ECN 201: Principles of Microeconomics Nusrat Jahan Lecture-2 Basic Concepts of Demand and Supply

Market Demand and Supply Market is a place where buyers and sellers meet for exchanging goods and services Markets Buyers Sellers Product Market Household Firms Factor Market Demand and Supply 𝑩𝒖𝒚𝒆𝒓𝒔⇒𝑩𝒖𝒚 𝑺𝒆𝒍𝒍𝒆𝒓𝒔⇒𝑺𝒆𝒍𝒍 Equilibrium

Demand Curve Law of Demand Demand curve shows the change in quantity demanded with the change in price.  Movement along the demand curve- when price change quantity demanded change.  Shift in demand curve- when other determinant (except price) of demand change demand changes and the demand curve shifts. Law of Demand When P↑ quantity demanded↓ and when P↓ quantity demanded↑ Why? Substitution effect- When the price of a good rises, other things remaining the same, its relative price—its opportunity cost—rises. As the opportunity cost of a good rises, the incentive to economize on its use and switch to a substitute becomes stronger. Income effect- When a price rises, other things remaining the same, the price rises relative to income. Faced with a higher price and an unchanged income, people cannot afford to buy all the things they previously bought. They must decrease the quantities demanded of at least some goods and services

Shift in Demand Curve Prices of related goods => Price of Substitute ↑ Demand ↑ => Price of Complement ↑ Demand ↓ Average income of consumers => Income ↑ Demand ↑ => Income ↓ Demand ↓ Size of the market Tastes Special influences weather, govt. policy, taxation etc… Price Quantity

Supply Curve Shift in Supply Curve Cost of production Supply curve shows the change in quantity supplies with the change in price.  Movement along the supply curve- when price change quantity supplied change.  Shift in supply curve- when other determinant (except price) of supply change supply changes and the supply curve shifts. Shift in Supply Curve Cost of production Technological change Price of related goods Size of the market Government policy Special influences

Equilibrium and Market Clearing Price The price at which quantity demanded equals the quantity supplied is called the equilibrium price or the market clearing price. Mathematical determination of Equilibrium Price and Quantity Effect of shift in demand or supply on equilibrium price Quantity Demanded= QD Quantity Supplied = QS Equilibrium Quantity = Q* Equilibrium Price = P* Demand Curve: P = a-bQD Supply Curve : P = c+dQS