ABM-Module: A- Supply and Demand
Demand
Demand is the desire backed by ability and willingness to pay for a commodity Demand generally means the desire or want for a thing. But in Economics mere desire or want for a thing is not demand. Only when the desire for a commodity is backed by the ability and willingness to pay for it, the desire becomes demand. A commodity may be any good that is produced for sale in the market. In economics, market means all the areas in which buyers and sellers are in contact with each other for the purchase and sale of a commodity.
Demand for a commodity is always at a price. A person's demand for a commodity varies according to its price. At a lower price he will buy more of a commodity and only less at a higher price. The basic unit of consumption is the individual household. It is, therefore necessary to know the individual households' demand for a commodity.
LAW OF DEMAND
Law of demand states the relationship between price and demand of a commodity. As per the law, on change in price of a commodity, its demand also changes. For instance, decline in price may lead to increase in demand (but other things being equal) or increase in price may lead to decline in demand. This relationship is generally inverse (i.e. moves in opposite direction) relationship.
DEMAND SCHEDULE
Demand schedule provides the information regarding different quantities of a commodity demanded, by a consumer or all consumers at different prices. Demand schedule can be drawn for an individual or for the whole market. The demand curve, both for the individual or for the whole market, generally shows downward slope from left to right.
Expansion I Contraction of Demand and increase I decrease in demand
Whenever there is any change in the quantity demanded of a commodity as a result of change in price, it is called expansion or contraction of demand. But whenever there is change in demand due to factors other than price, it is called increase / decrease in demand.
Similarly, the difference between change in quantity demanded (i.e. expansion or contraction in demand) and change in demand (i.e. increase or decrease in demand) arises because of price and non-price factors respectively as explained above.
Expansion or contraction (or change in quantity demanded)-- Due to change in price of a commodity
Increase or decrease in demand (or change in demand)-- Due to factors other than change in price
Shifting of demand curve
When whole demand curve shifts either forward or backward, it is called shifting of demand curve.
DIFFERENT KINDS OF DEMAND
Price demand (change in demand due to change in price)
The price demand is the demand of a particular commodity at a particular price. As per the Law of Demand, with increase in price of a commodity, its demand falls and with decrease in price, its demand increases. Due to this reason, the demand curve of a commodity has a negative slope, as the two variables namely price and quantity demanded, move in opposite direction.
Income demand (change in demand due to change in income)
The income demand differs with the nature of goods.
For superior goods, with increase in income of the consumer, the demand increases which means that there is positive correlation.
As regards the inferior goods, the increase in income leads to fall in the demand of these goods, because a consumer, with increase in income starts using superior goods and discards inferior goods. Hence a negative correlation.
As regards the demand curve, it shows upward movement from left to right in case of superior goods while downward slope in case of inferior goods.
Cross demand (change in demand due to change in price of other commodities)
So far as cross demand is concerned it also has to be seen in the light of complementary goods and substitute goods.
Cross Demand - Complimentary Goods
The complementary goods are those goods which can be used with a particular commodity, such as vehicle and petrol. With increase in price of one commodity, the demand for the complementary commodity will decrease. Due to this reason the demand curve in case of complementary commodity will move from left to right downwards
Cross Demand - Substituted goods
For substitute goods (which can be used in place of another commodity like tea and coffee), with increase in price of one of them, the demand for the substitute commodity will increase. Due to this reason the demand curve always shows an upward slope from left to right
Different kinds of Goods
a) Superior Goods: There is positive co-relationship between income and demand for superior goods. With increase in income the demand for such goods increases. However, there is negative correlation with price as, with increase in their price, the demand goes down.
b) Inferior goods: These goods are generally the goods for mass consumption such as vanaspati. There is inverse relationship between the demand for inferior goods and increase in income of consumer as the consumers shift their preferences in favour of superior goods with increase in income.
c) Complementary goods: These are the goods that are used with a particular another commodity (for instance the pen and ink, bread and butter). With increase in price of a commodity, the demand of complementary goods decreases along with the demand for the original goods. (say with increase in price of bread, demand for butter goes down).
d) Substitute Goods: These goods are the goods that can be used an alternative to particular goods, such as tea and coffee. In case of increase in the price of particular commodities, the demand for the substitute goods increases because the consumers would give preference to use the alternative goods, available at a lower price.
e) Independent Goods: These are the goods which are not related to each other such as books and clothes. The price change or income change of such goods does not effect the demand for other goods.
