Theory of Demand Theory of Supply Market Equilibrium Government Intervention in the Market Laws of market economy 1

Theory of Demand Theory of Supply Market Equilibrium Government Intervention in the Market Laws of market economy 2

Demand for a commodity Depends on size of the market (Industry Demand for the commodity) Summation of Individual level Demand Related to Consumer Choice Theory Consumer Demand Theory Q d = f (P x, I, P y,T) Demand of a Commodity 3

How are price and demand related for a good? (law of demand) Normal Goods Inferior Goods Example:Suzuki Mehran Effect of price of substitute and complementary goods Effect of Change in Income and Tastes Assuming everything else fixed……………. Individual Demand 4

Horizontal Summation of Individual Demand Curves Negatively sloped, why? Inverse relation between price and quantity Q D = F(P x, I, N, P y, T) Bandwagon Effect and Snob Effect Market Demand 5

Change in demand Change in quantity Demanded Market Demand 6

Monopolist WAPDA Perfect Competition No true example exists (Small scale farmers producing homogeneous wheat in USA) Horizontal demand curve, why? Demand Faced by A Firm 7

Oligopoly Few firms with standardized or differentiated product Monopolistic Competition Heterogeneous and differentiated products Factors effecting Demand Advertising, Promotional Policies, Price expectations Demand Faced by A Firm 8

Firms selling durable goods face more volatile & unstable demand Like automobiles, washing machines, water geezers Why? Consumers can wait for Availability of credit, or growth in economy Demand Faced by A Firm 9

Demand function faced by a firm Q D = a 0 +a 1 P x +a 2 I+a 3 N+a 4 P y + a 5 T…………… a is coefficient to be estimated with regression analysis Implications of estimated demand: Types of inputs Quantity of Inputs Demand Faced by A Firm 10

Theory of Demand Theory of Supply Market Equilibrium Government Intervention in the Market Laws of market economy 11

The quantity sellers are willing to sell at a given price level Depends on: Price of the commodity Prices of inputs Technology Opportunity cost Future expectations Number of sellers Supply of a Commodity 12

The higher the price, greater is the quantity sellers are willing to sell in the market (law of supply) Effect of prices of inputs and changes in technology Effect of prices of goods which can be produced with same inputs Effect of changes in expectations of future Assuming everything else is fixed……… Individual Supply 13

Horizontal Summation of Individual Supply Curves Positively sloped, why? Positive relation between price and quantity Market Supply 14

Change in supply Change in quantity supplied Market Supply 15

Theory of Demand Theory of Supply Market Equilibrium Government Intervention in the Market Laws of market economy 16

Equilibrium exists when quantity sellers are willing to sell is equal to the quantity buyers are willing to buy at a given price. Market Equilibrium 17 E Quantity Supplied and Demanded Price QEQE PEPE Supply Curve Demand Curve

Surplus-Results in downward pressure on the price Shortage-Results in upward pressure on the price Impact of Changes in Demand on Market Equilibrium Impact of Changes in Supply on Market Equilibrium Market Equilibrium 18

Theory of Demand Theory of Supply Market Equilibrium Government Intervention in the Market Laws of market economy 19

Public Sector Services Monopolies Restrictions and Barriers to Entry Reducing Trade Barriers Vs Import Tariffs Taxation Subsidies and Welfare payments Laws and Regulations Role of the Government 20

What would be the equilibrium price and quantity in presence of insurance? What would happen to the demand curve of health care facilities in absence of medical insurance? Explain the role of government in influencing the market of health care facilities? Explain a few scenarios in which the supply curve might shift? Case Study 21