Demand And Supply

Amity Business School

1

Amity Business SchoolTOPICS COVERED

• Demand

• Law of Demand

• Law of Supply

• Equilibrium

• Shortage and Surplus

• Shift in Demand Curve

• Shift in Supply Curve

• Case Study of Tax Incidence

• Live Example2

Amity Business SchoolDEMAND

3

THE PERSON IN THE CAR NEED PETROL

THE PERSON HAS PUURCHASING POWER

THE PERSON HAS WILLINGNESS TO PAY

IF ALL 3 THINGS ARE THERE THEN PETROL IS THE DEMAND OF THAT PERSON.

Amity Business SchoolLaw of Demand

• law of demand states that as price falls, demand extends and as price rises, demand contracts, other things being equal.

• other things being equal means that all factors other than price influencing the demand are assumed constant(no change) like prices of related goods, income of consumer, future expectations regarding price and income etc.

Amity Business School

Curve of Law of Demand

PRICE QUANTITY

5 10

4 20

3 30

2 40

1 50

Amity Business SchoolLaw of Supply

• law of supply states that as price rises, supply rises and as price falls, supply falls, other things being equal.

• other things being equal means that all factors other than price influencing supply are assumed as constant(no change) like prices of factors of production, goal of the firm, govt. policy, future expectations regarding price etc.

Amity Business School

Curve of Law of Supply

PRICE QUANTITY

5 50

4 40

3 30

2 20

1 10

Amity Business SchoolEquilibrium:-

• In economics, an equilibrium is a situation in which:

quantity demanded equals quantity supplied.

refers to a condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers.

Amity Business School

Curve of Equilibrium

PRICE QUANTITY DEMANDED

QUANTITYSUPPLIED

5 10 50

4 20 40

3 30 30

2 40 20

1 50 10

Amity Business School

Shortage and Surplus

• A shortage occurs when quantity demanded exceeds quantity supplied.– A shortage implies the market price is too low.

• A surplus occurs when quantity supplied exceeds quantity demanded. – A surplus implies the market price is too high.

Amity Business School

Shift in the Demand Curve

• A change in any variable other than price that influences quantity demanded produces a shift in the demand curve or a change in demand.

• Factors that shift the demand curve include:– Change in consumer incomes– Population change– Consumer preferences

11

Amity Business School

Shift in Demand curve

12

Amity Business School

Equilibrium After a Demand Shift

13

Amity Business SchoolShift in Supply Curve

• A change in any variable other than price that influences quantity supplied produces a shift in the supply curve or a change in supply.

• Factors that shift the supply curve include:– Change in input costs

– Increase in technology

14

Amity Business School

Shift in Supply Curve

15

Amity Business School

Equilibrium After a Supply Shift

16

Amity Business SchoolCASE STUDY

TAX INCIDENCE:-• As one example of demand and supply analysis, let us

assume we have a product with the situation shown in the graph below. The price is $1.00 per unit.

17

Amity Business SchoolContinued….

Now a sales tax is imposed. The tax is charged to the seller. For every $1.00 of sales, assume that the seller must pay $0.07 to the government. (Notice that consumers do not pay sales taxes. You have not paid any sales tax money to any government agency. The store pays the sales tax to the government.)

From the point of view of the seller, this is an additional cost of production. In addition to all other costs, the seller must also pay the sales tax.

Do costs of production affect demand or supply? Will there be a shift or movement along supply? Since the change is caused by something other than the price of the

product, the answer is a shift. Since costs of production are increasing, the good is less profitable,

causing supply to decrease.

18

Amity Business SchoolContinued…..

we can say that the seller would like to, raise the price to $1.07. Then, the seller could pay the $0.07 in tax and still have the same $1.00 that was earned before the sales tax was imposed.

However, due to the law of demand, the seller cannot raise the price to $1.07. If the seller raises the price, the quantity demanded will fall.

In this case, equilibrium occurs with the new price at $1.04. At any higher price, there would be a surplus. We say that $0.04 is the incidence of the tax on the buyer because the buyer must pay a $0.04 higher price.

We say that the other $0.03 is the incidence of the tax on the seller because the seller earns $0.03 less that was earned before the sales tax was imposed ($1.04 - $0.07 = $0.97).

19

Amity Business School

20

E1

SUPPLY1

DEMAND

1

1.4

QUANTITY

PRICE

E2

SUPPLY2

Amity Business School

LIVE EXAMPLE:-

21

• The heat of oil prices was strongly felt as the oil prices reached $50 per barrel in early 2005 from $10 per barrel in 1998.

• The prices were driven by the surge in demand in countries that included US, India and China and also the supply factors that had failed to meet the rise in demand.

Amity Business SchoolEFFORTS OF:-

HERSHUL VIRENDRAKAMAL GOVILSNEHA SUNDRANISHYAM AGRAWALDEEPIKA PRABHAKARRAJAT GUPTA

22