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Demand and Supply Analysis

Supply
 Indicates the quantities of a good or service that the

seller is willing and able to provide at a price, at a given point of time.  Supply of a product X (Sx) depends upon:  Price of the product (Px)  Cost of production (C)  State of technology (T)  Government policy regarding taxes and subsidies (G)  Other factors like number of firms (N)  Hence the supply function is given as: Sx = (Px, C, T, G, N)

Law of Supply
 Law of Supply states that other things remaining the same, the higher the price of a commodity the greater is the quantity supplied.  Price of the product is revenue to the supplier; therefore higher price means greater revenue to the supplier and hence greater is the incentive to supply.  Supply bears a positive relation to the price of the commodity. Supply Schedule
Point on Supply Curve a b c d e Price (Rs. Per cup) 15 20 25 30 35 Supply (000 cups per month) 10 20 30 45 60
35 30 25 20 15 0 a 10 20 30 40 50 60 Quantity of Coffee b c d e

Supply Curve

Change in Supply
 Shift in the supply curve from S0 to S1  More is supplied at each price (Q1>Q0)  Increase in supply caused by:  Improvements in the technology  Fall in the price of inputs  Shift in the supply curve from S0 to S2  Less is supplied at each price (Q2<Q0)  Decrease in supply caused by:  A rise in the price of inputs  Change in government policy (VAT)

Price

S2

S0 S1

Q2

Q0

Q1

Quantity

Market Equilibrium
 Equilibrium occurs at the price where the quantity demanded and the quantity supplied are equal to each other.  At point E demand is equal to supply hence 25 is equilibrium price
Price

Price (Rs) 15

Supply (000 cups/ month) 10 15 30 45 70

Demand (000 cups/ month) 50 40 30 15 10

E 25

20 25 30
D

35

30

Quantity

Market Equilibrium
 For prices below the equilibrium, Quantity demanded exceeds quantity supplied (D>S)
 Price pulled upward

 For prices above the equilibrium, Quantity demanded is less than quantity supplied (D<S)
 Price pulled downward.

 At point E demand is equal to supply hence 25 is equilibrium price.


Price S 30 E 25 20 D O 30 Quantity

Price (Rs) 15 20 25 30 35

Supply (000 cups/ month) 10 15 30 45 70

Demand (000 cups/ month) 50 40 30 15 10

Changes in Market Equilibrium


(Shifts in Supply Curve)
 The original point of equilibrium is

 

at E, the point of intersection of curves D1 and S1, at price P and quantity Q An increase in supply shifts the supply curve to S2 Price falls to P2 and quantity rises to Q2, taking the new equilibrium to E2 A decrease in supply shifts the supply curve to S0. Price rises to P0 and quantity falls to Q0 taking the new equilibrium to E0 Thus an increase in supply raises quantity but lowers price, while a decrease in supply lowers quantity but raises price; demand being unchanged

Price D1 P0 P P2 S0 S1 S2 O Q0 Q Q2 D1 E0 E E2

S0 S1 S2

Quantity

Changes in Market Equilibrium


(Shifts in Demand Curve)
 The original point of equilibrium is at E, the point of intersection of curves D1 and S1, at price P and quantity Q  An increase in demand shifts the demand curve to D2
 Price rises to P1 and quantity rises to Q1 taking the new equilibrium to E1

Price D2 D1 D0 P1 P P* S1 E E2 D2 D0 Q* Q Q1 D1 Quantity E1 S1

 A decrease in demand shifts the demand curve to D0


 Price falls to P* and quantity falls to Q* taking the new equilibrium to E2.

 Thus, an increase in demand raises both price and quantity, while a decrease in demand lowers both price and quantity; when supply remains same.

Change in Both Demand and Supply


Price

D2 D1

D2

P2 P1

E1 S1

S2 Q1

quantity combination (P1, Q1).  An increase in both demand and supply takes place;  demand curve shifts to the right S1 from D1 D1 to D2 D2 S2  supply curve also shifts to the right from S1 S1 to S2 S2.  The new equilibrium is at E2, and E2 E0 price quantity is (P2, Q2).  An increase in both supply and demand will cause the sales to rise, D2 but D2 D1  the price will increase if increase Quantity in D>S (as at E2 ) Q2  No change in price if increase in D=increase in S (as at E0 )

 Initial equilibrium is at E1, with price

Summary
 Demand is defined as the desire to acquire a commodity to satisfy 

human wants, which is backed by ability to pay the price. Categories of demand are made on the basis of the nature of commodity demanded (consumer goods and capital goods); time unit for which it is demanded (short run and long run); relation between two goods (substitutes and complements), etc. The law of demand states that the consumers will buy more of the commodity when prices are high and less when prices are low, provided all the other factors of demand remains constant. Demand for a product X (Dx) is a function of price of the commodity X (Px), income of the consumer (Y), price of related (substitutes or complements) commodities (Po), tastes and preference of the consumer (T), advertising (A), future expectations (Ef), population and economic growth (N). A change in quantity demanded denotes movements along the demand curve due to a change in price, while a change in demand denotes a rightwards or leftward shift of the demand curve due to a change in the other determinants of demand other than price.

Summary
 Supply is defined as the willingness to produce and sell the commodity by 

production units or firms. The law of supply states that firms will sell more of the commodity when prices are high and less of the commodity when prices are low provided all the other factors of supply remains constant. Supply of a product X (Sx) is a function of price of the product (Px), cost of production (C), state of technology (T), Government policy regarding taxes and subsidies (G), other factors like number of firms (N). Change in quantity supplied refers to movements along the same supply curve due to change in the price of the commodity. However when change in supply is associated with change in the factors like costs of production, technology, etc. it causes a shift of the supply curve upwards or downwards Market equilibrium occurs where demand and supply are equal. This equilibrium determines the price in the market through the forces of demand and supply. Comparative statics is the process of comparison between two equilibrium situations. An increase in both supply and demand will cause the sales to rise, but the effect on price can be positive, negative or equal to zero, depending on the extent of the shifts in the demand and supply curves.