GIFFIN GOODS OR GIFFIN PARADOX
Giffin goods are those goods, which are inferior goods compared to the other goods. The concept is related to Sir R. Giffin who stated that the Law of Demand does not become applicable on inferior goods. Demand for such goods increases on increase in their price and decreases when there is decline in their price. This is also called Giffin paradox.
In case of such goods the price effect is positive but the income effect is negative since with increase in income, a consumer starts using the superior goods.
Where does Law of Demand not apply ?
Normally the law of demand explains that the demand of a commodity moves up on decline of its price and vice versa, but in the following situations the law does not apply.
a) Giffin Paradox
b) Commodities which are necessary for life
c) Commodities which involve prestige.
d) High price commodities
e) Emergencies
Reasons for the downward slope to right of demand curve
The demand curve slopes from left to right downwards, because of application of Law of Diminishing Marginal Utility. This law states that with increase in consumption of a commodity by the consumer, each additional unit provides decreased utility.
LAW OF SUPPLY
The law of supply states that the price and supply are directly related as the supply of a commodity increases on increase in its price and it declines, with decline in price.
Supply Schedule
The supply schedule can be for an individual firm or can be for the entire market. The supply schedule provides information about different quantities of a commodity, which are offered in a market, for sale, at different prices.
Supply curve - As regards supply curve, it moves from left to right upwards due to positive correlation of supply with price.
Expansion of Supply and Contraction of Supply (due to price factors)
When supply of a commodity increases on account of increase in price and declines due to falling price of the commodity, it is called expansion or contraction of supply, respectively. This is also called change in quantity of supply.
Increase in supply I decrease in supply (due to non-price factors)
When supply position of a commodity changes due to a reason other than the price, it is called increase in supply or decrease in supply. The factors other than price, which increase or decrease the supply, include technical changes, change in fashion, social and political factors etc, This is called change in supply
DEMAND SCHEDULE
1. The amount of a commodity people buy depends on its price.
2. The higher the price of an article, other things held constant, the fewer units consumers are willing to buy.
3. The lower is its market price, the more units of it are bought.
4. Other things remaining constant, there is a definite relationship between the market price of a good and the quantity demanded of that good.
5. The relationship between price and quantity bought is called the demand schedule, or the demand curve.
6. The quantity demanded increases with the fall in price.
Demand Curve-
It is a statement depicting the quantity demanded of a commodity at different prices. Demand can be drawn based on demand schedule.
1. The graphical representation of the demand schedule is the demand curve.
2. The quantity demanded is plotted on the horizontal axis (X axis) and the price is plotted on the vertical axis (Y axis).
3. The quantity demanded and price are inversely related.
4. Demand curve slopes downward, going from northwest to southeast. This important property is called the law of downward-sloping demand.
5. Law of downward-sloping demand: When the price of a commodity is raised (and other things being constant), buyers tend to buy less of the commodity. Similarly, when the price is lowered, other things being constant, quantity demanded increases.
6. Quantity demand tends to fall as price rises for two reasons. First reason is the substitution effect. When price of a commodity rises, the consumer tries to substitute it with another similar product e.g. Tea and Coffee. Second reason is the income effect when a higher price reduces quantity demanded. When price goes up, one finds himself somewhat poorer than before as effectively real income goes down.
Market Demand:
1. Market demand represents the sum total of all individual demands.
2. The market demand curve is found by adding together the quantities demanded by all individuals at each price.
3. The market demand curve also obeys the law of downward-slopping demand. If prices drop, the lower prices attract new customers through the substitution effect. In addition, a price reduction will induce extra purchases of goods by existing consumers though both the income and the substitution effects. Conversely, a rise in the price of a good will cause some of us to but less.
Forces behind the Market Demand Curve:
Number of factors influences how much will be demanded at a given price: average levels of income, the size of the population, the prices and availability of related goods, individual and social tastes and special influences.
