Chapter 2: Demand

INoDateChapter2DemandTheory of demand (3235000)The relationship between the quantity OF a well defined commoditythat a consumer IS both willing and able to buy at each possibleprice during a given period of time, when other determinants of demandheld constantDeterminants of demand (@@@@ 66mDPrice of the product2price of other products (substitutes and complements3Consumers' income4Various sociological and cultural factors.Demand function C 90'so 50 200Qdr = F (Px, P, ... PnH, Y, S)sociologicalfactorsconsumerPricePrice of allconsumers'ofincomedemandother relatedthisfor the productproductsproductReasons for the downward sloping demand curve / Reasons for thenegative relationship between quantity and price.1Substitution effect C &Change in the quantity demanded of a certain commodity dueto the relative price change in that commodity , when otherdeterminants of demand except price held constant.2Income effect CChange in the quantity demanded for a certain commodity dueto the change in the real income of consumers HA when othedeterminants of demand except price held constant.SAMMANTH NOT NAFER SINGH Name SEIS DemandIndividualMarketDemand of an individual- Demand of all individuals in aAPBmarketMarketPP,1010DADBDn20a40>2>@60Demand equation C 3036somesGSQd = a - bpQuantity demandedAnd = slope of demand curvewhen price is zero.DPMovements along the demand curve ( DOGE goodPThis IS a result OF a change in thepriceA20movement downIncrease in QdAB10movement upDecrease in Qda0100300Shifts of the demand curve C 3000 00:08:30)PThis IS 0 result of a change in any of(shift factors)the variables that were held constant7when original curve was drawn.D2Rightward shift Increase in demandD3D1Leftward shift Decrease in demand7@ SupplySupply indicates how much of a commodity , producers are bothwilling and able to offer for sale in a given time period at eachpossible prices a holding other conditions of supply constant.Determinants of supply carego (362))DPrice of the product(2)prices of factors of production3goals of producing firms4the state of technologysprice expectations6Changes resulting from natureDGovernment policiesSupply functionQs = F C Px D Py, F1Fm.Quantity of supply PricePrices of all factors of productionReasons for the upward sloping supply curveIWillingness based on the profit2Law of increasing opportunity costSupply curveCOaP5eSAMMANIS But FAPER ISINGLE FULD-TOTAL EqulibriumPSa E,D = SPEEDQQEConsumers' & producers surplusPSconsumerssarplusPEProducers:surplusDQP.EthreePelasticElasticityEP= as10Ameasure of responsiveness7EP - 2-33.IPrice elasticity of demandEP=5pointed = % sedDed P2EP=0.5xDPQ% A PEPEOare06101620Qand (P2+P12DPX@a+@112per fectlyDeterminants of the price elasticity of demandelasticAvailability of substitutes at the Prevailing market priceThe number of possible substitute uses3The proportion of income spent on a good4The period of timeUsed of Ed(s)The poss) bility of new purchasers.Iin economists theoraticalanalysis2in the practical decisionsof the businessthe government 2Income elasticity of demand"ey = "% AQdvpointLOG /% D YLYeare0% - 2:1-72PinformPR-P: / 0.00assisOF03Cross elasticity of demandexy =%DQA% APB4Price elasticity of supplyes - AQSPDPQsGovernment interventionPrice controlI Maximum price legislation / Price ceilings (203000)-Price ceiling is government-mandated maximum legal once abovewhich a product cannot be sold; must be set below the equilatureprice-Price ceilings are imposed at,rice = gas, bus fare, raines fare, breadhousing loans ex.NEW ant- 6DatePmaximum blackP3market priceSsocial castPExcess demandP2Price cellingD Q0Q3Q1D2Effects of a plice ceiling1Price Falls down From P1 to P2 according to the legislation.2Demand increases from 01 to Q2 and supply decreases from Q1 toQ3. - As a result of that an excess demand occurs.3Due to the excess demand it becomes unable to distribute goodsefficienctly with the price legislation. Because OF that 'non-plicemethods are used to distribute the limited supply of goods.eg- distributing according to the order of customers' arrivelUsing quotas in distributing goodsSelling at a black market priceDistributing goods for bribes or close relationshipsDistributing by joining with another goodIMarket inefficiences are occurred due to above easonseg - not fulfilled wantsTime and money wasteillegal profitsLimiting investment flow.3The drop of social welfare is identified as the dead weightloss of the government policy. 72Minimum Price legislation / Piece Floor CHIPSOPrice Floor IS a government mandated minimum legal price belowwhich a product cannot be sold ; must be set above theequlibrium pnce.Pexcess5supplyP2Price floorP.D?Q2Q,isE Effects of a price FloorDMarket price goes up from P1 to P2 because of the legislation.2Demand decreases from Q1 to Q2 and supply increases fromQ1 to Qs. So, an excess supply CQ2 - Q3) occurs.3Number of market inefficiencies take place because of theexcess supply.eg- wastage of goodsincurring losses for producers when they cannot cover the cost.when this happens in service industry, this results in unemploymentWhen sellers try to sell the products at a discounted piecethere's a high risk of falling down prices largely.Due to the effors of sellers to keep the prices at a higherlevel, an over investment condition occurs.4To ensure the success of a Price floor 2 policies are used.IBuying the excess inventory C 268020 62000 dez corsoI(egn 3600 6950)social Indirect taxesThe amount of payment or proportionate payment by the producerto government per unit IS tax on producer / indirect tax.Change in equationsBefore tax 2Rd - 60-5P No impactQs = IS +10PAfter a tax of 3 14pees 2Qs = 15 + 10 (P-t)= 15 +10 (P-3)= 15+10P-30= -15+10Pchange in curvesPS2- Tax is a cost for the producer SoS,supply curve shift leftwardt=3pncepaid by -consumertaxLeesocial costPrice receivedby producer@Q2orTax burden with elasticity of demandPDPPP52S2S2S2SIS1AaSISTP2DaPIP.P2DP1ADDQ19 02QQoQ2Q1Q2.Q100% taxburden on80% (majonty) of tax50% tax. burden25% (small amountQconsumerburden on consumeron consumernote tax burden onSAMMANIEconsumer 9NoDateTax burden and elasticity of supplyPSIPSPSSiS+P25)P2P29PI.5P3P1AP390>Q>QQ7QP2 0,az Q.--no impact on supply80% tax burden25 % tax burden- Price increase by the tar-curveon produceron producer- O burden on piodu cerno social costtotal (100%) taxburdenIS on producerDead weight loss of the taxSISox9PIabePodeP2nij,Q1 Q.Loss in consumers' surplus =(a+b+c)Loss in producers' surplus = -(d+e+f)Gam in government revenue + (a+b+d+e)Net result- (cte)SAMPLAME ANCIE NOT WITH