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Markets and Competiton

  • Market is a group of buyers and sellers of particular good or service.
  • Buyers determine the demand for the product.
  • Sellers determine the supply of the product.

Demand

  • Quantity Demanded : Amount of a good buyers are willing and able to purchase.

    Example

    When price of good is increases , quantity demand of that good decreases.

    If Amul raises the prices of Toned Milk by 10 ruppees suddenly , then consumers will switch to a different brand. Hence , decreasing the demand for Amul Toned Milk.

  • Law Of Demand: When the price of the good increases , quantity demanded of a good falls.

  • Demand Schedule (table): Relationship between the price of a good and quantity demanded.
  • Demand Curve (graph): Relationship between the price of a good and quantity demanded.
  • Individual Demand: Demand of an individual.

Demand Schedule and Demand Curve

Market Demand Curve

It is the sum of individual demand curves horizontally.

  • Total quantity demanded of a good varies
    • As the price of the good varies
    • Other things constant

Market Demand as the Sum of Individual Demands

Shifts in the Demand Curve

  • Increase in demand
    • Any change that increases the quantity demanded at every price.
    • Demand curve shifts right
  • Decrease in demand
    • Any change that decreases the quantity demanded at every price.
    • Demand curve shifts left.

Shifts in the Demand Curve

Factors affecting Demand Curve

  • Income (Other factors are constant)

    • Normal Good: An increase in income leads increase in demand.

      Example

      If the income increases a person can now buy more of a certain goods.

      Buying trendy clothes becomes normal.

    • Inferior Good: An increase in income leads to decrease in demand

      Example

      If the income increases a person will look for better options for slightly higher price

      Buying expensive shoes from brands like nike and puma.

  • Prices of related goods

    • Substitute (two goods): An increase in the price of one leads to an increase in demand of the other

      Example

      If the price of Tata Tea increases , consumer will move to a different brand, which will lead to increase in demand of the latter.

    • Complements (two goods): An increase in the price of one leads to an decrease in demand of the other

      Example

      If the price of fuel increases , all the goods become costly due to transportation expenses , this will lead to decrease in demand of certain goods because of high price.

  • Tastes: Changes in tastes over time changes the demand.

    Example

    A person when of young age does not like coffee but as he grows older coffee/tea gives the person utility/satisfaction.

  • Expectations : Expectation about the future

    • Expecting an increase in income might lead to increase in current demand of a certain good.

      Example

      Buying goods on loan/EMI

    • Expecting higher prices might also lead to increase in current demand.

      Example

      Buying grains in large quantity when the news of bad harvest breaks out.

  • Number of buyers

Supply and Demand Together

Equilibrium is a situation when,

  • Supply and demand forces are in balance.
  • A sitation in which market price has reached a level where \(\text{Quantity Supplied} = \text{Quantity Demanded}\)
  • Supply and demand curves intersect.

Equilibrium Price: Balances quantity supplied and quantity demanded , also known as market-clearing price.

Equilibrium Quantity: Quantity supplied and quantity demanded at the equilibrium price.

Equilibrium of Supply and Demand