okay uh continuing with the previous modules where we developed the demand curve and the
supply curve and we discussed about the various determinants of demand determinants of supply
uh now we are going to see how the demand curve and the supply curve together they can
be used in a various ways like they can be used to see if there is any disturbance in
the market how is that resolved what happens in the market the basically the demand curve
and supply curve uh they give us the market equilibrium
we are going to see how that happens and then we are going to see that if that equilibrium
is disturbed because of any disturbance either to the uh consumers who are uh the people
who are demanding the goods or the producers who are the people who are supplying the goods
how the market equilibrium is disturbed and does the (equib) does the market again go
to reach another equilibrium uh what how does that happen so this is what we are going to
see in the in this module . so first we are going to bring the supply
and demand together in the market now so there is a market equilibrium which is reached where
demand equals supply that is the only point where which is the intersection of the demand
and the supply curves so basically what we are saying here is there is a bunch of people
the consumers who are looking for certain good
so they have their demand they are coming to the market looking for the goods and they
have in their mind some uh idea about not some actually they have a definite idea about
their the the prices that they would be willing to pay for a certain good of certain quality
and quantity so certain quantity of good how much they are willing to pay
so this this is there in the minds of all the people who are coming to the market and
similarly there are the suppliers who are bringing their product to the market and they
know that there are various quantities they will be able to supply to the market given
a set of prices so they meet in the market and wherever the demand matches the supply
that is the equilibrium so uh lets although it is a very simple concept but still nevertheless
lets try to draw it here let the demand and supply schedules of the so we started with
the demand for icecream and supply of icecream .
so lets uh say for example again the price of ice cream can be 10 20 30 40 50 and 60
and this is the market so we are no longer drawing a individual demand or supply curve
its not there is a single person coming to the single supplier and a single uh consumer
in the market there are whole lot of suppliers and whole lot of consumers in the market so
this is the equilibrium is in the market so in the market uh this is the demand curve
and this is the supply curve so demand curve is if the price is 10 then quantity demanded
is say 22 its 20 17 15 13 and 10 so the price if the price is very low the market the price
is around Rs 10 per cone of ice cream then the market is going to demand say 20000 kgs
of ice cream and how much i is the entire the whole lot of suppliers who are there in
the market how much are they willing to supply so they are willing to supply only 5000 kgs
it doesnt make sense for them to produce more than that so they are producing they are supplying
5000 kgs so if the price is slightly less sorry uh ya when the price is slightly more
20 then the supply is a little more the price goes up supply goes up yet again price goes
up to 40 they are willing to supply 15000 if its the price is even more they will supply
more and so this is the supply schedule and this is the demand schedule so where do you
think the market equilibrium is the market equilibrium is that price and that
quantity where the amount demanded by the consumers is equal to the amount supplied
by the consumer so we clearly see that that point is here it is the this is the market
equilibrium so this is the market equilibrium and where we get that the market equilibrium
is price is rs 40 and quantity quantity demanded is equal to quantity supplied is equal to
15 so this is where and if we draw these schedules theyll also be so this
is the point uh 15000 kgs ice cream supplied and demanded at a price of 40 rupees so this
is the demand curve this is the supply curve so this is the market equilibrium which we
get now given the equilibrium now lets uh understand
a couple of uh a couple of other uh concepts one is the surplus when quantity supplied
in the market becomes more than the quantity demanded say for example what happens if the
price goes up to say 60 due to some reason the price has gone up to 60 in the market
so uh so if the price is 60 the suppliers would be willing to supply uh 20 20000 uh
kgs of ice cream but that cannot be the equilibrium because at price of Rs 60 how much are the
consumers willing to uh buy they are willing to buy only 10 units they
are willing to buy only 10 units so so there is clearly a surplus in the market so there
is clearly a surplus in the market where uh quantity demand demanded is much less than
the quantity supplied now what happens in such a case in such a case the producers are
going to see that okay the price is high i have we have produced a lot of ice cream but
no one is willing to buy it so basically to sell the ice cream they will
be reducing their price so when they reduce their price gradually more people or more
consumers will be entering the market showing some interest to buy the ice creams and that
