Price determination and simple applications

Class 12 PPT on Price determination and simple applications Made by Amitesh YADAV

1. Price Determination and simple Applications

2. Market Consists of three elements Demand , describing the behaviour of consumers in the market Supply, describing the behaviour of firms in the market Market Equilibrium, connecting demand and supply and describing how consumers and producers interact in the market.

3. Perfect Competition is a market structure where each firm is a price-taker and price is determined by the market forces of demanded and supply. We know, equilibrium is determined when market demand is equal to market supply. Determination Of market Equilibrium Under Perfect Competition

4.   Market Demand & Market Supply Market Demand is the sum total of demand for a commodity by all the buyers in the market . Its curve slopes downwards due to operation of law of demand . Market Supply is the sum total of supplies of a commodity by all the producers in the market . Its curves slopes upwards due to operation of law of supply.

5.   Market Equilibrium Market Equilibrium is determined when the quantity demanded of a commodity becomes equal to the quantity supplied . In Fig Market Demand curve DD and market supply curve SS intersect each other at point E, which is the market equilibrium .

6. Why any other price is not the equilibrium price? Any price above Rs6 is not the equilibrium price as the resulting surplus, i.e. excess supply would cause competition among sellers. In order to sell the excess stock, price would come down to the equilibrium price of Rs 6. Any price below Rs6 is also not the equilibrium price as due to excess demand, buyers would be ready to pay higher price to meet their demand. As a result, price would rise upto the equilibrium price of Rs 6.

7. Excess Demand Excess Demand refers to a situation, when quantity demanded is more than quantity supplied at the prevailing market price.

8. Excess Supply Excess Supply refers to a situation, where the quantity supplied is more than the quantity demanded at the prevailing market price.

9. Viable Industry Viable Industry refers to an industry for which supply curve and the demand curve intersect each other in positive axes.

10.   Non - Viable Industry Non-Viable Industry refers to an industry for which supply curve and demand curve never intersect each other in the positive axes.

11. A Demand Curve shifts due to the following reasons: Change in price of complementary goods Change in price of substitute goods Change in income(normal and inferior goods) Change in tastes and preferences Expectation of Change in the price in future Change in Population

12. A supply Curve Shifts due to following reasons: Change in prices of factors of production Change in prices of other goods Change in the state of technology Change in the taxation policy Expectation of change in price in future Change in the goals of firms Change in the number of Firms

13. Change In Demand   Increase in Demand An Increase in demand (assuming no change in supply) leads to a rightward shift in demand curve from DD to D1D1.

14.   Decrease In Demand I n case of decrease in demand (supply remaining unchanged ), demand curve shifts to the left from DD to D2D2.

15. Change in Supply When there is an increase in supply , demand remaining unchanged , the supply curve shifts towards right from SS to S1S1.   Increase in Supply

16.   Decrease in Supply When there is an decrease in supply , demand remaining unchanged , the supply curve shifts to the left from to S2S2.

17. The following four cases of simultaneous shifts in demand and supply curves Both Demand and Supply decreases Both Demand and Supply increase Demand decreases and supply increases Demand increases and supply decreases

18. Both Demand and Supply Decreases Case1: Decrease in Demand=Decrease in Supply

19. Case2:Decrease in Demand>Decrease in Supply

20. Case3:Decrease in Demand<Decrease in Supply

21. Both Demand and Supply Increase Case1:Increase in Demand=Increase in Supply

22. Case2:Increase in Demand> Increase in Supply

23. Case3:Increase in Demand<Increase in Supply

24.   Demand decreases and supply Increases Case1:Decrease in Demand = Increase in supply

25. Case2:Decrease in Demand> Increase in Supply

26. Case3:Decrease in Demand< Increase In supply

27. Demand Increase and supply decreases Case1:Increase in Demand=Decrease in Supply

28. Case2:Increase in Demand>decrease in Supply

29. Case3:Increase in Demand< Decrease in Supply

30. Special Cases The effect on equilibrium price and equilibrium quantity in the following four cases : Change in supply when Demand is Perfectly Elastic Change in Demand when Supply is Perfectly Elastic Change in Demand when Supply is perfectly Inelastic Change in Supply when Demand is Perfectly Inelastic

31.   Change in Demand when Supply is Perfectly Elastic Increase In Demand   Decrease in Demand

32. Change in Supply when Demand is Perfectly Elastic   Increase In supply Decrease In Supply

33. Change in Demand when Supply is Perfectly Inelastic Increase in Demand Decrease In Demand

34. Change in Supply when Demand is Perfectly Inelastic Increase In Supply Decrease In Supply

35. Simple applications OF tools OF Demand And Supply It refers to fixing the maximum price of a commodity at a lower level than the equilibrium price. Price Ceiling

36. Black Markets & Ration Shops A black market is any market in which the commodities are sold at a price higher than the maximum price fixed by the government. Consumers have to stand in long queues to buy goods from ration shops. Sometimes, commodities are not available in the ration shops or goods are of inferior quality.

37. Price floor or minimum support price(MSP) It refers to the minimum price(above the equilibrium price), fixed by the government, which the producers must be paid for their produce.

38. Minimum wage legislation Under Minimum Wage Legislation, the government aims to ensure that wage rate of labour does not fall below a particular level and minimum wages are set above the equilibrium wage level (as discussed in case of price floor).

39. THANK YOU