1) Definition
2) LoD/LoS
3) Demand curve/supply
Price
AS Economics (Micro)
4)
MAC-Ds
57 Shift DINon-price
to LoD
Chapter 2: Market Equilibrium 1) Exceptions
in
Demand: It refers to the willingness and ability of consumers to buy goods and services at a
given price.
What is the Law of Demand?
The Law of Demand states that the Price and Quantity demanded for a certain good is
negatively related. It means that as the Price rises, the Quantity demanded will fall. Similarly, if
the Price falls, the Quantity demanded will rise. Hence, they are negatively related.
Demand curve: It is agrammatical
geographical relationship of Price and Quantity demanded.
The demand curve is a downward
sloping curve due to the negative
relationship between Price and
Quantity demanded.
Pa
t
P
-
D
-
9
P= Price Qd= Quantity demanded
D
D=Demand
9.
-
Qu
Qd
Change in Demand
Price Factor
Non-Price Factor
-Also known as Endogenous factor
-Also known as Enogenous
factor
Y
-Causes a Movement along
-Causes a Shift in Demand
Di D
the Curve (MAC)
A in
&D
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=
a,
a
Movement along the curve
t im P
to in RD
Entension
t in &
Contraction due
Price
This upward
movement is
contraction in
demand (Qd )
P1
P2
Key point 1: this diagram
shows a movement along
the demand curve.
Movement along the curve
(MAC) only occurs only
when price changes
This downward
movement is
extension in
demand (Qd )
D
Q1
Quantity
Q2
Ceteris Paribus: holding all other factors constant
Reasons for Shift in Demand (Non-Price Factors)
1) Income rises which leads to a rise in demand (Normal goods)
2) Income rises which leads to a fall in demand (Inferior goods) eg public
3) Rise in Income Tax which leads to a fall in demand
4) Taste/Fashion of product rises which leads to a rise in demand
5) More advertisements lead to a rise in demand
6) Increase in population results in rise in demand
7) Price of Substitutes: Ptea
Dcoffee (substitutes are goods with alternative demand
>
Dcoket
eg tea and coffee) Propsit
8) Price of compliments: Ppetrol
Dcars (Compliments are goods that have a joint
demand eg petrol and cars) Puerto > Drea ↑
9) Rise in Interest Rates lead to a fall in demand
D4
10) Increase in loans lead to a rise in demand
11) Quality ↑ >
P
transport
-
-
-
⑫Daniel
P
↑ iD
D2
tim D
D3
D1
Q
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Exceptions to the Law of Demand
Very rarely, the law of demand is violated. This means that in some cases, price and
quantity demanded are not negatively related, but are in fact positively related. This
means that as prices rises, quantity demanded also rises. There are 4 cases:
1. Veblen goods: also known as snob goods, these are highly luxurious goods which
people by to show off. The more expensive they are they more the very rich desire them
2. Quality judged by price: sometimes consumers buy expensive goods because they
believe these goods will have better quality than other cheaper goods.
3. Speculative goods: these are goods that are bought to be sold in the future. So as their
price rises, speculators buy these more in the hope that once their prices reach peak,
they’ll sell these goods to earn profit or capital gains
4: Giffen goods: these are extreme types of inferior goods. Their price and quantity
demanded is positively related as people do not prefer these goods when overall prices
are low as they can afford better goods, while if general price level is high, then people
tend to switch to these goods to improve purchasing power. E.g. in case of beef and
bread, bread is a giffen good.
Ne! -
Definition of
all other
Holding
Beef
Ceteris paribus
factor
uS
-
1kg
11
=
=
Rslovs-
Rs 1100
↳ 1g
constant
>
consumed
It
3kg
n= 10
-
Bread
=
%
Rsloo + 8
Rollo
=
↳ lo packet
&x*(Guffer)
-
(Normal) I a
PN- Ext
P4 -
*
SUPPLY
It refers to the willingness and ability of producers to sell their products at a given price
What is the Law of Supply?
The Law of Supply states that Price and Quantity Supplied have a positive relationship. If the
Price of a good rises, the Quantity supplied will rise as well. Similarly, if the Price falls, the
Quantity supplied will fall as well. Hence a positive relationship is established.
Supply curve: It is the mical
geographical relationship between Price and Quantity supplied.
P
Supply curve is upwards sloping
due to the positive relationship
between Price and Quantity
Supplied
Pi
↓
Pene
P=Price Qs=Quantity supplied
S
S
P2
Contractions
Pxt
Ost
an a ,a
S=Supply
97Q-
Qs
Change in Supply
Price Factor
Non-Price Factor
-Causes Movement along the Curve (MAC)
Movement Along The Curve (MAC)
-Causes a Shift in Supply
Pd
S
Pr
↑
Pr
extensionOst
Pit
a
,- &
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S
Key point 3: this diagram
shows a movement along
the supply curve.
Movement along the curve
(MAC) only occurs only
when price changes
This upward
movement is
extension in
supply (Qs )
P2
P1
This downward
movement is
contraction in
supply (Qs )
Q1
Price T
↳ Scopper
Ceterisparibus
DYASN
Q2
Ad* - DR + Sti
Copa
Princ
Shift in Supply
+
&st +
Supper
1)Rise in Cost of Production leads to a fall in Supply
2)Price of jointly supplied goods eg Zinc and Copper. (Pzinc
with
Scopper ) Do not confuse
compliments
confuse with subs
jouitly demanded Subs egtMinist
alt
top
3)Price of alternatively supplied goods etc Potatoes and Cabbages (Ppotato
4)Technology advancements lead to a rise in supply
demanded
Not the
5)Increase in raw materials leads to a rise in supply
) Do not
Scabbage
=
same as
wine & copper
jointly supplied eg
&
potatoes cabbages
alt
supplied
of
6) Advertisements increase Cost of Production for firm. Hence Supply falls
7)Indirect Taxes lead to a fall in supply due to increase in Cost of Production
8)Subsidies lead to increase in supply due to fall in Cost of Production
tre
↳
S3
S1
↓S
S2
Price
.
