Prices and Markets

Ch a p t e r fo u r
Meaning of price and value
 Value is exchange
 Prices are monitory measures of exchange
value

Types of markets
 Old and new market
 Local, national and international markets
Demand
 A desire for a good which is backed up by
willingness and ability to pay the price of that
good.
 Demand is defined as quantity demanded at
any given price over some given period of
time
Law of demand
 There is inverse relationship between price and
quantity demanded.
 Other things constant places a limitation on the
application of the law of demand.
 When price increases the quantity demand
decreases
 When price decreases the quantity demand
decreases
 Demand vs. Quantity Demanded
 Demand is the amount of a product
that people are willing and able to
purchase at each possible price
during a given period of time.


 The quantity demand is the amount of

a product that people are willing and
able to purchase at one, specific
price.
Shape of demand curve
 The demand curve slopes downward and to the
right
 Income effect
 Related goods effect

Pric e (p e r u n it )
A

D
0
Qu a n t it y d e m a n d e d (p e r u n it o f t im e )
Supply
 Quantity of a commodity which is supplied at
an given price over some given period of
time.
 More will be supplied at higher prices than
lower prices.

Law of supply
 There is negative relationship between price
and quantity supplied.
 When holding other things constant
 When price increases the quantity supplied
also increase
 When price decreases then quantity supplied
also decreases
 Shape of supply curve
 Firms try to earn maximum profits


S
Price (per unit)

A
PA

0 QA
Quantity supplied (per unit of time)
Market price
 When demand and supply intersect at one
price called equilibrium price and quantity is
called equilibrium quantity.

Demand and Supply

$5.00
S
4.00 Excess supply
3.50
Price per DVD

A
3.00
2.50 E
2.00 C
1.50
1.00
Excess demand D
1 2 3 4 5 6 7 8 9 10 11 12
Quantity of DVDs supplied and demanded
 Excess supply: when quantity supply is greater
than quantity demanded (surplus)
 Excess demand: when quantity demand is
greater than quantity supplied (shortage)
Changes in Demand
 Movement along the demand curve
 Movement of demand curve
Movement along the curve

$2 B
Pric e (p e r u n it )

Ch a n g e in q u a n t it y d e m a n d e d
(a m o ve m e n t a lo n g t h e c u rve )

A
$1

D1
0
100 200
Qu a n t it y d e m a n d e d (p e r u n it o f t im e )
Movement of demand curve (shift in
demand)

Change in demand
(a shift of the curve)
$2
Price (per unit)

B A
$1

D0

D1
100 200 250
Quantity demanded (per unit of time)
Causes of movement of demand
curve( determinants of demand)
1.Changes in income
2.Changes in the prices of other goods
1.Substitutes
2.Complements
3.Changes in taste and fashion
4.Advertising
5.Hire purchase
Increase or decrease in demand
 When demand curve shift towards left it is
decreasing
 When demand curve shift towards right it is
increasing
Changes in supply
 Movement along the curve
 Movement of the supply curve
Movement along the curve
S0
Pric e (p e r u n it )

Ch a n g e in q u a n t it y
A s u p p lie d (a
$15
m o ve m e n t a lo n g
t h e c u rve )

1,250 1,500
Qu a n t it y s u p p lie d (p e r u n it o f t im e )
Movement of supply curve
S0
S1
Pric e (p e r u n it )

A B
$15
Shift in Supply
(a shift of the curve)

1,250 1,500
Qu a n t it y s u p p lie d (p e r u n it o f t im e )
Effects of changes in supply curve
 When supply increases it shifts towards
rightward
 When supply decreases it shifts towards
leftward
Demand and supply: some important
relationships
 Competitive demand_ goods which are
substitutes for one another are said to be in
competitive demand.
 Joint demand_ when use of one good requires
use of another good
 Joint supply_ production of one good creates
supply of another good
 Demand of one good is joint with supply
another good
Demand and supply some real example
 Non-market prices
 Holding down food prices during emergency
 Offering farmers a guaranteed price higher than
the free market price.
 A fixed supply _ cup final tickets



 Taxes and subsidies
 Effect of placing a tax
on a commodity
 The effect of a subsidy