1. The average income of consumers is a key determinant of demand. As people's income rises, individuals tend to buy more of almost everything, even if prices do not change. Automobiles purchases tend to rise sharply with higher levels of income.
2. The size of the market — measured, say, by the population — clearly affects the market demand curve. More the population, more is the demand.
3. The prices and availability of related goods: Demand is affected by availability of substitute products like apples and oatmeal, pens and pencils, small cars and large cars, or oil and natural gas. Demand for good A tends to be low if the price of substitute product B is low.
4. Tastes and preferences: Subjective elements like tastes or preferences also affect demand. Tastes represent a variety of cultural and historical influences. They may reflect genuine psychological or physiological needs (for liquids, love, or excitement). They may also contain a large element of tradition or religion (eating beef is popular in America but taboo in India, while curried jellyfish is a delicacy in Japan but not liked by many Americans.)
5. Special influences: The demand for umbrellas is high in rainy Mumbai but low in sunny Delhi; the demand for air conditioners will rise in hot weather. Further, expectations about future economic conditions, particularly prices, may have an important impact on demand.
SHIFTS IN DEMAND:
1. When there is a change in demand for reasons other than price, it is called Shift in demand curve.
2. Demand curve shifts because factors other than the good's price also change.
3. The net effect on demand due to changes in underlying influences is called an increase in demand.
4. An increase in the demand is indicated by rightward shift in the demand curve and a decrease in demand is indicated by leftward shift in demand curve.
5. The shift in demand means more or less number of commodity will be bought at every price.
THE SUPPLY SCHEDULE:
1. The supply side of a market involves the terms on which businesses produce and sell their products.
2.The supply schedule relates the quantity supplied of a good to its market price, other things being constant.
3.In considering supply, the other things that are held constant include input prices, prices of related goods and government policies.
4. The supply schedule (or supply curve) for a commodity shows the relationship between its market price and the amount of that commodity that producers are willing to produce and sell, other things being constant.
5. Higher the price more supply is expected and lower the price lower would be the supply.
The supply Curve:
1. The supply curve is an upward sloping curve for an individual commodity indicating that as the price of the commodity increases more of it will be produced.
2. One important reason for the upward slope is 'the law of diminishing returns'.
FORCES BEHIND THE SUPPLY CURVE
1. One major factor indicating the forces determining the supply curve, is that producers supply commodities for profit and not for fun or charity.
2. Cost of Production: One major element underlying the supply curve is the cost of production. When production costs for a good are low relative to the market price, it is profitable for producers to supply a great deal. When production costs are high relative to price, firms produce little, switch over the production of other products, or may simply go out of business. But production costs are not the only ingredient that goes into the supply curve.
3. Input costs: Production costs are primarily determined by the price of inputs and technological advances. The prices of inputs such as labour, energy or machinery obviously have a very important influence on the cost of producing a given level of output.
4: Technological advances: Another important determinant of production costs is technological advances, which consist of changes that lower the quantity of inputs needed to produce the same quantity of output. Such technological advances include scientific breakthroughs, better application of existing technology, reorganization of the flow of work.
5. Price of related goods: Supply is also influenced by the prices of related-goods, particularly goods that are alternative outputs of the production process. If the price of one production substitute rises, the supply of another substitute will decrease.
6. Government policy also has an important influence on the supply curve. Environmental and health considerations determine that technologies can be used, while taxes and minimum-wage laws can significantly raise input prices.
7. Special factors:. The weather exerts an important influence on farming and on the agro-industry. The computer industry has been marked by a keen spirit of innovation, which has led to a continuous flow of newer products. Market structure will affect supply, and expectations about future prices often have an important impact upon supply decisions.
SHIFTS IN SUPPLY
1. When changes in factors other than a good's own price affect the quantity supplied, it is called as shifts in supply. Supply increases (or decreases) when the amount supplied increases (or decreases) at each market price.
EQUILIBRIUM OF SUPPLY AND DEMAND
1. Supply and demand interacts to produce an equilibrium price and quantity or market equilibrium. .
2. The market equilibrium comes at that price and quantity where the forces of supply and demand are in balance. At the equilibrium price, the amount that buyers want to buy is just equal to the amount that sellers want to sell.
