The Market Process

Concept of Demand
Demand
 Desire backed
by purchasing
power n
willingness to
part with it at
given price and
time in the
market.
 Axiom of utility
maximization
Determinants of Demand

 Price of the commodity

 Income of the consumer
 Price of related goods
a) substitutes
b) complements
 Consumer preferences
 Future price expectation
Law of Demand

There is inverse relation between

the quantity demanded and price of
the commodity given other as
constant.
 Demand Curve

20 A
Price

B
10

0
2 8
Quantity Demanded
Cause for downward sloping
demand curve
 Diminishing Marginal utility
 New consumer
 Substitution effect
 Factors that Influence Change in
Demand
 A change in the level of consumer
income.
 A change in tastes or preferences of
consumers.
 A change in the prices of related
goods.
 A change in buyer’s expectations
about future prices.
 A change in population: size and age
composition.
 Shift in Demand Curve
Increase in Demand Extension in Demand
D2

D1
Price

Price
D1

A A
10 10

5 B

2 8 2 8
Quantity Demanded
 Shift in Demand Curve
Decrease in Demand Contraction in Demand
D1

D1
Price

Price
D2

A B
10 10

5 A

2 8 2 8
Quantity Demanded
Supply

 A schedule showing the

relationship between price and
quantity supplied, other things
being equal, for a specified period
of time.
Law of Supply
 At higher prices, a larger quantity will
generally be supplied than a lower
prices, all other things held constant.
 Case Study Demand and Supply.doc
 At lower prices, a smaller quantity
will generally be supplied than at
higher prices, all other things held
constant.
Supply Relationship

 There is a positive, or direct

relationship between the price of
any good or service and the
quantity supplied, holding other
factors constant.
 Supply Curve

B
20
Price

A
10

0
2 8
Quantity Supplied
Factors influencing supply

 Expectations of price changes

 Prices of other goods (substitutes
n complementary)
 Cost of production
 Changes in technology
 Uncertain factors
 Shift in Supply Curve
Increase in Supply Extension in Supply
Price

Price
A B
10 10 B

5 A

2 8
Quantity Supplied 2 8
EQUILIBRIUM PRICE

 The price mechanism brings the

forces of demand and supply in
equilibrium and the price at
which these opposite forces are
at parity, is Equilibrium Price.
 MARKET EQUILIBRIUM
S

P1

E
Price

P2
D

Q
Quantity
Elasticity of Demand

Percentage change in quantity

demanded due to percentage change
in determining factor.
Price Elasticity

 % Change in Quantity Demanded

% Change in Price of commodity

1.Point Elasticity= Lower Segment

Upper Segment
2. Arc Elasticity= Change in Q/ Q
Change in P/ P
Determinants Of Price EL

 Availability of substitutes
 Nature of need the commodity
satisfies
 Time period
 No. of uses of commodity
 Proportion of income spent on
commodity
 PRICE ELASTICITY
E= infinity

Ep>1
PRICE

Ep=1

Ep<1

E=0
QUANTIY
ELASTICITY

 E=1 Unitary Elastic Demand

 E>1 Highly Elastic Demand
 E<1 Inelastic Demand
 E=0 Perfectly Elastic Demand
 E=Infinity Perfectly Inelastic
Demand
INCOME ELASTICITY

Income elasticity of demand

% Change in Quantity Demanded

% Change in income of household
CROSS ELASTICITY

Cross elasticity of demand

% Chg in quantity demanded of A

% Change in price of B
ELASTICITY OF SUPPLY

 The price elasticity of supply

indicates the responsiveness of
supply to a change in price.

% Change in Quantity Supplied

% Change in Price of commodity
Factors affecting El of Supply

 Existence of stocks of finished

goods
 Availability of labor
 Availability of raw material
 Barriers to entry in market
 Time scale
Elasticity of supply n Time

 Market period
 Long run
 Secular period
 MS LS

P4
SS
P3

P2

P1 E

D2

D1

Quantity demanded n supplied