↑S
IDT
Quantity
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B
100
Individual vs Market demand and supply
=
--
Individual Demand is one consumer’s demand for a product while Market Demand is the
horizontal sum of all individual demand curves.
Same is the case with individual and market supply which is the horizontal sum of all
individual supply curves
iRTD
Market Equilibrium
:
-
tendency for price
is no
is where There
Equilibrium
to
AAD
change
It is when quantity demanded is equal to the quantity supplied
P
S
e
Pe
·
D
Q
Qe
P M
Pi
Si
surplus
P >Pe-DaS
,
>
-
>
still D= Se Pe
-
p
a
Pr
↓
↓
-
L
L
Joe
11-
T
Pape > DaS
>
Shortage (ercssD)
-
↑
-
-
Shortage
Re
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Surplus (encess supply)
-
PrtilD So Pe
=
Di
&
&
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:
Market Disequilibrium
DFS &heuse price
Excess supply
will not remain at
that
point
.
S
P2
At P2
D<S
Surplus
P till it
comes to P1 where D = S (MAC)
Price falls
P1
Price rises
At P3
D>S
Shortage
P till it
comes to P1 where D = S (MAC)
P3
Excess demand
D
Quantity
PQp
40
5
Changes in Equilibrium
Equilibrium changes due to shift in demand or supply.
1035
30
25
30
P2
P1
P3
D2
Q1
Q2
=
40
An increase in demand
causes an increase in the
price and quantity of the
good, while a fall in
demand causes a decrease
in price and quantity of the
good in the market
D1
D3
D S
P in so
S
Price
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TM ?
Changes in Demand
Q3
&s
Quantity
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(D + S)
Disquilliam
Pi
Pe
Si
surplus
-
t
P2
↓
L
L
V
-
>
-
-
2
·
&
MAC
Pl - &T
SHIFT
DT + 44 >
-M
T
M
7
↑
Stage
Di
S
De
Surplus
DaS >
, Pe >
till P Pe where D
P
-
-
=
P2Pe
till P
=
>
-
D >S
>
-
Pe where D
=
Q
>
-
S
Shortage
=
Ph
S
> PM
-
PM
Po
Pi
S3
↑
S
Asis
:
Sa
↑
-
-
↓
Pa
Entu)
Stsurplu
↓ - Shortage->
PT + &t. )
Di
=
-
93 Q
Qu
,
Contact
Sa
As in Demand
Pa
Si
Pa
p
.
=
↑ D>
4
-
PP + Q4(enterion
↓D-
,
P
Surplus
>
-
↑
L
-
-
Du Q ,
Q2
Shortage
Ds
Pt/QHcontenti
D
D
,
&
&
Changes in Supply
S3
S1
Price
An increase in supply
causes price to decrease
while quantity increases,
whereas a fall in supply
causes price to increase
while quantity decreases
S2
P3
P1
P2
D
Q3
Q1
Quantity
Q2
Shift in both curves at the same time
Key point 5: Remember, when demand and supply both change in the same direction,
quantity changes but change in price remains uncertain (increase in D & S increases quantity,
and vice versa for fall in D & S). Whereas, when demand supply both change in opposite
directions, price changes but change in quantity remains uncertain (increase in D and fall in S
causes price to rise, and vice versa).
Demand rises & supply rises
Demand rises & supply falls
S1
S2
S1
S2
P2
P1
P1
D2
D2
D1
Q1
Q1
Q2
Quantity rises, Price uncertain
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What happens to PoQ due toDsin DOS
>
direction
changes price
when DOS
Quantity
change in same
in
direction
when
-
is uncertain
-
↑
.
But
price changes but
DIS change
-
quarkly
opposite
is uncertain
,
↑
P
D
S
Q
M
I
x
-
-
-
=
=
=
↑
↓
↑nI
↓
↓
↓
a
=
I
I
↓
=
T
3)
=
? [)
=
m
E
↓
↑
a
↓
↓
M
↓
4
1
Mixed
Price Functions in Market and Fixed Economies
-
1) Rationing: Price is used to allocate resources/goods only for those who can afford
2) Signaling: Price acts as a signal to indicate shortage or surplus of products in a market
3) Incentive: Price increase creates an incentive for producers to produce more goods for
profit whereas a fall in price gives an incentive for consumers to buy more
As
=
Q =
10 + 5P
50
-
#
29
5pTo-p
10
-
+
40
6P
=
p
n
+
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=
$6
.
67
&
xx
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LGS Gulberg A level 2020-22
x
supply
Demand
lability willingness arit
o
.
willings
Definition
to sell
-
Plakanshy Har
-
② Law
P & QD =
-ve
bu
Relationsh
P& &s
-
the
=
-
PT = &D , Ph +& Prt &↑ PUtBst
,
P
M
Pa
↳
Curve
③
DiP-
④ MAL
>
EXT
&
⑥Exception
MAC
L
3
&
s
AnP > MAC
-
:- Ext
CONT :
⑤ Shift
Q
S
P
Cont
:
a
Non-prefactor
va
&
X
0
