MICRO ECONOMICS-I UNIT-2 (2)jjjjjjjj.pptx

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1. MICRO ECONOMICS-I UNIT-2 BY : DR J R KALYANKAR, ADVOCATE BSc, LLM, DLL, DTL, DBM, DCA, CRBO, DBF, CAIIB, MMS, PhD.

2. Unit-2 Syllabus Law of Demand. Assumptions and Exemptions. Determinants of Demand Demand Schedule and Demand Curve Shift in Demand Curve Various types of Elasticities of Demand Methods of measuring Elasticity Theory of Supply Elasticity of Supply Market Equilibrium and changes in it

3. Introduction to the Law of Demand The Law of Demand expresses a relationship between the quantity demanded and it’s price. It may be defined as "the amount demanded increases with a fall in price, and diminishes with rise in price” It express inverse relation between price & demand . The law refers to the direction in which quantity demanded changes with change in price. See figure.

4. Assumptions of the Law of Demand There is no change in the tastes and preferences of the consumer. The income of the consumer remains constant. There is no change in customs. The commodity to be used should not confer distinction of the consumer. There should not be any substitute of the commodity. There should not be any change in the prices of other products. There should not be any possibility of change in the price of the product being used . There should not be any change in the quality of the product. The habits of the customers should remain unchanged. If there is change even in one of these conditions, it will stop operating.

5. Exceptions to the Law of Demand War: If shortage is feared in anticipation of war, people may start buying for building stock even when the price rises. Depression: During a depression, the prices of commodities are very low and demand for them is also less. This is because of lack of purchasing power of consumers. Giffen Paradox: If a commodity happens to be a necessity of life like wheat and its price goes up, consumers are forced to curtail the consumption of more expensive foods like meat & fish and wheat being still the cheapest food they will consume more. Demonstration Effect: If people are affected by demonstration effect, they will like to buy more of those commodities which confer distinction on the possessor, when their prices rise. On other hand, with fall in the prices of such articles, their demand falls

6. Exceptions to the Law of Demand Ignorance effect: Consumers buy more at a higher price under the influence of the “ignorance effect”, where a commodity may be mistaken for some other commodity due to deceptive packing, label etc. Speculation: Marshall mentions speculation as one of the important exemption to the downward sloping demand curve. According to him the law of demand does not apply to the demand in a group of speculators. Necessities of Life: The law of demand does not apply on necessity of life such as food, cloths etc. Even the prices of these goods increases, the consumer does not reduce their demand.

7. Determinants of Demand In economics, there are several factors or determinants which affect the demand. Following are the major factors affecting demand. Price of goods or service: This is most logical determinant to understand. It tells that as the price of the goods increases, fever people will interested in buying the goods or product. Income of the buyers: Money makes the potential buyers to purchase of the goods and services. The more money the buyers have, the more likely that their purchases would increase. Price of related goods: Related goods can either be a substitute or a complement. Substitute products are those which are bought by buyers as an alternative to main product. If the price of the substitute goods decreases, then more people will buy these substitute goods. Hence demand of main goods will decrease.

8. Demand Schedule The Law of demand states that, other things remaining constant, when the price of a commodity falls, its demand increases and when price of the commodity rises, its demand decreases. Thus there is inverse relationship between price and quantity demanded of a commodity. Demand Schedule: It is a statement in the form of table that shows the different quantities of demand at different prices.

9. Individual Demand Schedule It is a schedule that shows the demand of an individual customer for a commodity in relation to its price Following is the individual demand schedule. We can see that when the price of Ice-cream is Re.1/-, its demand is 4 units and when the price is 4, its demand is 1. Thus we can conclude that as the price falls individual demand increases and the price raises the individual demand decreases. It is inverse relationship in price and quantity demanded. We can plot a demand curve on the basis of this demand schedule.

10. Market Demand Schedule Market demand schedule is a summation of individual demand schedules and shows the demand of customers for a commodity in relation of price. Following is the market demand schedule which shows the market demand for Ice-cream. When the price of the Ice-cream is Re.1/-, customer A demands 4 units while the customer B demands 5 units. Thus the market demand is 4 + 5 = 9 and when its price is Rs.4/-, customer A demands 1 unit & customer B demands 2 units forming the market demand of Ice-cream is 1 + 2 = 3 units. Thus it is concluded that whether the demand is individual or market, the law of demand governs both of them

11. Individual & Market Demand Curve Individual and Market Demand Curve is a graphical representation of the individual or market demand schedule. The X- axix represents the demand in units and Y- axix represents the price of a commodity.

12. Shift in Demand Curve Demand Curve is drawn to show the relationship between price and quantity of the commodity, assuming all other factors are constant. A change in one or the other factor shifts the demand curve. Ex: suppose income of a consumer increases, he may increase the demand of the product even though the price has not changed, such increase in demand of the product whose price has not changed, cannot be represented by the original curve. It will shift demand curve. When demand of a commodity changes due to change in any other factor other than price of commodity, it is called as change in demand. It is expressed as a shift in the demand curve.

13. Reasons for shift in Demand Curve Change in price of substitute goods: Change in price of complimentary goods . Change in income of consumer. Change in the Tastes and Preferences. Expectation of change in price in future. Change in population . Change in distribution of income. Change in season and weather. Shift in demand is either Rightward Shift or Leftward Shift

14. Rightward shift in Demand Curve Increase/Expansion in demand is shown by rightward or upward shift in demand curve from E1 to E2. Demand rises from Q-15 to Q-20 due to favourable change in other factors at the same price P-12000.