3. It is called equilibrium because when the forces of supply and demand are in balance, there is no reason for price to rise or fall, as long as other things remain unchanged.
4. A market equilibrium comes at the price at which quantity demanded equals quantity supplied. At that equilibrium, there is no tendency for the price to rise or fall.
5. The equilibrium price is also called the market-clearing price. This denotes that all supply and demand orders are filled, the books are 'cleared' of orders and demander's and suppliers are satisfied.
Equilibrium with Supply and Demand Curves
1. The market equilibrium is for the price at which quantity demanded equals quantity supplied. The equilibrium price comes at the intersection of the supply and demand curves.
2. The equilibrium price and quantity come where the amount willingly supplied equals the amount willingly demanded. In a competitive market, this equilibrium is found at the intersection of the supply and demand curves. There are no shortages or surpluses at the equilibrium price.
EFFECT OF A SHIFT IN SUPPLY OR DEMAND
1. The supply-and-demand curves can be used to ascertain the equilibrium price and quantity.
2. It can also be used to predict the impact of changes in economic conditions on prices and quantities.
3. For example, if due to bad weather the price of wheat increases which is a key ingredient of bread. That shifts the supply curve for bread to the left. But, the demand curve for bread does not shift because people's sandwich demand is largely unaffected by farming weather. However, if prices do not change, then due to increase in price of input, bakers will produce less bread at the old price. So quantity demanded exceeds quantity supplied. The price of bread therefore rises, encouraging production and thereby raising quantity supplied, while simultaneously discouraging consumption and lowering quantity demanded. The price continues to rise until, at the new equilibrium price, the amount demanded and supplied are once again equal.
4. The supply-and-demand curves can also be used to examine how changes in demand affect the market equilibrium. For example, with a sharp increase in family incomes, everyone wants to eat more bread resulting in a 'demand shift' rightward. The demand shift produces a shortage of bread at the old price. Prices are raised until supply and demand come back into balance at a higher price.
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Demand is the desire backed by ability and willingness to pay for a commodity Demand generally means the desire or want for a thing. But in Economics mere desire or want for a thing is not demand. Only when the desire for a commodity is backed by the ability and willingness to pay for it, the desire becomes demand. A commodity may be any good that is produced for sale in the market. In economics, market means all the areas in which buyers and sellers are in contact with each other for the purchase and sale of a commodity.
Demand for a commodity is always at a price. A person's demand for a commodity varies according to its price. At a lower price he will buy more of a commodity and only less at a higher price. The basic unit of consumption is the individual household. It is, therefore necessary to know the individual households' demand for a commodity.
LAW OF DEMAND
Law of demand states the relationship between price and demand of a commodity. As per the law, on change in price of a commodity, its demand also changes. For instance, decline in price may lead to increase in demand (but other things being equal) or increase in price may lead to decline in demand. This relationship is generally inverse (i.e. moves in opposite direction) relationship.
DEMAND SCHEDULE
Demand schedule provides the information regarding different quantities of a commodity demanded, by a consumer or all consumers at different prices. Demand schedule can be drawn for an individual or for the whole market. The demand curve, both for the individual or for the whole market, generally shows downward slope from left to right.
Expansion I Contraction of Demand and increase I decrease in demand
Whenever there is any change in the quantity demanded of a commodity as a result of change in price, it is called expansion or contraction of demand. But whenever there is change in demand due to factors other than price, it is called increase / decrease in demand.
Similarly, the difference between change in quantity demanded (i.e. expansion or contraction in demand) and change in demand (i.e. increase or decrease in demand) arises because of price and non-price factors respectively as explained above.
Expansion or contraction (or change in quantity demanded)-- Due to change in price of a commodity
Increase or decrease in demand (or change in demand)-- Due to factors other than change in price
Shifting of demand curve
When whole demand curve shifts either forward or backward, it is called shifting of demand curve.
