TOPICS

PRODUCTION POSSIBILITY CURVE. CONCEPT OF DEMAND. SHIFT IN DEMAND CURVE AND MOVEMENT ALONG THE DEMAND CURVE. CONCEPT OF SUPPLY. SHIFT IN SUPPLY CURVE AND MOVEMENT ALONG THE SUPPLY CURVE. EQUILIBRIUM PRICE.

(PPC)

COTENTS
DEFINITION OF PRODUCTION POSSIBILITY CURVE. PRODUCTION POSSIBILITY SCHUDLE. PRODUCTION POSSIBILITY CURVE. SHIFT IN PRODUCTION POSSIBILITY CURVE. CURVE SHOWING UNDER UTILIZATION OF RESOURCES AND FULL UTILIZATION OF RESOURCES.

Objectives
To understand meaning of PPC. To understand PPC schedule. To understand PPC. To understand why it is concave to the origin. To understand that any point inside it shows under utilization of resources , point on it shows full utilization of resources. To understand central problems.

PRODUCTION POSSIBILITY CURVE

Production possibility curve is that curve which represents the maximum amount of a pair of goods or services that can both be produced with an economys given resources and technique, assuming that all resources are fully employed.

 Assumptions of PPC (a) Fixed quantity of factor of production of production. (b) Resources are fully and efficiently utilized. (c) Technology of production remains constant. (d) Assumption of two goods.

PRODUCTION POSSIBILITY SCHUDLE

A GOOD 0 1 2 3 4 B GOOD 100 90 70 40 0

PRODUCTION POSSIBILITY CURVE

A1 A2 A3
A GOOD A4

A5

B1 B2 B3 B4

B5 B GOOD

Two Basic Properties of PPC

(1)Production Possibility Curve Slopes Downwards: Production possibility curve slopes downwards from left to right. It is because in a situation of fuller utilization of the given resources, production of both the goods can not be increased. More of good-Can be produced only with less of good-Y. (2) 1)Production Possibility Curve is concave to the point of origin; It is because to produce each additional unit of good-X, more and more unit of good-Y will have to be sacrificed than before. Opportunity cost of producing every additional unit of good X tends to increase in terms of loss of production of good-Y.In other words, production will obey the Law of Increasing opportunity cost

P1 P A GOOD GROWTH OF RESOURCES

Initial Resources

P1 B GOOD

Full Utilization of resources

. .
Z
Under utilization of resources

Unattainable combination of output

A GOOD

. .

S
.

.
E

B GOOD

OPPORTUNITY COST
Opportunity Cost:- Opportunity Cost refers to value of a factor in its next best (or second best) alternative use.
Available Resources Possible uses of land Market value of production Assumption One hectare of land and a given package of other inputs Use-1Production of wheat Use-2 Production of Rice Use -3 Production of maize Use-1 Rs. 6000 Use-2 Rs. 5000 Use-3 Rs. 4000 Technique of production is constant and resources are fully utilized

Y A
Rs.6000 Use-1 value of output

O
Rs. 5000

B
Use-2 value of output

Opportunity cost of employing resources in use -1=loss of out put in next best alternative use of the given resources which is Rs. 5000 in use -2

Evaluation
Define P.P.C. ? What does slope of P.P.C show ? What does the point inside the P.P.C. show ? What does the shifting of P.P.C show ? Can you show the central problems through the P.P.C ?

DEMAND
Meaning the quantity of a commodity or service that a consumer would buy at a given price and at a given time .

Contents of demand
Desire for a commodity. Ability to pay. Readiness to spend. Specific time. Specific place. Specific price.

FACTORS AFFECTING DEMAND

1. Price of the commodity. 2. Income of the consumer. 3. Price of related goods. 4. Tastes and preferences. 5. Future expectations.

LAW OF DEMAND
If other things remaining the same, when the price of a commodity increases, its demand falls and when the price falls, its demand increases.

Assumptions of law of Demand

(1)Income

of the consumer remains constant. (2)There is no change in the taste and preference of the consumer. (3)No change in price of the related good. (4)The commodities are normal. (5)There is no expectations of change in price in near future. (6)No new substitute of the commodity are available. (7)No change in the distribution of income and wealth. (8)Other relevant factors like size and composition of population, seasonal and climate factors, economic condition of the country etc. remain unchanged.

RELATION OF PRICE WITH DEMAND

PRICES (Rs.) 1 2 3 4 5 DEMAND (Qt.) 5 4 3 2 1

5
Price 1 O 1 5 D X Quantity

DIFFERENCE
Sr.no
Base of difference

Change in Quantity Demand Change in Quantity demanded refers to increase or decrease In quantity purchased of a commodity in response to decrease or increase in its price other than its determinants. Movements along the Demand curve (1)Extension of Demand (2)Contraction of Demand

Change in Demand

Definition

Alternative Name

Change in Quantity demanded refers to increase or decrease In quantity purchased of a commodity in response to change in other determinants of demand, other than price of the same commodity.
Shifting of the Demand curve (1)Increase in Demand (2)Decrease in Demand

Difference between Contraction and Decrease in Demand

This is caused only by change in the price of concerned commodity Increase in price of the commodity is the only cause

This is caused by change in determinants, other than price of the concerned commodity Several causes: Decrease in income, decrease in price of substitute good, increase in price of complementary good,

Price(Rs.) Quantity (Units) Description

p Q.D.

