Postgraduate Diploma in Business and Finance 2015/16 Demand Supply and Price Theory Dr. M. Ganeshamoorthy, B.A (Hons) PDN, PgDED CMB, M.A CMB, Ph.D The.

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Postgraduate Diploma in Business and Finance 2015/16 Demand Supply and Price Theory Dr. M. Ganeshamoorthy, B.A (Hons) PDN, PgDED CMB, M.A CMB, Ph.D The Netherlands

DEMAND AND SUPPLY What is demand? The quantities that the consumer is willing, able and to purchase at different prices of a good or service is known as demand. Three conditions must be fulfilled: 1.Desire to buy 2.Ability to buy (purchasing power) 3.Ready to buy

DEMAND AND SUPPLY Determinants of demand: 1.Price of the product in question 2.Ability to buy (purchasing power) 3.Ready to buy

DEMAND AND SUPPLY The Law of Demand: (explains the relationship between the price and quantity demanded of a good while keeping all other determinants of demand constant) “Ceteris paribus, higher the price lower the quantity demanded and vice versa” There exists a negative (inverse) relationship between the price and quantity demanded of a good

DEMAND AND SUPPLY Why there is a negative relationship between price and quantity demanded? (why the demand curve is downward sloping? Why demand decreases when price increases?) 1. Substitution effect - if substitutes are available consumer will purchase cheap substitutes when the price of a good is increased. 2. Income effect – given fixed income, a consumer has to reduce consumption when there is an increase of price of a good. 3. Diminishing marginal utility – people do not like to pay high price for large quantities as the satisfaction diminishes when consuming large quantities.

DEMAND AND SUPPLY

Demand cam be explained using a table or graph or an equation. Demand table: A demand table shows how much of a given product a consumer is would be willing to buy at different prices Demand curves are derived from demand tables.

DEMAND AND SUPPLY

When quantity demanded exceeds quantity supplied, price tends to rise. When the price in a market rises, quantity demanded falls and quantity supplied rises until an equilibrium is reached at which quantity demanded and quantity supplied are equal. Market Equilibrium Excess Demand At a price of $1.75 per bushel, quantity demanded exceeds quantity supplied. When excess demand exists, there is a tendency for price to rise. When quantity demanded equals quantity supplied, excess demand is eliminated and the market is in equilibrium. Here the equilibrium price is $2.50 and the equilibrium quantity is 35,000 bushels.

When quantity supplied exceeds quantity demanded at the current price, the price tends to fall. When price falls, quantity supplied is likely to decrease and quantity demanded is likely to increase until an equilibrium price is reached where quantity supplied and quantity demanded are equal. Market Equilibrium Excess Supply At a price of $3.00, quantity supplied exceeds quantity demanded by 20,000 bushels. This excess supply will cause the price to fall.

27 of 9 Market Equilibrium Changes In Equilibrium