and internet access. restaurants and dining at home
air travel and hotel rooms holiday in Goa versus holiday in
movies and popcorn Mussourie
bathing suits and sun tan lotion economics courses and political science
candy and dentistry courses
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Expectations
QD1 QD2
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Supply Curve
The supply curve is the graph of the
relationship between the price of a good and
the quantity supplied.
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0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity of cones supplied.
Copyright2003 Southwestern/Thomson Learning
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0 Quantity of
Ice-Cream Cones
Copyright2003 Southwestern/Thomson Learning
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Suppose that the supply function is A change in technology that allows the
Qs = 50 + 10P 8PI + 5T commodity to be produced more
If PI = 50 and T = 90, then cheaply should shift the supply curve
Qs = 50 + 10P 8(50) + 5(90) downwards and to the right.
= 50 + 10P 400 + 450 If input prices increase, exactly the
Qs = 100 + 10P opposite should happen.
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Equilibrium Equilibrium
P
S Equilibrium
D
Excess supply/Surplus
P Shortage
When price < equilibrium price, then quantity
P* 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.
S D
0 Q* Q
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D
S Shifts in equilibrium
0 Q* Q
Use the supply-and-demand diagram to (a) both the price of petrol and the quantity
see how the shift affects equilibrium purchased would definitely rise.
price and quantity. (b) both the price and the quantity purchased of
petrol would definitely fall.
(c) the price of petrol might rise or fall, but the
quantity purchased would definitely fall.
(d) the quantity purchased of petrol might rise or fall,
but the price of petrol must rise.
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P
Government interventions
D2 S2
Sometimes Governments try to correct
D1 S1 the the existing pattern of income
P2 distribution.
They often try to achieve the results
indirectly, by interfering with the market
processes.
P1
D2
S
D
0 H
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S
D
0 L
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Conclusion
Are interventions in the forms of price
ceilings or price floors always
undesirable?
There is some gain from each of these
actions and there are some losses, and
these must be balanced by society
against each other.
But when markets are not allowed to
operate freely, forces build up that tend
to bypass regulations, with unintended
and undesirable outcomes.
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