Topic:
Price Mechanism
(Microeconomics)
Supply And Demand
What Is a Market
A market is determined as an institution where the buyer and seller react. This interaction will lead
to determination of the market price and quantity sold.
Theory Of Demand
Relationship between various possible prices and the corresponding quantities that the
consumers are willing and able to purchase per period Ceteris paribus.
Effective Demand= Willingness + Ability
As price falls the quantity demanded will rise
Law Of Demand: Price fall = quantity demand
increase.
Change in quantity demanded is due to move
along the curve.
Why Is Demand Curve Downward Sloping
Substitution Effect (SE)
Income Effect (IE)
Utility Effect (UE)
Substitution Effect
Price decreases, the good will become relatively cheaper than substitutes in turn people will buy
more of this good than the other substitutes available.
, Income Effect
Price decreases the purchasing power (Ability to Buy), or real income will increase and in turn the
quantity demanded will increase.
Real Income will rise due to two reasons:
Money Income Will Increase
Fall In Price
Utility Effect
Utility = Satisfaction => Extra Satisfaction from one additional unit. Quantity Increase will lead to
Marginal unit decrease will lead to Willingness to pay decrease in turn leading to price going down.
Theory Of Supply
It is a relationship between various possible prices and corresponding quantities that firms
are willing to offer per period ceterius paribus.
The supply curve is upward sloping as the price
increase leading to quantity supplied being
increased.
Why is the supply curve upward sloping?
1.Profit Motive
2.Cost Motive
Profit Motive
Price increases and the firms will be making a higher profit led to firms to produce more as
profitability increases.
Price Mechanism
(Microeconomics)
Supply And Demand
What Is a Market
A market is determined as an institution where the buyer and seller react. This interaction will lead
to determination of the market price and quantity sold.
Theory Of Demand
Relationship between various possible prices and the corresponding quantities that the
consumers are willing and able to purchase per period Ceteris paribus.
Effective Demand= Willingness + Ability
As price falls the quantity demanded will rise
Law Of Demand: Price fall = quantity demand
increase.
Change in quantity demanded is due to move
along the curve.
Why Is Demand Curve Downward Sloping
Substitution Effect (SE)
Income Effect (IE)
Utility Effect (UE)
Substitution Effect
Price decreases, the good will become relatively cheaper than substitutes in turn people will buy
more of this good than the other substitutes available.
, Income Effect
Price decreases the purchasing power (Ability to Buy), or real income will increase and in turn the
quantity demanded will increase.
Real Income will rise due to two reasons:
Money Income Will Increase
Fall In Price
Utility Effect
Utility = Satisfaction => Extra Satisfaction from one additional unit. Quantity Increase will lead to
Marginal unit decrease will lead to Willingness to pay decrease in turn leading to price going down.
Theory Of Supply
It is a relationship between various possible prices and corresponding quantities that firms
are willing to offer per period ceterius paribus.
The supply curve is upward sloping as the price
increase leading to quantity supplied being
increased.
Why is the supply curve upward sloping?
1.Profit Motive
2.Cost Motive
Profit Motive
Price increases and the firms will be making a higher profit led to firms to produce more as
profitability increases.
