of 84
8/4/2019 frz
1/84
TOPICS
PRODUCTION POSSIBILITY CURVE.
CONCEPT OF DEMAND.
SHIFT IN DEMAND CURVE AND MOVEMENT ALONG
THE DEMAND CURVE. CONCEPT OF SUPPLY.
SHIFT IN SUPPLY CURVE AND MOVEMENT ALONGTHE SUPPLY CURVE.
EQUILIBRIUM PRICE.
8/4/2019 frz
2/84
(PPC)
8/4/2019 frz
3/84
COTENTS
DEFINITION OF PRODUCTIONPOSSIBILITY CURVE.
PRODUCTION POSSIBILITY SCHUDLE.
PRODUCTION POSSIBILITY CURVE.
SHIFT IN PRODUCTION POSSIBILITYCURVE.
CURVE SHOWING UNDERUTILIZATION OF RESOURCES ANDFULL UTILIZATION OF RESOURCES.
8/4/2019 frz
4/84
Objectives
To understand meaning of PPC.
To understand PPC schedule.
To understand PPC.
To understand why it is concave to the origin.
To understand that any point inside it shows underutilization of resources , point on it shows full
utilization of resources. To understand central problems.
8/4/2019 frz
5/84
PRODUCTION POSSIBILITYCURVE
Production possibility curve is that curvewhich represents the maximum amount ofa pair of goods or services that can both
be produced with an economys givenresources and technique, assuming thatall resources are fully employed.
8/4/2019 frz
6/84
Assumptions of PPC
(a) Fixed quantity of factor of production ofproduction.
(b) Resources are fully and efficientlyutilized.
(c) Technology of production remainsconstant.
(d) Assumption of two goods.
8/4/2019 frz
7/84
PRODUCTION POSSIBILITYSCHUDLE
A GOOD B GOOD
0 100
1 90
2 70
3 40
4 0
8/4/2019 frz
8/84
A4
A3
PRODUCTION POSSIBILITY CURVE
B1 B2 B3 B4 B5O
A5
A2A1
B GOOD
AGOOD
8/4/2019 frz
9/84
Two Basic Properties of PPC (1)Production Possibility Curve Slopes Downwards:
Production possibility curve slopes downwards from leftto right. It is because in a situation of fuller utilization ofthe given resources, production of both the goods cannot be increased. More of good-Can be produced onlywith less of good-Y.
(2) 1)Production Possibility Curve is concave to thepoint of origin; It is because to produce eachadditional unit of good-X, more and more unit ofgood-Y will have to be sacrificed than before.Opportunity cost of producing every additional unitof good
X tends to increase in terms of loss of
production of good-Y.In other words, production willobey the Law of Increasing opportunity cost
8/4/2019 frz
10/84
o P
P
P1
P1GROWTH OF RESOURCES
B GOOD
A
GO
OD
InitialResources
8/4/2019 frz
11/84
Z E
W
S
O
A
GOOD
B GOOD
Y
P
P
Unattainablecombination of
output
.Underutilization ofresources
..
.
..
.
Full Utilizationof resources
.
8/4/2019 frz
12/84
OPPORTUNITY COST Opportunity Cost:- Opportunity Cost refers to value of a
factor in its next best (or second best) alternative use.AvailableResources
One hectare of land and agiven package of otherinputs
Possibleuses of land
Use-1Production of wheat
Use-2 Production of Rice
Use -3 Production of maize
Market value
of production
Use-1 Rs. 6000
Use-2 Rs. 5000
Use-3 Rs. 4000
Assumption Technique of production is
constant and resources arefully utilized
Y
XO
A
B
Use-1valueofoutput
Rs.6000
Use-2 value of output
Rs. 5000
Opportunity cost of employing resources in use -1=loss of
out put in next best alternative use of the given resources
which is Rs. 5000 in use -2
8/4/2019 frz
13/84
Evaluation
Define P.P.C. ?
What does slope of P.P.C show ?
What does the point inside the P.P.C.show ?
What does the shifting of P.P.C show ?
Can you show the central problemsthrough the P.P.C ?
8/4/2019 frz
14/84
DEMANDMeaning the quantity of a
commodity or service that a
consumer would buy at a givenprice and at a given time .
8/4/2019 frz
15/84
Contents of demand
Desire for acommodity.
Ability to pay. Readiness to
spend. Specific time. Specific place. Specific price.
8/4/2019 frz
16/84
FACTORS AFFECTING DEMAND
1. Price of thecommodity.
2. Income of the
consumer.3. Price of related
goods.
4. Tastes andpreferences.
5. Future expectations.
8/4/2019 frz
17/84
LAW OF DEMANDIf other things remaining thesame, when the price of a
commodity increases, itsdemand falls and when theprice falls, its demand
increases.