will keep on happening till so this basically happens so the price is so the quantity will
gradually demanded will increase to 15 and quantity supplied will fall to 15 and the
market will be back to equilibrium so what is happening if there is a surplus
pressure the price is going to come down and when price comes down suppliers are going
to uh reduce their supply and uh consumers going to raise their demand for the ice cream
and finally they again come back to the original market equilibrium
the opposite of surplus is shortage now what happens when there is a shortage in the market
say when quantity demanded in the market is more than what producers are willing to supply
so quantity demanded in the market is more than what producers are willing to supply
. say now say price falls and price falls to
20 rupees say price falls to 20 rupees so at 20 rupees the consumers have a lot of demand
for ice creams they would like to now they would like to purchase 20000 uh kgs of ice
cream but at 20 rupees the supplier can only afford to supply 9000 kgs of ice cream so
what happens in such a case in such a case the supplier is going to see
that there is lot of demand in the market so they are going to increase their price
or on the uh the the opposite of this the same reasoning is from the consumer side theyll
see that there is a shortage in the market i want the ice cream but it is not available
what is available in the market at this price is only 9000 kgs
so many of the people they will be willing to pay a little more for the ice cream so
gradually what will happen is the suppliers will increase their supply and consumers are
going to reduce their demand or they are going to quit the market as they see that the price
is going up so all the people who were expressing their demand over here they are going to gradually
quit the market as prices go up as prices go up the suppliers will be supplying more
and the consumers will be demanding less till they reach the equilibrium level of 15 units
so this is what happens in case of shortage so what are we seeing basically uh what is
correcting the market when there is any movement away from the equilibrium there is something
which is correcting the market and the market is coming back to equilibrium and what is
that now that is the price price is basically price acts as a signal in the market
it tells the consumers that at this price what you are demanding is not to be supplied
by the suppliers and to the supplier also the price tells that uh that at this price
you can only uh sell so much and you have to reduce the price if you want to sell more
similarly to the consumers it says that you have to increase the price if you want to
buy more so so price acts as a signal in the market and brings the market back into equilibrium
. so uh now lets understand how exactly what
happens how we can use this very simple framework to understand any disruptions in the market
for any good so how can uh disruptions happen in the market uh now this supply and demand
shortage uh that the sorry the the surplus and the shortage situations these situations
are basically changes in the price that is the price determinant is changing and so the
supply demand this equilibrium is happening in the market but now we are going to talk
about what happens any if any of these supply or demand curves any of these curves they
shift in the market and what what factors shift these curves they basically the non
price determinants of demand and supply shift the uh curves in the market
so non price determinants of demand and supply can affect the market so whenever uh any determinant
any disruption happens in the market how are we going to determine the uh effect of such
an event so basically the steps are we have to ask the questions does the event affect
the demand or the supply side in the market that is the first job that we need to do is
we have to see that any event in the market is it affecting my demand side or is it affecting
my supply side if i have been able to figure that out then the next questions is what is
happening to the demand and supply curves say if i have been able to determine that
this event is going to affect my demand how is it affecting the demand is it shifting
the demand curve is it shifting the demand curve to the right is it shifting it to the
left so i need to understand that and third is how does the change impact the
market equilibrium once i have figured out that which of the two curves is getting affected
and how it is getting affected it is easy to see what the new equilibrium is .
so lets uh try some examples and see how we can use this model to understand any changes
in the market say we are talking about a market for diesel operated cars and uh a event that
we are talking about is there is hike in petrol prices so hike in petrol prices means what
uh which of my 2 factors demand and supply is going to be affected
now when there is a hike in petrol prices the people who are going to buy the diesel
cars or the people who are going to buy the petrol cars or people who are looking for
cars they will be more inclined to buy the diesel cars because the fuel of petrol cars
is becoming more expensive and petrol cars are basically substitutes of diesel cars and
basically using a petrol car or substitute of diesel car is becoming expensive so the
consumers are going to demand more of the diesel cars .
