Amity Business School

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 TOPICS COVERED Amity Business School

• Demand
• Law of Demand
• Law of Supply
• Equilibrium
• Shortage and Surplus
• Shift in Demand Curve
• Shift in Supply Curve
• Case Study of Tax Incidence
• Live Example
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DEMAND Amity Business School

THE PERSON IN THE CAR NEED PETROL

THE PERSON HAS PUURCHASING POWER

THE PERSON HAS WILLINGNESS TO PAY

IF ALL 3 THINGS ARE THERE THEN

PETROL IS THE DEMAND OF THAT
PERSON.
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 Law of Demand Amity Business School

• law of demand states that as price falls,

demand extends and as price rises, demand
contracts, other things being equal.

• other things being equal means that all

factors other than price influencing the
demand are assumed constant(no change)
like prices of related goods, income of
consumer, future expectations regarding
price and income etc.
 Amity Business School

Curve of Law of Demand

PRICE QUANTITY

5 10

4 20

3 30

2 40

1 50
 Law of Supply Amity Business School

• law of supply states that as price rises,

supply rises and as price falls, supply falls,
other things being equal.

• other things being equal means that all

factors other than price influencing supply are
assumed as constant(no change) like prices
of factors of production, goal of the firm, govt.
policy, future expectations regarding price
etc.
 Amity Business School

Curve of Law of Supply

PRICE QUANTITY

5 50

4 40

3 30

2 20

1 10
 Equilibrium:- Amity Business School

• In economics, an equilibrium is a situation

in which:
 quantity demanded equals quantity
supplied.
 refers to a condition where a market price
is established through competition such that
the amount of goods or services sought
by buyers is equal to the amount of goods
or services produced by sellers.
 Amity Business School

Curve of Equilibrium

PRICE QUANTITY QUANTITY

DEMANDE SUPPLIED
D
5 10 50

4 20 40

3 30 30

2 40 20

1 50 10
 Amity Business School

Shortage and Surplus

• A shortage occurs when quantity

demanded exceeds quantity supplied.
– A shortage implies the market price is too low.
• A surplus occurs when quantity supplied
exceeds quantity demanded.
– A surplus implies the market price is too high.
 Amity Business School

Shift in the Demand Curve

• A change in any variable other than price
that influences quantity demanded
produces a shift in the demand curve or a
change in demand.
• Factors that shift the demand curve
include:
– Change in consumer incomes
– Population change
– Consumer preferences
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 Amity Business School

Shift in Demand curve

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 Amity Business School

Equilibrium After a Demand Shift

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 Shift in Supply Curve Amity Business School

• A change in any variable other than price

that influences quantity supplied produces
a shift in the supply curve or a change in
supply.
• Factors that shift the supply curve include:
– Change in input costs
– Increase in technology

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 Amity Business School

Shift in Supply Curve

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 Amity Business School

Equilibrium After a Supply Shift

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 CASE STUDY Amity Business School

TAX INCIDENCE:-
• As one example of demand and supply analysis, let us
assume we have a product with the situation shown in
the graph below. The price is $1.00 per unit.

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 Continued…. Amity Business School

 Now a sales tax is imposed. The tax is charged to the seller. For
every $1.00 of sales, assume that the seller must pay $0.07 to the
government. (Notice that consumers do not pay sales taxes. You
have not paid any sales tax money to any government agency. The
store pays the sales tax to the government.)
 From the point of view of the seller, this is an additional cost of
production. In addition to all other costs, the seller must also pay
the sales tax.
 Do costs of production affect demand or supply?
 Will there be a shift or movement along supply?
 Since the change is caused by something other than the price of the
product, the answer is a shift.
 Since costs of production are increasing, the good is less profitable,
causing supply to decrease.
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 Continued….. Amity Business School

 we can say that the seller would like to,

raise the price to $1.07. Then, the seller could pay the $0.07 in tax
and still have the same $1.00 that was earned before the sales tax
was imposed.
 However, due to the law of demand, the seller cannot raise the price
to $1.07. If the seller raises the price, the quantity demanded will
fall.
 In this case, equilibrium occurs with the new price at $1.04. At any
higher price, there would be a surplus. We say that $0.04 is the
incidence of the tax on the buyer because the buyer must pay a
$0.04 higher price.
 We say that the other $0.03 is the incidence of the tax on the
seller because the seller earns $0.03 less that was earned before
the sales tax was imposed ($1.04 - $0.07 = $0.97).

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 Amity Business School

PRICE
SUPPLY2

E2 SUPPLY1
1.4

1 E1

DEMAND

QUANTITY

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 Amity Business School

LIVE EXAMPLE:-
• The heat of oil prices was strongly felt as the oil
prices reached $50 per barrel in early 2005 from
$10 per barrel in 1998.
• The prices were driven by the surge in demand
in countries that included US, India and China
and also the supply factors that had failed to
meet the rise in demand.

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 EFFORTS OF:- Amity Business School

HERSHUL VIRENDRA
KAMAL GOVIL
SNEHA SUNDRANI
SHYAM AGRAWAL
DEEPIKA PRABHAKAR
RAJAT GUPTA

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