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Econs Lec 2

The document provides an introduction to market analysis, focusing on demand, supply, and equilibrium. It explains the concepts of demand and supply, their determinants, and how they interact to establish market equilibrium, including the effects of changes in these factors. Additionally, it outlines methods for analyzing shifts in demand and supply and their impact on equilibrium price and quantity.

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4 views20 pages

Econs Lec 2

The document provides an introduction to market analysis, focusing on demand, supply, and equilibrium. It explains the concepts of demand and supply, their determinants, and how they interact to establish market equilibrium, including the effects of changes in these factors. Additionally, it outlines methods for analyzing shifts in demand and supply and their impact on equilibrium price and quantity.

Uploaded by

mahfuzmohammedabulkhair
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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INTRODUCTION TO

MARKET ANALYSIS
(DEMAND , SUPPLY AND EQUILIBRIUM)

1
Learning Objectives
• Understand the market situation

• Examine the demand side of the market


• What is demand, determinants of demand, change in quantity demanded vs. change in
demand.

• Examine the supply side of the market


• What is supply, determinants of supply, change in quantity demanded vs. change in demand.

• Understand the concept of equilibrium

• Understand the effect of changes at the equilibrium 2


The Market
• A market is an institutional arrangement which brings consumers and suppliers
together.

• Determines what goods are being produced

• By finding the price at which the quantity demanded equals the quantity supplied
tells us for whom the goods are produced
• Those consumers willing to pay the equilibrium price

• Modern microeconomics is about supply, demand, and market equilibrium.


• If you want to know how any event or policy will affect the economy, you must think first
about how it will affect supply and demand.

• More often, markets are less organized. 3


The concept of Demand
• Quantities of a good or service that people
are ready (willing and able) to buy at
various prices within some given time
period.

• Law of Demand
• The higher the price, the lower the quantity
demanded and the lower the price the
higher the quantity demanded, “all things
being equal”.
• The demand curve is downward sloping.

• The market demand shows the horizontal


summation of quantities demanded at the
various price levels. 4
Determinants Of Demand (Demand Shifters)
Income of Taste and Price of
consumer preference related
• Normal good commodity
• Inferior • substitutes
• complements

Consumer
Number of
population future Advertising
buyers
expectation
The Demand Function
• A general equation representing the
demand curve
• Example:
Qxd = f(Px , PY , M, H,)

• Qx = quantity demand of good X.


d
• Demand Function
• Px = price of good X. • Qxd = 10 – 2Px
• PY = price of a related good Y.
• Substitute good. • Inverse Demand
• Complement good.
• M = income.
Function:
• Normal good. • 2Px = 10 – Qxd
• Inferior good.
• H = any other variable affecting demand. • Px = 5 – 0.5Qxd
6
Change In Demand Vs. Change In Quantity
Demanded.
Change In Demand (Caused by all the other Change In Quantity Demanded (Caused by only
determinants apart from price) A change in the price of the good or service)

7
The Concept Of Supply
• Supply is the quantity of goods and services
that producers are willing and able to
produce for the market, given the various
price levels over a period of time.

• Law of Supply
• The higher the price, the higher the
quantity supplied, the lower the price,
the lower the quantity supplied, “all
things being equal”.

• The market supply shows the horizontal


summation of quantities supplied at the
various price levels. 8
Determinants Of Supply (Supply Shifters)
Number of
firms Taxes or Price of Weather
subsidies inputs conditions

Future Price of
Technology expectation Government other goods
of price policy offered by
firm.
The Supply Function
• An equation representing the • Example:
supply curve:
QxS = f(Px , PR ,W, TX, H,) • Supply Function
• Qxs = 10 + 2Px

• QxS = quantity supplied of good X.


• Inverse Supply Function:
• Px = price of good X.
• 2Px = 10 + Qxs
• PR = price of a production substitute. • Px = 5 + 0.5Qxs
• TX = Tax
• W = price of inputs (e.g., wages).
• H = other variable affecting supply.
10
Change In Supply Vs. Change In Quantity
Supplied
Change in supply (caused by changes in all Change in quantity supplied (caused by only
other determinants apart from price) the change in price of the good in question)
Price
S0

Quantity

11
Market Equilibrium
• We are now able to combine supply with
demand into a complete analysis of the
market.

• Market equilibrium is determined at the


intersection of the market demand curve and
the market supply curve.

• Equilibrium price: The price that equates the


quantity demanded with the quantity
supplied.

• Equilibrium quantity: The amount that


people are willing to buy and sellers are
willing to offer at the equilibrium price level. 12
Market Equilibrium
• Shortage: A market situation in which
the quantity demanded exceeds the
quantity supplied.
• A shortage occurs at a price below the
equilibrium level.

• Surplus: A market situation in which the


quantity supplied exceeds the quantity
demanded.
• A surplus occurs at a price above the
equilibrium level.

13
Steps For Analyzing Changes In Equilibrium
1. Start out at initial equilibrium.

2. See a condition change on demand and/or on supply.

3. Shift the appropriate curve the appropriate direction.

4. At initial price note if excess supply or demand results.

5. Move to the new equilibrium point.

6. Compare the new equilibrium with the initial equilibrium. 14


Shifts in Demand and Supply

Decrease In Supply, Given Demand Decrease In Demand, Given Supply

15
Simultaneous Shift In Demand And Supply

• When supply and demand both increase, quantity will increase, but price may go up or
down. If the supply increase is greater, price will fall. If the demand increase is greater,
price will increase. 16
Effects Of Changes In Demand And Supply
Change in Change in Effect on Effect on
D S Pe Qe
Increase Fixed
Decrease Fixed
Fixed Increase
Fixed Decrease
Decrease Increase Uncertain
Increase Decrease Uncertain
Increase Increase Uncertain
Decrease Decrease Uncertain 17
Solved Example
• Assume that the demand for a
commodity is represented by the
equation Demand is P 10  .2Q
P = 10 ‑ .2Qd Therefore 5 P 50  Q d ; Q d 50  5 P
Supply is P 2  .2 Q s
and supply by the equation Therefore 5 P 10  Q s and Q s  10  5 P
P = 2 + .2Qs,
Substitute Q d and Q s into Q s Q d equilibrium condition
• Using the equilibrium condition Qs 50  5 P  10  5 P
= Qd, 60 10 P and 6 P
Now substitue P 6 in either Q d or Q s to determine equilibrium quantity :
Q d 50  5 P 50  56  20
1. solve the equations to or
determine equilibrium price. Q s  10  5 P  10  56  20
2. Determine equilibrium quantity.

3. Graph the two equations to 18


Try On Your Own…..Evaluate the effect of these scenarios on
either the demand or supply curves and its effect on
equilibrium price and quantity respectively.
1. A technological advancement in the 8. Favorable change in consumer tastes.
methods of producing B.
2. A decline in the number of firms in industry 9. Increase in the number of buyers.
B. 10. Rising income if product is a normal
3. An increase in the price of resources good.
required in the production of B.
11. Falling incomes if product is an inferior
4. The expectation that the equilibrium price
of B will be lower in the future than it is good.
currently. 12. Increase in the price of a substitute
5. A decline in the price of product A, a good good.
whose production requires substantially the
same techniques as does the production of 13. Decrease in the price of a
B. complementary good.
6. The levying of a specific sales tax upon B. 14. Consumers expect higher prices in the
7. The granting of a 50 pesewas per unit future.
subsidy for each unit of B produced.
19
END OF DISCUSSION

20

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