DIFFERENT KINDS OF DEMAND
Price demand (change in demand due to change in price)
The price demand is the demand of a particular commodity at a particular price. As per the Law of Demand, with increase in price of a commodity, its demand falls and with decrease in price, its demand increases. Due to this reason, the demand curve of a commodity has a negative slope, as the two variables namely price and quantity demanded, move in opposite direction.
Income demand (change in demand due to change in income)
The income demand differs with the nature of goods.
For superior goods, with increase in income of the consumer, the demand increases which means that there is positive correlation.
As regards the inferior goods, the increase in income leads to fall in the demand of these goods, because a consumer, with increase in income starts using superior goods and discards inferior goods. Hence a negative correlation.
As regards the demand curve, it shows upward movement from left to right in case of superior goods while downward slope in case of inferior goods.
Cross demand (change in demand due to change in price of other commodities)
So far as cross demand is concerned it also has to be seen in the light of complementary goods and substitute goods.
Cross Demand - Complimentary Goods
The complementary goods are those goods which can be used with a particular commodity, such as vehicle and petrol. With increase in price of one commodity, the demand for the complementary commodity will decrease. Due to this reason the demand curve in case of complementary commodity will move from left to right downwards
Cross Demand - Substituted goods
For substitute goods (which can be used in place of another commodity like tea and coffee), with increase in price of one of them, the demand for the substitute commodity will increase. Due to this reason the demand curve always shows an upward slope from left to right
Different kinds of Goods
a) Superior Goods: There is positive co-relationship between income and demand for superior goods. With increase in income the demand for such goods increases. However, there is negative correlation with price as, with increase in their price, the demand goes down.
b) Inferior goods: These goods are generally the goods for mass consumption such as vanaspati. There is inverse relationship between the demand for inferior goods and increase in income of consumer as the consumers shift their preferences in favour of superior goods with increase in income.
c) Complementary goods: These are the goods that are used with a particular another commodity (for instance the pen and ink, bread and butter). With increase in price of a commodity, the demand of complementary goods decreases along with the demand for the original goods. (say with increase in price of bread, demand for butter goes down).
d) Substitute Goods: These goods are the goods that can be used an alternative to particular goods, such as tea and coffee. In case of increase in the price of particular commodities, the demand for the substitute goods increases because the consumers would give preference to use the alternative goods, available at a lower price.
e) Independent Goods: These are the goods which are not related to each other such as books and clothes. The price change or income change of such goods does not effect the demand for other goods.
GIFFIN GOODS OR GIFFIN PARADOX
Giffin goods are those goods, which are inferior goods compared to the other goods. The concept is related to Sir R. Giffin who stated that the Law of Demand does not become applicable on inferior goods. Demand for such goods increases on increase in their price and decreases when there is decline in their price. This is also called Giffin paradox.
In case of such goods the price effect is positive but the income effect is negative since with increase in income, a consumer starts using the superior goods.
Where does Law of Demand not apply ?
Normally the law of demand explains that the demand of a commodity moves up on decline of its price and vice versa, but in the following situations the law does not apply.
a) Giffin Paradox
b) Commodities which are necessary for life
c) Commodities which involve prestige.
d) High price commodities
e) Emergencies
Reasons for the downward slope to right of demand curve
The demand curve slopes from left to right downwards, because of application of Law of Diminishing Marginal Utility. This law states that with increase in consumption of a commodity by the consumer, each additional unit provides decreased utility.
LAW OF SUPPLY
The law of supply states that the price and supply are directly related as the supply of a commodity increases on increase in its price and it declines, with decline in price.
Supply Schedule
The supply schedule can be for an individual firm or can be for the entire market. The supply schedule provides information about different quantities of a commodity, which are offered in a market, for sale, at different prices.
Supply curve - As regards supply curve, it moves from left to right upwards due to positive correlation of supply with price.
Expansion of Supply and Contraction of Supply (due to price factors)
When supply of a commodity increases on account of increase in price and declines due to falling price of the commodity, it is called expansion or contraction of supply, respectively. This is also called change in quantity of supply.
