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Unit-2-Final-1 (Final of Unit 2)
Unit-2-Final-1 (Final of Unit 2)
Unit-2-Final-1 (Final of Unit 2)
PALLABI MUKHERJEE
PALLABI MUKHERJEE
Demand
A relation between the price of a good and the
quantity that consumers are willing and able
to buy during a given period, other things
constant.
PALLABI MUKHERJEE
Market Demand Curve
Shows the amount of a good that will be
purchased at alternative prices.
Law of Demand
• The demand curve is downward sloping.
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Demand Schedule and Curve
Demand curve:
• a curve showing the
relation between the price
of a good and quantity
demanded during a given
period, other things
remaining constant.
CETERUS PARIBUS
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Exceptions to Law of Demand
Veblen effect Giffen Goods
Changes in peoples Different/same brand
expectations names having
Seasonal identical products
Fluctuations. with different prices
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Determinants of Demand
Income
Prices of substitutes
Prices of complements
Advertising
Population
Consumer expectations
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The Demand Function
An equation representing the demand curve
Qxd = f(Px , PY , M, T,A,)
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Change in Quantity Demanded
Price
A to B: Increase in quantity
demanded
A
10
B
6
D0
4 7 Quantity
PALLABI MUKHERJEE
Determinants of demand
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999
Causes of Increase in Demand
Increase in consumer
income
Causes consumers to
buy more of the product
at each and every price.
Normal goods
Inferior goods
Change in consumer income
Normal goods
A good for which demand
increases as consumer
income rise
Inferior goods
A good which demand
increases as consumer
income falls
Changes in Price of Related Goods
Substitutes
Goods that are not
consumed jointly
Goods that are related in
such a way that an increase
in the price of one shifts the
demand curve for the other
rightward.
Increase in price of Coke
leads to increase in
demand for Pepsi
Changes in the price of related goods
Complements
Goods that are
related in a such a
way that an increase
in the price of one
shifts the demand of
the other leftward
Two goods that are
consumed jointly.
An decrease in the
price of one will
increase demand
for the other
Changes in Consumer Expectations
Such as expectations in
Prices and income
Affect how consumers spend
their money and their
demand
If product cheaper today
than tomorrow, then
increase in demand
• Demand: A Summary
Supply
Producer’s side
A relation between the price of a good and the
quantity that the producers are willing and able to
offer for sale during a given period, other things
constant.
Law of Supply
The quantity of a good supplied during a given period
is usually directly related to the price of the good
Increase in price leads to increase in quantity supplied
Decrease in price leads to decrease in quantity
supplied.
Creates upward sloping supply curve
Law of Supply
The quantity of a good supplied during a given period
is usually directly related to the price of the good
Increase in price leads to increase in quantity supplied
Decrease in price leads to decrease in quantity
supplied.
Creates upward sloping supply curve
Supply Shifters
Input prices
Technology or
government
regulations
Number of firms
Substitutes in
production
Taxes
Producer expectations
PALLABI MUKHERJEE
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The Supply Function
An equation representing the supply curve:
QxS = f(Px , PR ,W, H,)
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Change in Quantity Supplied
Price A to B: Increase in quantity supplied
S0
B
20
A
10
5 10 Quantity
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Causes of increase in Supply
• Improvements in Technology
• Changes in relevant resources
▫ Decrease in the price of resources
▫ Lowers costs
• Changes in price of alternative goods
▫ If price of alternative good increases, supply of the
good increases
• Changes in producers expectations
Changes in technology
• Technology is the economy’s stock of knowledge
about how to combine resources efficiently
Changes in Relevant Resources
Decrease in resource
prices
Increases the supply S1
S2
of the good at each
$6
and every price.
300 400
Changes in prices of Alternative Goods
Alternative goods
Other goods that use
Price
some or all of the same S1
resources as the good in S2
question $6
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999
Equilibrium
P
At specific price
where: S
Quantity
demanded
$5
Equals Equilibrium
Quantity Supplied
D
Q
150
Reaching Equilibrium
S
equilibrium
Qs > QD
$6
Economy is at a
$5 SURPLUS
Market price will fall
Q
100 150 200
Reaching Equilibrium
If the market P
price is BELOW S
the equilibrium
price
QD > Qs $5
Shortage exists $4