15. L eftward shift in Demand Curve Decrease/contraction in demand is shown by leftward or downward shift in demand curve from E1 to E2. Demand falls from Q-15 to Q-10 due to unfavourable change in other factors at the same price P-12000.

16. Theory of Supply Supply is the quantity of a commodity which is offered for sale t a given price during particular time. Supply: Supply refers to various quantities offered for sale at different possible prices of the commodity. Quantity Supplied: It refers to a specific quantity of a commodity that the producers are ready to sale at a specific price. Individual Supply: It refers to different quantities offered far sale by an individual firm at different prices. Market Supply: It refers to the sum total of various quantities offered for sale by all the individual firms at different prices. Supply Schedule: It is a tabular statement showing different quantities of a firm is ready to sale at different prices during a given period of time.

17. Individual & Market Supply Schedule Individual Supply Schedule Market Supply Schedule Price. ( Rs .) Quantity supplied of good x (units) 1 5 2 10 3 15 4 20 5 25 Price ( Rs .) Individual Supply (units ) A Individual Supply (units) B Market Supply (units) (A+B) 2 5 15 5 + 15 = 20 4 15 25 15 + 25 = 40 6 25 35 25 + 35 = 60 8 30 50 30 + 50 = 80 10 40 60 40 + 60 = 100 12 50 70 50 + 70 = 120

18. Individual & Market Supply curves

19. Law of Supply Law of supply states that other things remaining constant, quantity supplied of a commodity increases with increase in the price and decreases with fall in price . It means in supply curve the price of commodity is directly proportionate to the quantity supplied.

20. Assumptions & Exceptions of Law of Supply Assumptions of Law of Supply: Price of other related goods should not change . Technology of production should not change. Cost of production should remain the same. Goal of the firm should bot change. Taxation policy of the government should not change. Exceptions to the Law of Supply: Law does not apply to the agriculture products whose supply is governed by natural resources . Supply of goods having social distinction will remain limited even if their price tends to rise. Sellers may be willing to sell more units of a perishable commodity at a lower price.

21. Expansion & Contraction of Supply Expansion of Supply: Expansion of supply refers to rise in supply of commodity due to rise in price of goods . Expansion of supply result in upward movement of the supply curve. Contraction of Supply: Contraction of supply refers to fall in supply due to fall in price of the goods. Contraction in supply results in the downward movement of the supply curve..

22. Expansion & Contraction of Supply Curve Expansion of supply curve is also called inward or leftward shift and contraction of supply curve is called as outward or rightward shift.

23. Market Equilibrium, Disequilibrium & change in Equilibrium Market: An interaction of buyers and sellers where goods, services or resources are exchanged. Shortage: When the quantity demanded of a good, service or resource is greater than the quantity supplied. Surplus : When the quantity supplied of a good, service or resource is greater than the quantity demanded. Equilibrium: In a market , an equilibrium occurs when price has adjusted until quantity supplied is equal to quantity demanded. In short when demand is equal to supply in the market. Disequilibrium: In a market , disequilibrium occurs when quantity supplied is not equal to quantity demanded. When a market is experiencing a disequilibrium, there will be either shortage or surplus.

24. Market Equilibrium Market equilibrium is achieved at the price at which quantities demanded and supplied are equal. Ex.- Imagine that sellers of mosquito repellant are willing to sell 1000 bottles of mosquito repellent at a price of Rs.30 per bottle. If buyers are willing to buy 1000 bottles of mosquito repellent at that price, then market would be in equilibrium at the price of Rs.30 and at the quantity of 1000 bottles. We can represent a market equilibrium in a graph showing the combined price & quantity at which the supply & demand curves intersect.

25. Market Disequilibrium Whenever market experience imbalances creating disequilibrium prices, surpluses and shortages market forces drive prices towards disequilibrium. A surplus exists when the price is above equilibrium, which encourages sellers to lower their prices to eliminate the surplus. A shortfall will exist at any price below equilibrium, which leads to the price of the goods, increasing. Ex.- Imagine the price of mosquito repellent is currently Rs.30 per bottle. People want to by only 800 bottles of Mosquito repellent, but the sellers are willing to sell 1200 bottles at that price. This creates a surplus because there are unsold units. Sellers will lower the prices to attract buyers for their bottles of Mosquito repellent.

26. Change in Equilibrium Change in the determinants of supply and/or demand result in a new equilibrium price and quantity. When there is change in supply or demand, the old price will no longer be an equilibrium. Instead there will be a shortage or surplus and price will subsequently adjust until there is a new equilibrium. Ex.- Suppose there is a sudden attack of aggressive mosquitos. There will be more people who want to buy mosquito repellent at all possible prices, causing demand to increase. At the original price there will be a shortage of mosquito repellent, signaling sellers to increase price until the quantity supplied and quantity demanded are once again equal.

27. Change in Supply Suppose the price of raw material which is used to make mosquito repellent, increases so that i t now costs the seller Rs.10 more per repellent to produce them. This will cause the supply of this good to decrease. To see the impact of decrease in supply will have on the equilibrium price and quantity , grab the interactive supply curve and shift it to the left until the price is Rs.10 higher at every level of output.

28. Change in Supply Now instead, suppose someone invents a new way to produce mosquito repellent, so there is less waste and fever resources are needed to produce them. This would result in an increase in supply of mosquito repellent. To see this impact an increase in supply will have on the equilibrium price and quantity , grab the interactive supply curve and shift it to the right so that at every quantity the price is Rs.10 lower.

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