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ECONOMICS: THEORY OF SUPPLY & DEMAND

SUPPLY & DEMAND:

Supply and demand is an economic model based on (i) PRICE, (ii) UTILITY and (iii) QUANTITY in a market. It concludes that in a competitive market (market economy), price (P) will function to equalize the "quantity demanded" by consumers, and the "quantity supplied" by producers, resulting in an "economic equilibrium" of price and quantity. An increase in the quantity produced or supplied will typically result in a reduction in price and vice-versa. Similarly, an increase in the number of workers tends to result in lower wages and vice-versa. The model incorporates other factors changing equilibrium as a shift of demand and/or supply.

MY EXPLANATION :

It is said that price of an object is such an economic property that always try to make demand and supply of an object to be in equilibrium.

If the demand of an object increases due to the change of the values of the non-price factors or parameter, it changes the equilibrium point and it shifts upward, having a rise in price, but that would make the factories to produce more as the profit-margin would increase, but a surge(increase) in supply would again make the price fall due to sluggish in demand.

So the surge in Supply would force the price to fall(decrease) and ultimately another equilibrium point would be there where the price and the quantity consumed both would increase and both demand curve and the supply curve would shift to a new equilibrium point.


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("in a market, price of the commodity is the most crucial factor in a highly competetive market economy.
just think from a buyer's point of view, the price definitely regulate our desire for an object, and thus would create a demand of the object/commodity. if the price of the object shoots up, it would be out of reaches for a group of people and such its overall demand of the object decreased. suppose you have a desire to buy an icecream of Rs 20.00 each, so you created a demand for a cup of ice cream, as you have Rs 100.00 in your pocket,
so you have a net positive purchasing power of Rs. 100.00, but at the shop you come to know that the price have been reduced by Rs. 8.00 and the ice cream is priced at Rs.12.00, and amazingly you would found that you have a increased desire for the ice cream ie the demand for the object is increased as the price is reduced.
the slope of the curve would be negative as decrease of price increases demand.
demand curve and the family of demand curve.
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how does a demand curve is constructed and what does it mean actually.
each red lines in the above diagrams are demand curves of different utility values that would depend upon purchasing power of the people, between this two curves, the lower one has value of lower utility, means if purchasing power or purchasing potential increases for a person, his demand curve would shift from the lower curve to the higher curve.

Demand Schedule:
Demand is defined as the "willingness" and "ability" of a consumer to purchase a given product in a given frame of time.
......The demand schedule, depicted graphically as the demand curve, represents the amount of goods that buyers are willing and able to purchase at various prices, assuming all other non-price factors remain the same. The demand curve is almost always represented as downwards-sloping, meaning that as price decreases, consumers will buy more of the good.
........Just as the supply curves reflect marginal cost curves, demand curves can be described as "marginal utility" curves.
.........The main determinants of individual demand are: the price of the good, level of income, personal tastes, the population (number of people), the government policies, the price of substitute goods, and the price of complementary goods.
The shape of the aggregate demand curve can be convex or concave, possibly depending on income distribution. In fact, an aggregate demand function cannot be derived except under restrictive and unrealistic assumptions.
As described above, the demand curve is generally downward sloping. There may be rare examples of goods that have upward sloping demand curves. Two different hypothetical types of goods with upward-sloping demand curves are a "Giffen good" (an inferior, but staple, good) and a "Veblen good" (a good made more fashionable by a higher price).
Similar to the supply curve, movements along it are also named expansions and contractions. A move downward on the demand curve is called an expansion of demand, since the willingness and ability of consumers to buy a given good has increased, in tandem with a fall in its price. Conversely, a move up the demand curve is called a contraction of demand, since consumers are less willing and able to purchase quantities of the product in question.

Changes in Market Equilibrium:
When Market parameter changes, Market Equilibrium also gets affected, and eventually it settles down to a new Equilibrium position and hence, the curves also shift due to this..

