economy effective demand individual and market demand and supply factors influencing demand and supply 09012020 Mohammad Ziaul Alam HOD Economics amp Bangladesh Studies ID: 910465
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Slide1
2 The price systemand the microeconomy
•
effective
demand
• individual and
market
demand
and supply
• factors
influencing
demand
and supply
Slide209/01/2020Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies2
Demand:
The willingness and ability of a consumer to purchase a quantity of a good or service at a certain price (in a given time period
).
Supply: The willingness and ability of a producer to produce a quantity of a good or service at a certain price (in a given time period).Law of demand: As the price of a good falls, the quantity demanded will normally increase. (The demand curve usually slopes downwards, ceteris paribus).Law of supply: As the price of a good rises, the quantity supplied will normally rise. (The supply curve usually slopes upwards, ceteris paribus).Ceteris paribus: An assumption that means ‘all other things being equal’.
Basic concepts
of demand
and supply
Slide3Effective demand & SupplyA commodity is demanded because it has the ability to satisfy the needs and wants. By ‘demand ‘ for a commodity, we mean the desire for the product backed by purchasing power. When a consumer wishes to consume a commodity and also has the necessary purchasing power, he is said to have a demand( or effective demand) for the product. Therefore,
Effective demand = Desire for a product + purchasing power
.
Three basic condition for demand-
Desire To have a product,
Willingness to have the product, Affordability to buy the product.Different concepts of demand are-Income demand 2. Cross Demand 3. Joint demand or complementary demandComposite demand 5. Competitive demand 6. Direct DemandDerived demand or indirect demand 8. Notional or ex ante demand9. Effective demand or ex post demand 09/01/2020Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
3
Slide4Factors determining demandThe demand
for any product depends on various factors. These are stated below:
The price of that product
Taste and preference pattern of the consumer
Money income of the consumer
Price of related productPrice expectationPattern of income distribution in a societyTotal population of a countryDemographic structure of a countryClimateTasteFashion09/01/2020Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies4
Slide5Demand function09/01/2020Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
5
Individual demand
for any product per time period depends upon the following factors:
Price of the product(
Px), price of related product py), income of consumer (Y) , Taste and preference of consumer (T), expected change of price (Pe). These interdenpency when represent by function it is called individual demand function.
Slide6The law of demand09/01/2020Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
6
The law
of demand
states that price and
quantity demanded of a commodity move in opposite directions. When the price of a commodity rises, the demand for it falls. When the price falls demand rises.Thus, the law of demand is nothing but a verbal or quantitative statement of what the demand curve shows in a diagram. It is a description of demand when price of the product changes.
Slide7Demand schedule09/01/2020
Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
7
The tabular representation
of demand
law is the demand schedule.Price f tea (per kg) tkIndividual’s demand (kg)
100
90
80
70
60
1
2
4
6
9
Demand
schedule for 200 consumer, will consider as
market demand
schedule
Price f tea (per kg)
tk
Aggregate demand
for tea (kg)
100
90
80
70
60
200
(
200X1)
400 (
200X2)
800 (
200X4)
1200 (
200X6)
1800 (
200X9)
Slide8Derivation of Demand Curve09/01/2020
Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
8
Price of tea per kg
p1
p1
p3
0
D
L
K
q3
q2
q1
D
Demand
(
kgs
)
M
Individual demand
Curve
price
P
0
0
D
0
D
1
D
2
Q
2
Q
1
Q
1
D
Quantity
Here, D
0
, D
1
, D
2
are the individual demand curves and D is the market demand curve. By adding up all individual demand curve, we get market demand curve.
D
0
+ D
1
+
D
2
=D
Slide9Exceptions to the demand law09/01/2020
Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
9
Sometime, the law
of demand
may not work, i.e., price and demand may not move in opposite direction. Some of the exceptions are stated below: Conspicuous to the law of demandBandwagon effectSnob effectOccupying insignificant portion of the consumer’s budgetSpeculationGiffen goods effectVeblen effect
D
price
0
quantity
Slide10Change in Demand09/01/2020
Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
10
A change
in demand
along affixed demand curve is known as change in quantity demanded.
Slide11Change in Demand Curve09/01/2020
Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
11
Slide12Changes of demand curve09/01/2020
Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
12
Movement along
the demand
curveIt shows negative or inverse relationship between price and quantity demand for any product.It indicates change in quantity demanded due to a change in price.Here, we move from one point to another along any particular demand curveHere changes due to a change in price of the product all other factors remain unchanged.
Shift of
the demand
curve
It shows either an increase or decrease in
the demand
for any product, given the price of that product.