Increase in supply I decrease in supply (due to non-price factors)
When supply position of a commodity changes due to a reason other than the price, it is called increase in supply or decrease in supply. The factors other than price, which increase or decrease the supply, include technical changes, change in fashion, social and political factors etc, This is called change in supply
DEMAND SCHEDULE
1. The amount of a commodity people buy depends on its price.
2. The higher the price of an article, other things held constant, the fewer units consumers are willing to buy.
3. The lower is its market price, the more units of it are bought.
4. Other things remaining constant, there is a definite relationship between the market price of a good and the quantity demanded of that good.
5. The relationship between price and quantity bought is called the demand schedule, or the demand curve.
6. The quantity demanded increases with the fall in price.
Demand Curve-
It is a statement depicting the quantity demanded of a commodity at different prices. Demand can be drawn based on demand schedule.
1. The graphical representation of the demand schedule is the demand curve.
2. The quantity demanded is plotted on the horizontal axis (X axis) and the price is plotted on the vertical axis (Y axis).
3. The quantity demanded and price are inversely related.
4. Demand curve slopes downward, going from northwest to southeast. This important property is called the law of downward-sloping demand.
5. Law of downward-sloping demand: When the price of a commodity is raised (and other things being constant), buyers tend to buy less of the commodity. Similarly, when the price is lowered, other things being constant, quantity demanded increases.
6. Quantity demand tends to fall as price rises for two reasons. First reason is the substitution effect. When price of a commodity rises, the consumer tries to substitute it with another similar product e.g. Tea and Coffee. Second reason is the income effect when a higher price reduces quantity demanded. When price goes up, one finds himself somewhat poorer than before as effectively real income goes down.
Market Demand:
1. Market demand represents the sum total of all individual demands.
2. The market demand curve is found by adding together the quantities demanded by all individuals at each price.
3. The market demand curve also obeys the law of downward-slopping demand. If prices drop, the lower prices attract new customers through the substitution effect. In addition, a price reduction will induce extra purchases of goods by existing consumers though both the income and the substitution effects. Conversely, a rise in the price of a good will cause some of us to but less.
Forces behind the Market Demand Curve:
Number of factors influences how much will be demanded at a given price: average levels of income, the size of the population, the prices and availability of related goods, individual and social tastes and special influences.
1. The average income of consumers is a key determinant of demand. As people's income rises, individuals tend to buy more of almost everything, even if prices do not change. Automobiles purchases tend to rise sharply with higher levels of income.
2. The size of the market — measured, say, by the population — clearly affects the market demand curve. More the population, more is the demand.
3. The prices and availability of related goods: Demand is affected by availability of substitute products like apples and oatmeal, pens and pencils, small cars and large cars, or oil and natural gas. Demand for good A tends to be low if the price of substitute product B is low.
4. Tastes and preferences: Subjective elements like tastes or preferences also affect demand. Tastes represent a variety of cultural and historical influences. They may reflect genuine psychological or physiological needs (for liquids, love, or excitement). They may also contain a large element of tradition or religion (eating beef is popular in America but taboo in India, while curried jellyfish is a delicacy in Japan but not liked by many Americans.)
5. Special influences: The demand for umbrellas is high in rainy Mumbai but low in sunny Delhi; the demand for air conditioners will rise in hot weather. Further, expectations about future economic conditions, particularly prices, may have an important impact on demand.
SHIFTS IN DEMAND:
1. When there is a change in demand for reasons other than price, it is called Shift in demand curve.
2. Demand curve shifts because factors other than the good's price also change.
3. The net effect on demand due to changes in underlying influences is called an increase in demand.
4. An increase in the demand is indicated by rightward shift in the demand curve and a decrease in demand is indicated by leftward shift in demand curve.
5. The shift in demand means more or less number of commodity will be bought at every price.
THE SUPPLY SCHEDULE:
1. The supply side of a market involves the terms on which businesses produce and sell their products.
2.The supply schedule relates the quantity supplied of a good to its market price, other things being constant.
3.In considering supply, the other things that are held constant include input prices, prices of related goods and government policies.
4. The supply schedule (or supply curve) for a commodity shows the relationship between its market price and the amount of that commodity that producers are willing to produce and sell, other things being constant.