Price (x) 10 10

Quantity (Units) 30 20

Contraction of demand

Price

P1
P

N
M Q1 Q Quantity
D

Decrease in demand
Y D1 D Price

E1

E D1

D
x

Q1 Q Quantity

Extension of demand
Y D

Price

P
P1

K
L Q Q1 Quantity D

Increase in demand
PRICE

D1

E1

D1

D
O
Q1 QUANTITY

Questions
VERY SHORT ANSWER TYPE Q .1 Define demand ? Q .2 Define supply ? Q .3 Define demand function ? Q .4 Define supply function ? Q. 5 what do you understand by demand schedule ? Q.6 what do you understand by supply schedule ? Q 7 Explain the law of demand ? Q 8 what are the factors affecting demand ? Q 9 what are the assumptions of law of demand ? Q 10 what are the exceptions to the law of demand ?

SUPPLY OF GOODS

The supply of goods is the quantity offered for sale in a given market at a given time at various prices.

 The law of supply states that other things remaining constant, the higher the price the greater the quantity supplied or the lower the price the smaller the quantity supplied.

FACTORS AFFECTING SUPPLY

Price Of Commodity. *Price Of Factors Of Production. *Productivity Of Factors. *Technology. *Numbers Of Firms. *Policy Of Govt. *Aim Of Firms.

TYPES OF SUPPLY SCHEDULE

(1)

Individual Supply Schedule.

(2)

Market Supply Schedule.

The table relating to price and quantity Supplied is called the supply schedule.

 Other things being are equal, when quantity supplied of a commodity increases due to rise in its price it is called extension.

DIFFERENCE BETWEEN CHANGE IN QUANTITY SUPPLIED AND CHANGE IN SUPPLY.

Change in quantity Supplied
1. Due to change in price. 2. Movement along the supply curve.

Change in supply
1. Due to change in other factors. 2. Shift in supply curve.

EXTENSION OF SUPPLY

EXTENSION OF SUPPLY

 Other things being equal, when quantity supplied of a commodity decreases due to fall in its price, it is called contraction of supply.

INCREASE IN SUPPLY

INCREASE IN SUPPLY
More supply at same price or same supply at less price is called increase in supply.

Increase in Supply

DECREASE IN SUPPLY
Less supply at same price and same supply at more price is called decrease supply.

DECREASE IN SUPPLY

Evaluation
What do you mean by supply ? Define the law of supply ? Name any four factors effecting the supply of a commodity. Define the expansion of supply. What do you mean by contraction of supply ?

 Equilibrium Price Will be Shown by the Diagram Effect of Change in demand on Equilibrium Price- When supply is Constant ,Perfectly Elastic and Perfectly Inelastic Effect of Change in Supply on Equilibrium PriceWhen Demand is Constant ,Perfectly Elastic and Perfectly Inelastic Effect of Simultaneous Change in Demand and Supply All the Effects Mentioned Above Will be Shown by the Diagrams

HERE ARE SOME PICTURES OF HOUSEHOLD COMMODITIES

Rs. 8,000/Rs. 20,000/-

Rs. 5/-

THESE COMMODITIES HAVE DIFFERENT PRICES.

LETS KNOW HOW THESE PRICES DETERMINED IN THE MARKET.

 THE PRICE ON WHICH A COMMODITY IS SOLD AND PURCHASED IN MARKET IS CALLED EQUILIBIRIUM PRICE. EQUILIBIRIUM PRICE IS THAT PRICE ON WHICH THE DEMAND AND SUPPLY OF A COMMODITY IS EQUAL TO EACH OTHER.

SCHEDULE OF EQUILIBIRIUM PRICE

PRICE(RS.) QT.SUPPLIED QT.DEMANDED

1 2 3 4 5

1 2 3 4 5

5 4 3 2 1

EQUILIBIRIUM PRICE

Y Equilibrium Price is that price at which its two determinantsP demand and supply are in Price balance, or equal.
O

S Q

Quantity

PRICE
P1

S
EXCESS SUPPLY

p
P2 S

E
EXCESS DEMAND

D
X

QUANTITY

 When supply is constant

D1

D
E1 P1 P E

Price

S D
O Q
Q1

D1
Quantity
X

Y
Price

When supply is Perfectly Elastic and increase in demand D1 D

E1

D
O Q

D1
X

Quantity

Q1

When Supply is Perfectly Inelastic and demand increases.