Demand curve shifts:
When consumers increase the quantity demanded at a given price, it is referred to as an increase in demand. Increased demand can be represented on the graph as the curve being shifted outward. At each price point, a greater quantity is demanded, as from the initial curve D1 to the new curve D2. More people wanting coffee is an example. In the diagram, this raises the equilibrium price from P1 to the higher P2. This raises the equilibrium quantity from Q1 to the higher Q2. A movement along the curve is described as a "change in the quantity demanded" to distinguish it from a "change in demand," that is, a shift of the curve. In the example above, there has been an increase in demand which has caused an increase in (equilibrium) quantity. The increase in demand could also come from changing tastes and fads, incomes, complementary and substitute price changes, market expectations, and number of buyers. This would cause the entire demand curve to shift changing the equilibrium price and quantity.
......If the demand decreases, then the opposite happens: an inward shift of the curve. If the demand starts at D2, and decreases to D1, the price will decrease, and the quantity will decrease. This is an effect of demand changing. The quantity supplied at each price is the same as before the demand shift (at both Q1 and Q2). The equilibrium quantity, price and demand are different. At each point, a greater amount is demanded (when there is a shift from D1 to D2).
.......The demand curve "shifts" because a non-price determinant of demand has changed. Graphically the shift is due to a change in the x-intercept. A shift in the demand curve due to a change in a non-price determinant of demand will result in the market's being in a non-equilibrium state. If the demand curve shifts out the result will be a shortage - at the new market price quantity demanded will exceed quantity supplied. If the demand curve shifts in, there will be a surplus - at the new market price quantity supplied will exceed quantity demanded. The process by which a new equilibrium is established is not the province of comparative statics - the answers to issues concerning when, whether and how a new equilibrium will be established are issues that are addressed by stochastic models - economic dynamics.
........Two assumptions are necessary for the validity of the standard model. First, that supply and demand are independent and second, that supply is "constrained by a fixed resource."
If either of these conditions does not hold, then the Marshallian model cannot be sustained.
.......

Supply curve shifts:

When the suppliers' costs change for a given output, the supply curve shifts in the same direction. For example, assume that someone invents a better way of growing wheat so that the cost of growing a given quantity of wheat decreases. Otherwise stated, producers will be willing to supply more wheat at every price and this shifts the supply curve S1 outward, to S2—an increase in supply. This increase in supply causes the equilibrium price to decrease from P1 to P2. The equilibrium quantity increases from Q1 to Q2 as the quantity demanded extends at the new lower prices. In a supply curve shift, the price and the quantity move in opposite directions.
........If the quantity supplied decreases at a given price, the opposite happens. If the supply curve starts at S2, and shifts inward to S1, demand contracts, the equilibrium price will increase, and the equilibrium quantity will decrease. This is an effect of supply changing. The quantity demanded at each price is the same as before the supply shift (at both Q1 and Q2). The equilibrium quantity, price and supply changed.When there is a change in supply or demand, there are three possible movements. The demand curve can move inward or outward. The supply curve can also move inward or outward.
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Elasticity:
..........Elasticity is a central concept in the theory of supply and demand. In this context, elasticity refers to how supply and demand respond to various factors, including price as well as other stochastic principles. One way to define elasticity is the percentage change in one variable divided by the percentage change in another variable (known as arc elasticity, which calculates the elasticity over a range of values, in contrast with point elasticity, which uses differential calculus to determine the elasticity at a specific point). It is a measure of relative changes.
..............Often, it is useful to know how the quantity demanded or supplied will change when the price changes. This is known as the price elasticity of demand and the price elasticity of supply. If a monopolist decides to increase the price of their product, how will this affect their sales revenue? Will the increased unit price offset the likely decrease in sales volume? If a government imposes a tax on a good, thereby increasing the effective price, how will this affect the quantity demanded?
......Elasticity corresponds to the slope of the line and is often expressed as a percentage. In other words, the units of measure (such as gallons vs. quarts, say for the response of quantity demanded of milk to a change in price) do not matter, only the slope. Since supply and demand can be curves as well as simple lines the slope, and hence the elasticity, can be different at different points on the line.

Elasticity is calculated as the percentage change in quantity over the associated percentage change in price. For example, if the price moves from $1.00 to $1.05, and the quantity supplied goes from 100 pens to 102 pens, the slope is 2/0.05 or 40 pens per dollar. Since the elasticity depends on the ...
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