Goods market

1. Goods market  SB   DB  DB   Shortage  PB until DB = SB DB > SB where ‘B’ stands for bicycles Factor market  SL   DL  DL   Shortage  PL  until DL = SL DL > SL where ‘L’ stands for labor

2. Introductory Economics Lecture 3

3. Summing UP

4. Factor market  Di   Si  Si   Surplus  Pi until Di = Si Di < Si where ‘i’ stands for iron Goods market  Dc  Sc  Sc   Surplus  Pc until Dc = Sc Dc< Sc where ‘c’ stands for cars

5. LAW OF DEMAND As the price of a good increases, its quantity demanded falls; as the price of a good falls, its quantity demanded increases In other words: The “price effect” on quantity demanded is negative (i.e. Qd moves in the opposite direction of the price change)

6. Price effect = Income effect Substitution effect + The effect of a change in price on quantity demanded arising from the consumer becoming better or worse off as a result of the price change The effect of a change in price on quantity demanded arising from the consumer switching to or from alternative products (substitutes)

7. Price of wheat is Rs. 15 / kg Price of rice is Rs. 5 / kg Given Income Rs. 100 Rs. 100  6.6 kg of wheat OR  20 kg of rice One Scenario: He buys 4 kg of wheat  Rs 60 8 kg of rice  Rs. 40 Ratio of wheat consumption to rice consumption = 1:2 Price of wheat rises to Rs. 20 per kg Price of wheat is Rs. 20 / kg Price of rice is Rs. 5 / kg  5 kg of wheat OR  20 kg of rice Rs. 100 If he wants to consume 4 kg of wheat, can he maintain the 1:2?  No. This is known as Income Effect.

8. Normal and inferior goods Normal goodsare those goods where the relationship between income and consumption or Qd is positive. Inferior goods are those goods where the relationship between income and consumption Qd is negative. Example Inferior Good: Margarine Normal Good: Butter As the person becomes richer i.e. his Income goes up he might reduce his expenditure on margarine and spend more on a better quality substitute i.e. butter.

9. Price of wheat is Rs. 20 / kg Price of rice is Rs. 5 / kg Given Income Rs. 100 One Scenario: He buys 3 kg of wheat  Rs 60 8 kg of rice  Rs. 40 Ratio of wheat consumption to rice consumption = 3:8 If expenditure is kept constant, loses 1 kg of wheat. The ratio of wheat consumption to rice consumption has changed from 1:2 to 3:8 This is known as Substitution Effect

10. Price effect = Income effect + Substitution effect • Normal goods : I.E is negative, S.E is negative. Hence P.E is also negative. • Inferior goods : If I.E is sufficiently positive, it can overturn the negative S.E to give a positive P.E. In this case increase in Price will also increase the Quantity Demanded (Giffen Goods).

11. Individual and market demand schedules * There are 1000 identical individuals in the market.

12. Graphical illustration P P P P d1000 d1 d2 d3 q q q q P D D = d1 + d2 + d3 + d4 … … … d1000 Q P D Q

13. Graphical illustration Movement along demand curve due to rise in income Income Price Shift due to increase in income Movement along demand curve due to fall in price Shift due to decrease in price DpG DPG Qd Qd

14. Factors causing shift in demand curve in PQ space • Income • Tastes • Price of Complimentary Goods • Price of Substitutes • Income Distribution • Future Prices

15. Demand function Qd = f ( Pg , T , Psi … Psn , Pci … Pcm , Y , B , Pget+1 ) Pg = Price of the good. T = Tastes Psi … Psn = Prices of substitute goods. Pci … Pcm = Prices of complimentary goods. Y = Income B = Income Distribution Pge t+1 = Future prices. Equation 1 Qd= a – b P

16. In Q - P space Equation 2B : Qd = 10,000 – 200 P Equation 2A : Qd = 8,000 – 40 P Equation 2C : Qd = 12,000 – 60 P Qd 12000 10000 C` 8000 B` A` P 40 50 60

17. Task for students Graph the income - Qd relationship in QY space and YQ space.