Y

D1

Price
P1

E1 E
D1
S D

Quantity

Effect of Decrease In Demand And no change in supply

Y D D1 E P P1 S

E1

Price

S O Q1 Q

D D1

Quantity X

When Supply is Perfectly Elastic

Y

D1

Price

E1

D1
O

D
X

Q1

Quantity

When Supply is Perfectly Inelastic D

D1 S

P
Price P1 D X E1

S Q

D1

Quantity

Effect of increase in supply and no change in demand

Y
Price D S S1

P P1

E1

S1 O
Q Q1

Quantity

When Supply is Perfectly Inelastic

Y D
D1

Price
P
E

P1

E1

D1 Q

D X

Quantity

When Demand is Perfectly Elastic

Y S S1

Price
P D E E1 D

S
O

S1 Q Q1

Quantity

When Demand is Perfectly Inelastic

Y Price E D S S1

P
P1 E1

S
S1 O D Q Quantity
X

Effect of Decrease in Supply and no change in Demand

Y D S1 S

Price
E1 P1 E P
S1

S O

D Q1 Q X

Quantity DEMANDED AND SUPPLIED

When Demand is Perfectly Inelastic

Price Y S1 D E1 S

P1

P S1

S O

D Q
X

Quantity DEMANDED AND SUPPLIED

When Demand is Perfectly Elastic

S1
Y S

Price
D P E1 E D

S1 S
O

Q1

Quantity DEMANDED AND SUPPLIED

Simultaneous Change in Demand and Supply

When Changes in Price Demand and P Supply are Equal
S S1
O

D1 D

S1

E1

D1 D Q Quantity Q1 X

Evaluation
Define the equilibrium price ? How does increase in demand effects equilibrium price when supply is constant? What will be the change in equilibrium price, when demand is perfectly elastic and supply increases ? What will be the change in equilibrium price, when supply is perfectly inelastic and demand decreases ?

OBJECTIVES
To know the meaning and components of AD and AS. To understand the concepts of inflationary and deflationary gap through the diagrams To understand the determination of income and employment through AD /AS and saving and investment.

 Aggregate demand refers to the sum total of demand for all the goods and services in the economy as a whole. It is measured in terms of total expenditure on the goods and services in an economy.

COMPONENTS OF AGGREGATE DEMAND

AD= C+I+G+(X-M). C= Household consumption expenditure. I=Investment expenditure. G=Govt. Expenditure. (X-M)=Net export (Export- import).

AGGREGATE SUPPLY
Aggregate supply refers to the flow of goods and services in an economy. Aggregate supply is the minimum sale proceeds which the producer must get so as to continue production at any given level of employment

AS=C+S. C=CONSUMPTION. S=SAVING.

DETERMINATION OF OUTPUT, INCOME AND EMPLOYMENT.

: AS/ AD approach Equilibrium level of output, income and employment id determined at the point where aggregate demand and aggregate supply are equal to each other. Equilibrium : AD -=AS Since , AD = C + I and AS = C + S Equality between (C + I) and (C + S) simply implies the equality between saving and investment . so that equilibrium occurs where, AS = AD or S = I Accordingly determination of output, income and employment can be explained in two ways : 1.On the basis of equilibrium between aggregate demand and aggregate supply 2.On the basis of equilibrium saving and investment

AS .AD AD AND AS E

O
SAV. AND INV.

S E

INCOME AND EMPLOYMENT

I
O S

I
INCOME AND EMPLOYMENT

AS
AD AND AS

AD E

FULL EMPLOYMENT LEVEL

Y
INCOME AND EMPLOYMENT

EQUILIBRIUM AT UNDEREMPLOYMENT
UNDEREMPLOYMENT EQ..

AS

AD
AD1

AD AND AS

E1

FULL EMPLOYMENT LEVEL

Y1

Y
INCOME AND EMPLOYMENT

EQUILIBRIUM AT UNDEREMPLOYMENT
UNDEREMPLOYMENT EQ..

AS

AD
AD1

AD AND AS

E1

FULL EMPLOYMENT LEVEL

Y1

INCOME AND EMPLOYMENT INCOME AND EMPLOYMENT

AS
OVER EMPLOYMENT EQ. E1
AD AND AS

AD1 AD

FULL EMPLOYMENT LEVEL

INCOME AND EMPLOYMENT

 FULLEMPLOYMENT LEVEL SHOWS ABSENCE OF UNVOULENTRY UNEMPLOYMENT. UNDER EMPLOYMENT LEVEL SHOWS DEFICIENT DEMAND ,ALSO CALLED DEFLATIONARY GAP. OVER EMPLOYMENT LEVEL SHOWS EXCESS DEMAND, ALSO CALLED INFLATIONARY GAP .

Evaluation
Define aggregate demand ? What do you mean by aggregate supply ? What are the components of aggregate demand? Explain the full employment level equilibrium of out put, income and employment. Explain the equilibrium of out put, income and employment through the help of AD/AS and Saving and investment.