It indicates a change in the
whole demand
schedule.
Here, we move from one price-quantity combination on
any demand
curve to another combination on a
different demand
curve.
Here, for any given price level, quantity changes due to a change in all other factors .
Slide13Factors responsible for Change in Demand09/01/2020
Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
13
Consumer preference
Income
Price of other commoditiesExpectation about future pricesNumber of potential consumersInequality of income and wealthPublic goods.
Slide14Concepts of supply09/01/2020Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
14
Supply of product means the amount offered for sale at a given price. Supply of any product depends upon the behaviour of the producer or suppliers.
The amount of a product that different firms are able and willing to offer for sale at different possible prices any be regarded as ‘
quantity demanded
’.In fact, a firm is the agent on the supply side of the theory of market price. Here, supply is desired flow, i.e., it indicates how much firms are willing to sell per period of time and not how much they actually sell.
Slide15Factors determining the Supply function09/01/2020Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
15
The major determinant of the quantity supplied in a particular market are as follows:
Price of the product (
Px
)Prices of the factors production (Pf)The state of technology (t)The goals of the producing firms (F)Government policies (G)Number of firms (N)Supply FunctionThe supply functionshows the interdependence between the supply of any product and the factors determining the supply. Thus, the supply of any product X depends upon these factors. So, the supply function can be expressed as-
Ceterus
paribus supply function
Slide16Stocks and Supply09/01/2020Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
16
Stocks
It implies the volume of the product which can be brought into the market for sale at short notice.
The stocks or inventories of a product include- a) Unsold quantity of the previous period, b) Excess of present production of the product over its present sale
The stock of a product mainly depends on – a) the production of the product, b) the procurement price of the product, c) the storage and transport costs of the productThe concept of stock has no time dimension The stock enable a firm to meet the unexpected rise in demand of the marketIn case of highly perishable product stock and supply are almost same.The stocks of any product helps in checking fluctuation of market price.SupplyIt implies the quantity of a product which actually brought into the market for sale.
Market sale of a product is a part of total stock of the product.
The supply of a product mainly depends upon the price of the product.
The concepts of supply has a time dimension
In case of durable product , supply consist only of a part of the total stock.
The supply or the actual market sale enables the firm to earn sales revenue.
The changes in quantity supplies during any particular period, however, depends on the fluctuation of market price of that product.
Slide17Law of supply09/01/2020Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
17
It is generally observed that Price increases , the supply also increase, and if price decreases, the supply also decreases. This is known as the law of supply.
It shows a positive relationship between price and quantity of a product. Supply curve is upward sloping by its nature.
Assumptions
Prices of the factors remain unchangedProduction technology remain unchangedThe policies of government remain unchangedThe goals of the firm remain unaltered.The number of the firm I the industry remain same.Exception of supply curve:Backward supply curve for labourPerfectly inelastic supplyDecreasing -cost industry
Slide18Supply schedule09/01/2020Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
18
The graphical representation of supply law known as supply schedule.
Price of the product (tk.)
Supply of the product (units)
5678
10
12
15
20
Price of the product (tk.)
Supply of the product (units)
5
6
7
8
1000 (100X10)
1200 (100X12)
1500 (100X15)
2000 (100X20)
Individual supply schedule (firm)
Market supply schedule (Industry)
Slide19Supply curve09/01/2020Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
19
Individual supply curve
Market supply curve
Slide20Reasons for upward sloping supply curve09/01/2020Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
20
Profit motive of individual firm
: firms wants to make more profit. So they supply for higher price to get more revenue and profit.
An increase-cost industry:
In the long run, higher price may attract new firm in the industry. However, input cost may also increase.
Slide21Change in supply09/01/2020Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
21
Slide22Change in Supply09/01/2020Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
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Change in Supply
Slide23Equilibrium (the market mechanism)09/01/2020Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
23
When demand and supply come together, we get the creation of the equilibrium market price and quantity. The equilibrium is self-righting. If a firm tries to raise its price, then there will be
excess supply
at the new price and price will fall back to the equilibrium. In the same way, if a firm tries to lower its price, then there will be
excess demand at the new price and price will go back up to the equilibrium.
Slide24A shift of demand to the right
09/01/2020
Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
24
Demand
shifts from D1 to D2. This may be caused by a change in any of the determinants of demand with the exception of a change in the price of the good itself, which would simply lead to a movement along the demand curve and an eventual return to the equilibrium price. When demand shifts, there will now be a supply of Q1 at the equilibrium price, but a demand of Q3. Thus, there will be excess demand of Q1Q3. This means that price will begin to rise. The process will continue until a new equilibrium is reached at P2 and Q2. More will be demanded and supplied at a higher price.