so lets again
so
so basically there is a increase in petrol prices diesel cars the demand for diesel cars
is increasing so my diesel the the demand curve for diesel cars is going to shift to
the right so this is my new demand so basically what i am saying is initially this was my
equilibrium this was the equilibrium price of car and supply of cars diesel cars say
dc and the supply and now the demand has increased so at the equilibrium level this is the this
is the existing price of diesel cars now all of a sudden at since petrol prices
have increased at this price of diesel cars demand for diesel car is now here so this
is the sorry this is the quantity so this is the quantity demanded of diesel cars this
is the quantity demanded of diesel cars but uh are they able to buy at this price no they
are not because no one is supplying how much are they supplying here so now when the the
demand curve has shifted to the right the suppliers are still not supplying so much
of diesel cars what they have observed in the market is basically
demand curve has shifted up and people are willing to pay more for the cars and this
is the new equilibrium where this is the new price of diesel cars and this is the new equilibrium
quantity of diesel cars so basically lets lets go through this once more at equilibrium
price of p dc the demand suddenly increased and quantity demanded also increased so what
situation is happening here what is happening is a shortage a shortage of diesel cars
so when the supplier see that there is a shortage of the diesel cars in the market so and people
are willing to buy more so they will supply more at a higher price obviously they cannot
supply a high quantity at a lower price so they have to follow their own supply curve
and they are willing to they are telling the rest of the customers that uh if you are willing
to pay a little more you can buy some diesel cars and the people here lot of them are going
to see that the prices are increasing so they will quit the market
so as some of them quit the market the market basically then gradually comes back comes
to a new equilibrium at this point where there is a new higher price of diesel cars and new
higher quantity of diesel cars which are being sold in the market so this is one example
so event is hike in petrol prices and this shifts the demand curve
now lets look at another situation say we are talking about generally the market for
cars and the event that has happened is many new car car manufacturers have entered the
market its a some policy of the government which encourages manufacturing sector and
maybe there is the economy is thriving and uh basically they see a lot of promise in
this sector so lot of new manufacturers have entered the market .
now what happens in that case which of so this event is a non price determinant of which
of the 2 factors supply or demand now when the new car manufacturers have entered the
market clearly the number of sellers has gone up in the market and the supply has gone up
so if this is the demand this is this was the original supply and this was the price
of cars this was the quantity of cars getting sold and now since more suppliers have entered
the market supply curve has shifted to the right and at this price the equilibrium price
of p c there are more suppliers to supply cars and they would be willing to sell q c
dash of number of cars but are people willing to buy those cars no there is a clearly a
surplus in the market so when there is a surplus in the market as
we discussed what happens they know that there is a surplus in the market so suppliers know
that they’ll have to reduce the price to sell the units they are willing to sell and
so price goes down and as price goes down some people beyond this point they would be
willing to uh buy the cars so as price goes down this is the new equilibrium for cars
and this is the new price at which the cars will be available so this is the so this is
the explanation of the event many new car manufacturers and shifts the supply curve
and what happens when the events happen together .
so lets uh so this this is about the supply and in the previous case we saw that there
was a increase in demand so the demand shifts so what happens there is a intersection at
this point demand and supply curve and there is a new equilibrium so basically now there
are more number of cars in the market as is so although the difference is diesel cars
and cars but mind you that within cars also there are many diesel cars so we can well
assume that if the number of cars the supply of cars has increased the number of diesel
cars would also increase so this kind of situation is going to uh affect the market for diesel
cars also so there is a new equilibrium and there is
a new equilibrium in the diesel cars market where there is the price is the price has
gone down and the output has gone up because the demand has gone up and the number of sellers
in the market has also gone up so the price has gone down and the output has gone up in
the market so this uh completes our discussion of the demand supply framework we have introduced
the demand supply framework and let me summarize .
we have we started with the concept of perfectly competitive markets we are trying to explain
equilibrium in a perfectly competitive market and we started with the concept we said that
there are many buyers and sellers and all are price takers and the we start we developed
the demand supply framework to understand equilibrium in the competitive market we said
the demand curve comes from the law of demand the supply curve comes from the law of supply
although there are various other determinants of demand and supply
so the intersection of demand and supply determines the market equilibrium and we saw how price
corrects shortages and surpluses in the market and any disturbance in the market may be explained
through the demand and supply model its a very simple model yet a very powerful model
uh even uh even later when we are going to uh okay we are not going to uh discuss about
macroeconomic concepts but any market which has some price and some quantity say for example
investment market the the price is basically the rate of interest
so similarly uh say say foreign foreign exchange market the the price is basically the exchange
rate so there also this very simple framework of demand and supply can be used to understand
any kind of fluctuations in this market say if rate of interest changes what happens to
saving what happens to investment all these could be understood
so its a very uh simple yet powerful and uh uh model in the economics course so in the
next week we are going to talk about elasticities of demand and supply we are going to develop
uh the we are going to talk about elasticity price elasticity income elasticity etc we
are going to see how changes in prices change demand etc and how they also help us understand
uh various uh factors the decision making factors in case of demand and supply thank
you