5. Higher the price more supply is expected and lower the price lower would be the supply.
The supply Curve:
1. The supply curve is an upward sloping curve for an individual commodity indicating that as the price of the commodity increases more of it will be produced.
2. One important reason for the upward slope is 'the law of diminishing returns'.
FORCES BEHIND THE SUPPLY CURVE
1. One major factor indicating the forces determining the supply curve, is that producers supply commodities for profit and not for fun or charity.
2. Cost of Production: One major element underlying the supply curve is the cost of production. When production costs for a good are low relative to the market price, it is profitable for producers to supply a great deal. When production costs are high relative to price, firms produce little, switch over the production of other products, or may simply go out of business. But production costs are not the only ingredient that goes into the supply curve.
3. Input costs: Production costs are primarily determined by the price of inputs and technological advances. The prices of inputs such as labour, energy or machinery obviously have a very important influence on the cost of producing a given level of output.
4: Technological advances: Another important determinant of production costs is technological advances, which consist of changes that lower the quantity of inputs needed to produce the same quantity of output. Such technological advances include scientific breakthroughs, better application of existing technology, reorganization of the flow of work.
5. Price of related goods: Supply is also influenced by the prices of related-goods, particularly goods that are alternative outputs of the production process. If the price of one production substitute rises, the supply of another substitute will decrease.
6. Government policy also has an important influence on the supply curve. Environmental and health considerations determine that technologies can be used, while taxes and minimum-wage laws can significantly raise input prices.
7. Special factors:. The weather exerts an important influence on farming and on the agro-industry. The computer industry has been marked by a keen spirit of innovation, which has led to a continuous flow of newer products. Market structure will affect supply, and expectations about future prices often have an important impact upon supply decisions.
SHIFTS IN SUPPLY
1. When changes in factors other than a good's own price affect the quantity supplied, it is called as shifts in supply. Supply increases (or decreases) when the amount supplied increases (or decreases) at each market price.
EQUILIBRIUM OF SUPPLY AND DEMAND
1. Supply and demand interacts to produce an equilibrium price and quantity or market equilibrium. .
2. The market equilibrium comes at that price and quantity where the forces of supply and demand are in balance. At the equilibrium price, the amount that buyers want to buy is just equal to the amount that sellers want to sell.
3. It is called equilibrium because when the forces of supply and demand are in balance, there is no reason for price to rise or fall, as long as other things remain unchanged.
4. A market equilibrium comes at the price at which quantity demanded equals quantity supplied. At that equilibrium, there is no tendency for the price to rise or fall.
5. The equilibrium price is also called the market-clearing price. This denotes that all supply and demand orders are filled, the books are 'cleared' of orders and demander's and suppliers are satisfied.
Equilibrium with Supply and Demand Curves
1. The market equilibrium is for the price at which quantity demanded equals quantity supplied. The equilibrium price comes at the intersection of the supply and demand curves.
2. The equilibrium price and quantity come where the amount willingly supplied equals the amount willingly demanded. In a competitive market, this equilibrium is found at the intersection of the supply and demand curves. There are no shortages or surpluses at the equilibrium price.
EFFECT OF A SHIFT IN SUPPLY OR DEMAND
1. The supply-and-demand curves can be used to ascertain the equilibrium price and quantity.
2. It can also be used to predict the impact of changes in economic conditions on prices and quantities.
3. For example, if due to bad weather the price of wheat increases which is a key ingredient of bread. That shifts the supply curve for bread to the left. But, the demand curve for bread does not shift because people's sandwich demand is largely unaffected by farming weather. However, if prices do not change, then due to increase in price of input, bakers will produce less bread at the old price. So quantity demanded exceeds quantity supplied. The price of bread therefore rises, encouraging production and thereby raising quantity supplied, while simultaneously discouraging consumption and lowering quantity demanded. The price continues to rise until, at the new equilibrium price, the amount demanded and supplied are once again equal.
4. The supply-and-demand curves can also be used to examine how changes in demand affect the market equilibrium. For example, with a sharp increase in family incomes, everyone wants to eat more bread resulting in a 'demand shift' rightward. The demand shift produces a shortage of bread at the old price. Prices are raised until supply and demand come back into balance at a higher price.
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