Slide25A shift of demand to the left09/01/2020
Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
25
Demand shifts from D
1
to D2. This may be caused by a change in any of the determinants of demand with the exception of a change in the price of the good itself, which would simply lead to a movement along the demand curve and an eventual return to the equilibrium price. When demand shifts, there will now be a supply of Q1 at the equilibrium price, but a demand of only Q3. Thus, there will be excess supply of Q3Q1. This means that price will begin to fall. The process will continue until a new equilibrium is reached at P2 and Q2. Less will be demanded and supplied at a lower price.
Slide26A shift of supply to the right09/01/2020Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
26
Supply shifts from S1 to S2. This may be caused by a change in any of the determinants of supply with the exception of a change in the price of the good itself, which would simply lead to a movement along the supply curve an eventual return to the equilibrium price. When supply shifts, there will now be a demand of Q1 at the equilibrium price, but a supply of Q3. Thus, there will be excess supply of Q1Q3. This means that price will begin to fall. The process will continue until a new equilibrium is reached at P2 and Q2. More will be demanded and supplied at a lower price.
Slide27A shift of supply to the left09/01/2020
Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
27
Supply
shifts from S1 to S2. This may be caused by a change in any of the determinants of supply with the exception of a change in the price of the good itself, which would simply lead to a movement along the supply curve and an eventual return to the equilibrium price. When supply shifts, there will now be a demand of Q1 at the equilibrium price, but a supply of Q3. Thus, there will be excess demand of Q3Q1. This means that price will begin to rise. The process will continue until a new equilibrium is reached at P2 and Q2. Less will be demanded and supplied at a higher price.
Slide28Consumer surplus09/01/2020Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
28
Consumer
surplus
is shown in Figure 19.Consumers are able
to obtain a value from consuming a particular product that is above the price paid until at some point consumers pay a price that is exactly equal to the value gained. In the diagram, this is P*.All the consumers up to Q* have gained a value that is above the
price and
this
is shown by
the
shaded area between
the
price line and
the demand
curve. When price is
P*
and quantity is
Q*,
the
consumer surplus
has disappeared
. The demand curve is actually showing
the
marginal social
benefic
(
MSB)
of
the
consumption. This means that
the
demand curve combines
all the
points where consumers are gaining from
the
fan that one price is
being charged to
all consumers in
the market,
despite
the
fan that
they
would
have been
prepared
to
pay more. They are gaining a marginal social benefic by
being able to buy
a
product
at a lower price than
they
were originally prepared
to pay, i.e
.
they
gain from
the
additional benefic received.
Slide29Producer’s surplus09/01/2020Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
29
Producer surplus
is shown in Figure 20. Producers are able
to gain
because for all the units sold up to Q*, they have received a price that is above the cost of producing those units. The supply curve is actually showing the marginal social cost of the production. This means that while (he supply curve is made up
of the
points indicating
the cost
of producing that output, a firm will gain
because the
price charged is higher than
the cost,
i.e. it will gain from
the
additional
benefic received where
the
price is greater than
the
cost When
the producer surplus
disappears, that additional benefic disappears. The producer surplus
is shown
by
the
shaded area between
the
price line and
the
supply curve.
When price
is
P*
and quantity is
Q*,
t
he
producer surplus has disappeared.
Slide30Prices as rationing and allocative mechanisms / Role of price / Functions of price
09/01/2020
Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
30
Allocative Mechanism:
Prices perform an important role in the allocation of resources in a marker. The price mechanism allocates resources because price changes act as signals as the conditions of demand and supply in a marker change. The Scottish Economist Adam Smith (1723-90) argued that prices in a marker therefore acted as an 'invisible hand' in allocating scarce resources.
Rationing:
Prices
also perform an important function in a marker as a rationing mechanism
. For
example, if a producer has a limited
capacity to produce
certain products
, and
if these products are expensive,
this
high price will have t
he
effect
of rationing
demand. For example, in
the
case of exclusive brands of cars,
which tend to be
very expensive,
the
high price
will limit
demand
to only
those
people who can
afford
to pay the
high price of
the
cars
Slide31Source / References09/01/2020Mohammad Ziaul Alam, HOD, Economics & Bangladesh Studies
31
Cambridge O level Economics
By Susan Grant
2.
Edexcel IGCSE Economic By Rob Jones3. Economics IGCSE Revision guide By Brian Titley with Halen Carrier4. Economics for IGCSE By Robert Dransfield, Terry cook, Jane KingEconomics GCSE(9-1) By Rob Jones6. Economics for IGCSE and O level By Moynihan and Titley