8/4/2019 frz
18/84
Assumptions of law of Demand(1)Income of the consumer remains constant.
(2)There is no change in the taste and preference of theconsumer.
(3)No change in price of the related good.
(4)The commodities are normal.
(5)There is no expectations of change in price in near future.(6)No new substitute of the commodity are available.
(7)No change in the distribution of income and wealth.
(8)Other relevant factors like size and composition ofpopulation, seasonal and climate factors, economiccondition of the country etc. remain unchanged.
8/4/2019 frz
19/84
RELATION OF PRICE WITHDEMAND
PRICES (Rs.) DEMAND (Qt.)
1 5
2 4
3 3
4 2
5 1
8/4/2019 frz
20/84
X
Y
O
Quantity
Price
D
D
1
5
1 5
8/4/2019 frz
21/84
DIFFERENCE
Sr.no Change in Quantity Demand Change in Demand
Base of
difference
Definition Change in Quantity demanded
refers to increase or decrease
In quantity purchased of a
commodity in response todecrease or increase in its
price other than its
determinants.
Movements along the
Demand curve
(1)Extension of Demand
(2)Contraction of Demand
Change in Quantity
demanded refers to
increase or decrease In
quantity purchased of a
commodity in response
to change in other
determinants of demand,
other than price of the
same commodity.
Shifting of the Demandcurve
(1)Increase in Demand
(2)Decrease in Demand
Alternative
Name
1
2
8/4/2019 frz
22/84
Difference between Contraction and Decrease in Demand
This is caused only by
change in the price of
concerned commodity Increase in price of
the commodity is the
only cause
This is caused by change in
determinants, other than
price of the concernedcommodity
Several causes: Decrease
in income, decrease in price
of substitute good, increasein price of complementary
good,
Price (x) Quantity (Units)
10 30
10 20
Price(Rs.)
Q.D.
Quantity (Units) Description
1 5 p
D
8/4/2019 frz
23/84
Contraction of demand
M
Quantity
Price
QQ1
N
O
P
P1
D
D
8/4/2019 frz
24/84
Decrease in demand
EE1
D
D
D1
D1
QQ1O
Quantity
Price
Y
x
P
8/4/2019 frz
25/84
Extension of demand
L
K
D
D
Y
Quantity
Price
P
P1
Q Q1O
P1P1P1P1
8/4/2019 frz
26/84
p
O X
Y
D
PRICE
QUANTITY
E
DD1
D1
E1
1
Increase in demand
8/4/2019 frz
27/84
VERY SHORT ANSWER TYPEQ .1 Define demand ?Q .2 Define supply ?Q .3 Define demand function ?Q .4 Define supply function ?
Q. 5 what do you understand by demand schedule ?Q.6 what do you understand by supply schedule ?Q 7 Explain the law of demand ?Q 8 what are the factors affecting demand ?Q 9 what are the assumptions of law ofdemand ?Q 10 what are the exceptions to the law ofdemand ?
Questions
8/4/2019 frz
28/84
8/4/2019 frz
29/84
SUPPLY OF GOODS
8/4/2019 frz
30/84
The supply of goods is thequantity offered for sale in a
given market at a given timeat various prices.
8/4/2019 frz
31/84
The law of supply states that other things remaining constant,the higher the price the greater the quantity supplied or thelower the price the smaller the quantity supplied.
FACTORS AFFECTING SUPPLY
8/4/2019 frz
32/84
FACTORS AFFECTING SUPPLYPrice Of Commodity.
*Price Of Factors Of Production.
*Productivity Of Factors.*Technology.*Numbers Of Firms.*Policy Of Govt.*Aim Of Firms.
8/4/2019 frz
33/84
(1
) Individual SupplySchedule.
(2) Market SupplySchedule.
