Equilibrium price determination

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2. EQUILIBRIUM PRICE DETERMINATION PRESENTED BY :- RAHUL SAHU ( 13DM048 ) DEBANSHU GHOSH ( 13DM013 ) 2

3. OVERVIEW DEMAND SUPPLY EQUILIBRIUM PRICE & ITS MARKET EQUILIBRIUM CHANGES IN MARKET PRICES CASE STUDIES 3

4. WHAT IS DEMAND? Demand is defined as various quantities of a product which a consumer purchases at different price, at a given time, other things being equal. In economics, demand for a commodity or a service signifies the following - Desire for a commodity or a service Willingness to purchase it Ability to pay for it. 4

5. LAW OF DEMAND Statement of the law - “ Higher the price, lower the quantity demanded, lower the price higher the quantity demanded, other things remaining the same.” The law states inverse relationship between price of a commodity & its quantity demanded . The law holds under the condition - ‘other things remain constant’ ( ‘Other things’ include ‘determinants other than own price’ ) 5

6. TYPES OF DEMAND INDIVIDUAL DEMAND MARKET DEMAND 6

7. DEMAND CURVE AND DEMAND SCHEDULE Price ($) Quantity Demanded 800 200 1200 160 1600 120 1800 100 2000 80 2200 60 2400 40 2800 Monthly Demand of Sony VAIO Laptops in Noida , UP, India. Demand Schedule Price Quantity Demanded 2800 2400 2000 1600 1200 800 400 40 60 80 100 120 140 160 180 200 Demand Curve 7

8. MARKET DEMAND SCHEDULE Price/Kg (in Rs.) of Mangoes Quantity demanded per week (in units) of Individual A Quantity demanded per week (in units) of Individual B Quantity demanded per week (in units) of Individual C Market demand per week D M = D A +D B +D C 60 2 1 3 50 4 2 2 8 40 6 3 4 13 30 8 4 6 18 8

9. MARKET DEMAND CURVE 12 Market demanded Price 8 4 2 10 6 60 50 40 30 20 10 70 D A D A D B D B D C D C 14 16 18 D M = D A+ D B+ D C D M 9

10. WHAT IS SUPPLY? SUPPLY – Quantity of a commodity offered for sale by the producer at a given price, in a given time. STOCK – Total quantity of a commodity available with the producer at a given time. Stock is the basis or determinant of supply. Without stock supply is not possible. 10

11. LAW OF SUPPLY Statement of the law - “ Higher the price higher the quantity supplied , lower the price lower the quantity supplied, other things remaining the same ”. There is direct relationship between price of a commodity & its quantity supplied. The supply curve slopes upwards from left to right. 11

12. SUPPLY CURVE AND SUPPLY SCHEDULE Price ($) Quantity Supplied 800 1200 1600 40 1800 60 2000 80 2200 100 2400 120 2800 160 Monthly Supply of VAIO Laptops in Noida , UP, India by SONY Supply Schedule Price Quantity Supplied 2800 2400 2000 1600 1200 800 400 40 60 80 100 120 140 160 180 200 Supply Curve 12

13. EQUILIBRIUM MEANING OF EQUILIBRIUM – State in which forces acting in opposite directions are perfectly in balance, so that there is no tendency to change. EQUILIBRIUM PRICE – The price at which quantity demanded of a commodity is equal to its quantity supplied. Qs = Qd 13

14. MARKET EQUILIBRIUM Price ($) Qty. Demanded Qty. Supplied 800 200 1200 160 1600 120 40 1800 100 60 2000 80 80 2200 60 100 2400 40 120 2800 160 The Market for VAIO Laptops in Noida , UP, India . Price Quantity 2800 2400 2000 1600 1200 800 400 40 60 80 100 120 140 160 180 200 Demand Curve Supply Curve Excess Supply Excess Demand 14

15. CHANGES IN MARKET CONDITIONS I. Changes in demand or supply – Effect of increase or decrease in demand (Demand changes supply remaining the same) Effect of increase or decrease in supply (Supply changes demand remaining the same) II. Simultaneous Changes in demand & supply - Demand increases, supply increases Demand increases, supply decreases Demand decreases, supply increases Demand decreases, supply decreases 15

16. CHANGES IN MARKET PRICES There are four “laws” of supply and demand. 1. An increase in demand causes an increase in both the equilibrium price and equilibrium quantity . S Price D 1 D • • q q 1 p 1 p Quantity 2 . A decrease in demand causes a decrease in both equilibrium price and equilibrium quantity. E 1 E 16

17. 3. An increase in supply causes a decrease in the equilibrium price and an increase in the equilibrium quantity. 4. A decrease in supply causes an increase in the equilibrium price and a decrease in the equilibrium quantity. S 1 Price S D • q 1 q p p 1 Quantity • E 1 E 17

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19. CASE STUDIES... 19

20. 1. People come to believe that eating apples is good for them. The more apples they eat, the more likely they are to stay well. What is the effect on the market for apples? P Q p q APPLE MARKET supply demand 20

21. There is a change in preferences that affects demand . Here's the process . P Q p q APPLE MARKET supply demand new demand p 1 q 1 Demand increases, so price and quantity are higher. 21

22. 2. MSU agricultural scientists develop a new strain of corn that increases yields by about 15%. What is the effect of the improvement in technology on the market for corn? P Q p q CORN MARKET demand supply 22

23. P Q p q CORN MARKET demand supply supply with improved technology p 1 q 1 The improvement changes supply, creating an excess supply of corn. Here's the process. Excess supply In the new equilibrium price is lower and quantity higher. 23

24. CONCLUSION Price changes in response to the existence of excess demand or excess supply. Changes in demand and changes in supply lead to changes in equilibrium prices and quantities . 24

25. THANK YOU 25