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LECTURE 3
DEMAND & SUPPLY
Prof. D. Tripati Rao
Indian Institute of Management Lucknow
tripati@iiml.ac.in, June 28, 2016
Review QEUSTIONS !
What is:
a Market?
Invisible Hand?
Scarcity?
Opportunity Cost?
People take decisions at the margin
Productive- vs. Allocative- Efficiency?
Comparative Statics Analysis?
Positive vs. Normative Economics?
Accounting vs. Economic Profit?
Non-Price Determinants
price of related products
tastes & preferences
income & wealth
future expectations
number of buyers
Short-Run
Changes
Constant
Long-Run
INR200
Px
= a + bQx
INR100
D
0
Quantity of Pizzas
Price of Pizza
Change in Demand
Shifts in the DD Curve
Increase
in Demand
Change in Income
Increase
Decrease
Decrease
in Demand
Demand Curve, D2
Demand Curve, D1
Demand Curve, D3
0
Quantity of Pizza
Price of
Pizza
(INR)
Qty of
Pizza DD
(000)
0
50
100
150
200
250
300
0
0
1
2
3
4
5
300
250
An Increase
in Price 200
150
100
50
1 2
0
9 10 11 12 Quantity of
Pizza
Supply Curve, S 3
Supply
Curve, S 1
Supply
Curve, S 2
Increase
in supply
Quantity of Pizza
Shortage
Price < P*, then QD > QS
a case of excess demand at that price
price will rise to adjust to equilibrium QD = QS
Supply
Equilibrium Price
Equilibrium
200
Equilibrium
Quantity
0 1
Demand
2 3 4 5 6 7 8 9 10 11 12 13
Quantity of Pizza
Supply
Surplus
250
200
Demand
0
10
Quantity
Demanded
Quantity
Supplied
Quantity of Pizza
Price of
Pizza
Supply
200
150
Shortage
Demand
0
4
Quantity
Supplied
10
Quantity of Pizza
Quantity
Demanded
Understanding Changes in
Supply & Demand Forces
Steps
1. Identify whether the event shifted supply or
demand or both
2. Identify in which direction the curve shifts
3. Use the SS-DD curves to analyse how the
shift changes in P & Q
A Decrease
in SS
No Change
in DD
P same
Q same
P up
Q down
An Increase
in DD
P up
Q up
P ambiguous
P up
Q up
Q ambiguous
A Decrease
in DD
P down
Q down
P down
P ambiguous
Q ambiguous
Q down
10
11
D1
increase in DD causes
P & Q to rise
P1
Q1
S
h
o
rt
a
g
e
P2
Q2
P1
S
u
r
p
l
u
s
decrease in DD causes
P & Q to fall
P2
Q2
Q1
12
13
increase in DD causes
P & Q to rise
D1
P2
P1=P3
Q1
Q2
Q3
14