Market Forces of Demand & Supply

Lesson 2

For Econ101, PGCSM (Post Graduate Certificate in Securities Markets)

 Re-visiting lesson 1
• History of economic thought
Econ101@NISM | Lesson 2 | 08-08-2024

• Classical, Austrian, and Keynesian

• Ten principles of economics
1. People face trade-offs
2. The cost of something is what you give up to get it
3. Rational people think at the margin
4. People respond to incentives
5. Trade can make everyone better off
6. Markets are usually a good way to organize economic activity
7. Governments can sometimes improve market outcomes
8. A country's standard of living depends on its ability to produce goods and services
9. Prices rise when the government prints too much money
10. Society faces a short-run trade-off between inflation and unemployment

2
 What we will discuss today
Lesson 2: Market Forces of Demand and Supply
Econ101@NISM | Lesson 2 | 08-08-2024

• The demand curve

• The supply curve
• Market equilibrium
• Movement vs. Shift in demand and supply
• Prices help in allocation of scarce resources (Principle 6)

3
 Market forces
• Market forces of demand and supply
Econ101@NISM | Lesson 2 | 08-08-2024

• Market is a group of buyers and sellers of any particular good or service

• Structure of the market can be perfectly competitive or otherwise
• Perfectly competitive market has a large number of buyers and sellers
• Characteristics 1: goods or services offered are exactly same
• No single buyer or seller has influence over the market price
• Assumption of perfect competition

4
 The demand curve
• Demand function
Econ101@NISM | Lesson 2 | 08-08-2024

• Relationship between price and quantity demanded

• Individual vs market demand
• Movement vs shift in demand curve
• Consumer surplus

5
 Demand function
• 𝐷𝑥 = 𝑓 𝑃𝑥 , 𝐼, 𝑃𝑦 , 𝑇
Econ101@NISM | Lesson 2 | 08-08-2024

• 𝐷𝑥 𝑖𝑠 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑓𝑜𝑟 𝑔𝑜𝑜𝑑 𝑋 (dependant variable)

• 𝑃𝑥 𝑖𝑠 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋 (Independent variable)
• 𝐼 𝑖𝑠 𝑖𝑛𝑐𝑜𝑚𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑟
• 𝑃𝑦 𝑖𝑠 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑟𝑒𝑙𝑎𝑡𝑒𝑑 𝑔𝑜𝑜𝑑 𝑌
• 𝑇 𝑖𝑠 𝑡𝑎𝑠𝑡𝑒 𝑎𝑛𝑑 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑟
• Ceteris paribus, a Latin phrase meaning "all else being equal“
• Assuming everything else (𝐼, 𝑃𝑦 ,𝑇) remains the same, quantity demanded falls
when prices rise
• Law of demand

6
 Econ101@NISM | Lesson 2 | 08-08-2024

Demand schedule and demand curve

7
 Econ101@NISM | Lesson 2 | 08-08-2024

Individual vs. market demand

8
 Movement vs. Shift in the demand curve
Econ101@NISM | Lesson 2 | 08-08-2024

9
 Econ101@NISM | Lesson 2 | 08-08-2024

Consumer surplus

10
 Does law of demand always hold good?
Econ101@NISM | Lesson 2 | 08-08-2024

11
 The supply curve
• Supply function
Econ101@NISM | Lesson 2 | 08-08-2024

• Relationship between price and quantity supplied

• Individual vs market supply
• Movement vs shift in supply curve
• Producer surplus

12
 Supply function
• 𝑆𝑥 = 𝑓 𝑃𝑥 , 𝐶, 𝑃𝑦 , 𝑇
Econ101@NISM | Lesson 2 | 08-08-2024

• 𝑆𝑥 𝑖𝑠 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑 𝑓𝑜𝑟 𝑔𝑜𝑜𝑑 𝑋 (dependant variable)

• 𝑃𝑥 𝑖𝑠 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋 (Independent variable)
• 𝐶 𝑖𝑠 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛
• 𝑃𝑦 𝑖𝑠 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑟𝑒𝑙𝑎𝑡𝑒𝑑 𝑔𝑜𝑜𝑑 𝑌
• 𝑇 𝑖𝑠 𝑡𝑎𝑥𝑒𝑠 𝑎𝑛𝑑 𝑠𝑢𝑏𝑠𝑖𝑑𝑖𝑒𝑠
• Assuming everything else (𝐶, 𝑃𝑦 ,𝑇) remains the same, quantity supplied rises
when price rises
• Law of supply

13
 Econ101@NISM | Lesson 2 | 08-08-2024

Supply schedule and supply curve

14
 Econ101@NISM | Lesson 2 | 08-08-2024

Individual vs. market supply

15
 Econ101@NISM | Lesson 2 | 08-08-2024

Shift in supply curve

16
 Econ101@NISM | Lesson 2 | 08-08-2024

Producer surplus

17
 Market equilibrium
• Interaction between demand and supply curve
Econ101@NISM | Lesson 2 | 08-08-2024

• Equilibrium price and quantity

• What happens when market price is not equilibrium price
• Change in equilibrium due to shift in demand
• Change in equilibrium due to shift in supply
• Change in equilibrium due to shift in both demand and supply

18
 Econ101@NISM | Lesson 2 | 08-08-2024

Market equilibrium

19
 Market price different than equilibrium price
Econ101@NISM | Lesson 2 | 08-08-2024

20
 Change in equilibrium due to shift in demand
Econ101@NISM | Lesson 2 | 08-08-2024

21
 Change in equilibrium due to shift in supply
Econ101@NISM | Lesson 2 | 08-08-2024

22
 Change in equilibrium due to shift in both
Econ101@NISM | Lesson 2 | 08-08-2024

23
 Allocation of scarce resources
• Principe 6: Markets are usually a good way to organize economic activity
Econ101@NISM | Lesson 2 | 08-08-2024

• Are market outcomes good or bad?

• Do you see how markets work?
• In a market economy, prices determine
• Which goods to be produced?
• Who produces these goods?
• How much is produced?
• Who consumes these goods?

24
 Discussion
What makes Mumbai housing market defy principles of economics?
Econ101@NISM | Lesson 2 | 08-08-2024

Published in ET, Deepesh Salgia, Director, Shapoorji Pallonji Group, 2015

25
 Before the next lesson
• Ch 4 of the reference textbook
Econ101@NISM | Lesson 2 | 08-08-2024

• Mumbai housing market defy principles of economics -

[Link]
mumbai-housing-market-defy-principles-of-economics/869
• Thank you!

26