TYPES OF SUPPLY SCHEDULE
http://rds.yahoo.com/S=96062857/K=flower/v=2/SID=w/l=II/R=148/SS=i/OID=874098353fc976a4/SIG=1qpmi037n/EXP=1126768655/*-http%3A//images.search.yahoo.com/search/images/view?back=http%3A%2F%2Fimages.search.yahoo.com%2Fsearch%2Fimages%3Fei%3DUTF-8%26p%3Dflower%26imgsz%3Dall%26fr%3Dslv1-%26b%3D141&h=480&w=591&imgcurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&imgurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&size=42.6kB&name=Flower_TC.jpg&rcurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&rurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&p=flower&type=jpeg&no=148&tt=1,234,799&ei=UTF-8http://rds.yahoo.com/S=96062857/K=flower/v=2/SID=w/l=II/R=148/SS=i/OID=874098353fc976a4/SIG=1qpmi037n/EXP=1126768655/*-http%3A//images.search.yahoo.com/search/images/view?back=http%3A%2F%2Fimages.search.yahoo.com%2Fsearch%2Fimages%3Fei%3DUTF-8%26p%3Dflower%26imgsz%3Dall%26fr%3Dslv1-%26b%3D141&h=480&w=591&imgcurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&imgurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&size=42.6kB&name=Flower_TC.jpg&rcurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&rurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&p=flower&type=jpeg&no=148&tt=1,234,799&ei=UTF-8http://rds.yahoo.com/S=96062857/K=flower/v=2/SID=w/l=II/R=148/SS=i/OID=874098353fc976a4/SIG=1qpmi037n/EXP=1126768655/*-http%3A//images.search.yahoo.com/search/images/view?back=http%3A%2F%2Fimages.search.yahoo.com%2Fsearch%2Fimages%3Fei%3DUTF-8%26p%3Dflower%26imgsz%3Dall%26fr%3Dslv1-%26b%3D141&h=480&w=591&imgcurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&imgurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&size=42.6kB&name=Flower_TC.jpg&rcurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&rurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&p=flower&type=jpeg&no=148&tt=1,234,799&ei=UTF-8http://rds.yahoo.com/S=96062857/K=flower/v=2/SID=w/l=II/R=148/SS=i/OID=874098353fc976a4/SIG=1qpmi037n/EXP=1126768655/*-http%3A//images.search.yahoo.com/search/images/view?back=http%3A%2F%2Fimages.search.yahoo.com%2Fsearch%2Fimages%3Fei%3DUTF-8%26p%3Dflower%26imgsz%3Dall%26fr%3Dslv1-%26b%3D141&h=480&w=591&imgcurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&imgurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&size=42.6kB&name=Flower_TC.jpg&rcurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&rurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&p=flower&type=jpeg&no=148&tt=1,234,799&ei=UTF-8http://rds.yahoo.com/S=96062857/K=flower/v=2/SID=w/l=II/R=148/SS=i/OID=874098353fc976a4/SIG=1qpmi037n/EXP=1126768655/*-http%3A//images.search.yahoo.com/search/images/view?back=http%3A%2F%2Fimages.search.yahoo.com%2Fsearch%2Fimages%3Fei%3DUTF-8%26p%3Dflower%26imgsz%3Dall%26fr%3Dslv1-%26b%3D141&h=480&w=591&imgcurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&imgurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&size=42.6kB&name=Flower_TC.jpg&rcurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&rurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&p=flower&type=jpeg&no=148&tt=1,234,799&ei=UTF-8http://rds.yahoo.com/S=96062857/K=flower/v=2/SID=w/l=II/R=148/SS=i/OID=874098353fc976a4/SIG=1qpmi037n/EXP=1126768655/*-http%3A//images.search.yahoo.com/search/images/view?back=http%3A%2F%2Fimages.search.yahoo.com%2Fsearch%2Fimages%3Fei%3DUTF-8%26p%3Dflower%26imgsz%3Dall%26fr%3Dslv1-%26b%3D141&h=480&w=591&imgcurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&imgurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&size=42.6kB&name=Flower_TC.jpg&rcurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&rurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&p=flower&type=jpeg&no=148&tt=1,234,799&ei=UTF-8http://rds.yahoo.com/S=96062857/K=flower/v=2/SID=w/l=II/R=148/SS=i/OID=874098353fc976a4/SIG=1qpmi037n/EXP=1126768655/*-http%3A//images.search.yahoo.com/search/images/view?back=http%3A%2F%2Fimages.search.yahoo.com%2Fsearch%2Fimages%3Fei%3DUTF-8%26p%3Dflower%26imgsz%3Dall%26fr%3Dslv1-%26b%3D141&h=480&w=591&imgcurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&imgurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&size=42.6kB&name=Flower_TC.jpg&rcurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&rurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&p=flower&type=jpeg&no=148&tt=1,234,799&ei=UTF-88/4/2019 frz
34/84
The table relating to price and
quantity Supplied is called thesupply schedule.
8/4/2019 frz
35/84
Other things being are equal, whenquantity supplied of a commodityincreases due to rise in its price it is
called extension.
8/4/2019 frz
36/84
DIFFERENCE BETWEENCHANGE IN QUANTITY SUPPLIED AND
CHANGE IN SUPPLY.
Change in quantity
Supplied
1. Due to change inprice.
2. Movement alongthe supply curve.
Change in supply
1. Due to change inother factors.
2. Shift in supplycurve.
8/4/2019 frz
37/84
EXTENSION OF SUPPLY
8/4/2019 frz
38/84
EXTENSION OF SUPPLY
8/4/2019 frz
39/84
Other things being equal, when quantitysupplied of a commodity decreases due tofall in its price, it is called contraction of
supply.
