Professional Documents
Culture Documents
Quantity demanded
is the amount
of a good that buyers are
willing and able
to purchase.
Law of Demand
Pri
Demand Curve
Rs.3
P
2.5
0
2.0
0
1.5
0
0
1.0
0
0.5
0
Quantity
0 1 2 3 4 5 6 7 8 9 1 1 1 of Ice-
0 1 2 Cream
Ceteris Paribus
Ceteris paribus is a Latin phrase that
means all variables other than the
ones being studied are assumed to be
constant. Literally, ceteris paribus
means “other things being equal.”
2.00 A
D1
0 12 20 Number of
Cigarettes Smoked
Change in Quantity Demanded
versus Change in Demand
Change in Demand
◆ A shift in the demand curve, either
to the left or right.
◆ Caused by a change in a
determinant other than the price.
Changes in Demand
Price of
Ice-Cream
Cone
Increase in
demand
Decrease in
demand
D2
D1
D3 Quantity
0
of Ice-
Cream
Change in Quantity Demanded
versus Change in Demand
Variables that A Change in
Affect Quantity
Demanded This Variable . . .
Price Represents a movement
along the demand curve
Income Shifts the demand curve
Prices of related Shifts the demand curve
goods
Tastes Shifts the demand curve
Expectations Shifts the demand curve
Number of Shifts the demand curve
buyers
Two Simple Rules for
Movements vs. Shifts
■ Rule One
➤When an independent variable changes and
that variable does not appear on the graph,
the curve on the graph will shift.
■ Rule Two
➤When an independent variable does appear
on the graph, the curve on the graph will not
shift, instead a movement along the existing
curve will occur.
Consumer Income
Price of
Normal Good
Ice-Cream
Cone
Rs.3.0 An
0
2.5 increase
0 Increase in
2.0 in demand income...
0
1.5
0
1.0
0
0.5
0
D2
D1 Quantity
0 1 2 3 4 5 6 7 8 9 1 1 1 of Ice-
0 1 2 Cream
Consumer Income
Price of
Inferior Good
Ice-Cream
Cone
Rs.3.00
2.5 An
0
2.0
increase
0 Decrease
in
1.5 in demand income...
0
1.0
0
0.5
0
D2 D1 Quantity
0 1 2 3 4 5 6 7 8 9 1 1 1 of Ice-
0 1 2 Cream
Exceptions to the law of
Demand
■ Law of Demand is a universal
phenomenon. Very rarely, it is so
observed that with a fall in price,
demand also falls and a increase in price
increases demand.
■ The demand curve in such cases is
upward sloping.
Exceptions to the law of
Demand
■ A few such exceptions are seen in case of:
■ Giffen Goods : In cases of some inferior goods,
as observed by Robert Giffen, when price falls,
there is a fall in the demand for these products.
■ Eg. This was observed by Giffen in Italy when
consumers purchased less of cheap potatoes
when the price went down and purchased meat
from the savings.
Exceptions to the law of
Demand
■ Snob Appeal : Goods that are used as “Status
Symbol” eg. Rolls Royce cars, Johney Walker
Scotch Whisky, Diamonds etc.
■ The demand for these goods increases even if
the price is increased because these goods are
purchased for their “exclusiveness” which
increases with an increase in price.
Exceptions to the law of
Demand
■ Speculation : When the consumers understand
that there is a increase in price of a product
and they are expecting a further rise, they will
not mind purchasing more of that product even
if it’s price is increased.
■ Consumer’s psychology : Many consumers do
not purchase products at the time of “discount
sales” etc assuming that the quality of the
products may have been compromised.
Law of Supply
Pri
Supply Curve
Pr
2.0
0
1.5
0
1.0
0
0.5
0
Quantity
0 1 2 3 4 5 6 7 8 9 1 1 1 of Ice-
0 1 2 Cream
Market Supply
Quantity
0 1 5 of Ice-
Cream
Change in Quantity Supplied
versus Change in Supply
Change in Supply
◆ A shift in the supply curve, either to the
left or right.
◆ Caused by a change in a determinant
other than price.
Change in Supply
Price of S3
Ice-Cream
Cone
S1 S2
Decrease
in Supply
Increase
in Supply
Quantity
0 of Ice-
Cream
Change in Quantity Supplied
versus Change in Supply
Variables that
AffectQuantity Supplied A ChangeinThis Variable. . .
Price Represents a movement along
the supply curve
Input prices Shifts the supply curve
Technology Shifts the supply curve
Expectations Shifts the supply curve
Number of sellers Shifts the supply curve
Shifts in Curves versus
Movements along Curves
◆ A shift in the supply curve is called a
change in supply.
◆ A movement along a fixed supply curve is
called a change in quantity supplied.
◆ A shift in the demand curve is called a
change in demand.
◆ A movement along a fixed demand curve is
called a change in quantity demanded.
Supply and Demand Together
Equilibrium Price
◆ The price that balances supply and
demand. On a graph, it is the price at which
the supply and demand curves intersect.
Equilibrium Quantity
◆ The quantity that balances supply and
demand. On a graph it is the quantity at
which the supply and demand curves
intersect.
Supply and Demand Together
Demand Supply
Schedule Schedule
Price P
At Rs.2.00, the quantity demanded is
equal to the quantity supplied!
Equilibrium of
Price of Supply and Demand
Ice-Cream
Cone
Supply
Rs.3.
00
2.5 Equilibriu
0 m
2.0
0
1.5
0
1.0
0
0.5 Demand
0 Quantity
0 1 2 3 4 5 6 7 8 9 10 11 12 of Ice-
Cream
Excess Supply
Price of
Ice-Cream
Cone
Supply
Rs.3. Surplus
00
2.5
0
2.0
0
1.5
0
1.0
0
0.5 Demand
0 Quantity
0 1 2 3 4 5 6 7 8 9 1 11 12 of Ice-
0 Cream
Surplus
Supply
Rs.2.00
Rs.1.50
Shortage Demand
0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of
Ice-Cream Cones
Shortage
Supply
2.00
2. ...resulting Initial
in a higher equilibrium
price...
D2
D1
0 7 10 Quantity of
3. ...and a higher Ice-Cream Cones
quantity sold.
How a Decrease in Supply Affects
the Equilibrium
Price of
Ice-Cream 1. Shortage of milk reduces
Cone the supply of ice cream...
S2
S1
New
Rs.2.50 equilibrium
0 1 2 3 4 7 8 9 10 11 12 13 Quantity of
3. ...and a lower Ice-Cream Cones
quantity sold.