8/4/2019 frz
40/84
8/4/2019 frz
41/84
INCREASE IN SUPPLY
8/4/2019 frz
42/84
INCREASE IN
SUPPLY More supply at same price
or same supply at less priceis called increase in supply.
8/4/2019 frz
43/84
Increase in Supply
C S
8/4/2019 frz
44/84
DECREASE IN
SUPPLY Less supply at same price and same
supply at more price is called decreasesupply.
8/4/2019 frz
45/84
DECREASE IN SUPPLY
8/4/2019 frz
46/84
Evaluation
What do you mean by supply ?
Define the law of supply ?
Name any four factors effecting the supplyof a commodity.
Define the expansion of supply.
What do you mean by contraction ofsupply ?
8/4/2019 frz
47/84
8/4/2019 frz
48/84
Equilibrium Price Will be Shown by the Diagram
Effect of Change in demand on EquilibriumPrice- When supply is Constant ,Perfectly Elasticand Perfectly Inelastic
Effect of Change in Supply on Equilibrium Price-When Demand is Constant ,Perfectly Elastic andPerfectly Inelastic
Effect of Simultaneous Change in Demand andSupply
All the Effects Mentioned Above Will be Shownby the Diagrams
HERE ARE SOME PICTURES OF
8/4/2019 frz
49/84
HERE ARE SOME PICTURES OFHOUSEHOLD COMMODITIES
Rs. 8,000/-Rs. 5/-
Rs. 20,000/-
THESE COMMODITIES HAVE
8/4/2019 frz
50/84
THESE COMMODITIES HAVEDIFFERENT PRICES.
LETS KNOW HOW
THESE PRICESDETERMINED IN THE
MARKET.
8/4/2019 frz
51/84
THE PRICE ON WHICH A COMMODITYIS SOLD AND PURCHASED IN MARKETIS CALLED EQUILIBIRIUM PRICE.
EQUILIBIRIUM PRICE IS THAT PRICEON WHICH THE DEMAND AND SUPPLY
OF A COMMODITY IS EQUAL TO EACHOTHER.
SCHEDULE OF EQUILIBIRIUM
8/4/2019 frz
52/84
SCHEDULE OF EQUILIBIRIUMPRICE
PRICE(RS.) QT.SUPPLIED QT.DEMANDED
1 1 5
2 2 4
3 3 3
4 4 2
5 5 1
EQUILIBIRIUM PRICE
8/4/2019 frz
53/84
EquilibriumPrice is thatprice at which
its twodeterminants-demand andsupply are in
balance, orequal.
E
D
D
S
S
P
QO X
Y
Price
Quantity
8/4/2019 frz
54/84
p
OQ
X
S
D
PRICE
QUANTITY
E
P1
D
S
P2
EXCESS SUPPLY
EXCESS DEMAND
8/4/2019 frz
55/84
8/4/2019 frz
56/84
Whensupplyisconstant
S
SD
D
D1
D1
P
Q
P1
Q1
E1
EPrice
QuantitO X
Y
When supply is Perfectly Elastic and
8/4/2019 frz
57/84
When supply is Perfectly Elastic andincrease in demand
D
D
D1
D1
E E1S S
Q1QO X
Y
Quantity
Price
P
When Supply is Perfectly Inelastic and demand
8/4/2019 frz
58/84
When Supply is Perfectly Inelastic and demandincreases.
Price
Quantity
O X
D
D
D1
D1
E
E1
Q
P
P1
Y
S
S
Effect of Decrease In Demand
8/4/2019 frz
59/84
Effect of Decrease In DemandAnd no change in supply
D
D
D1
D1S
S
E
E1P1
P
QQ1 Quantity
Price
O X
Y
8/4/2019 frz
60/84
When Supply is Perfectly Elastic
P
rice
P
D1
D1
D
D
SS
QuantityQQ1O X
Y
E1 E
When Supply is Perfectly
8/4/2019 frz
61/84
When Supply is PerfectlyInelastic
D
D
D1
D1S
S
E1
E
P
P1
Price
QuantityQ
OX
Y
Effect of increase in supply and no
8/4/2019 frz
62/84
pp ychange in demand
D
DS
S S1
S1
Q Q1
E
E1P
P1
Price
QuantityO
X
Y
8/4/2019 frz
63/84
When Supply is Perfectly InelasticD
D
D1
D1S
S
E1
EP
P1
Price
QuantityQ
OX
Y
8/4/2019 frz
64/84
When Demand is Perfectly Elastic
O
S
S
S1
S1
E E1
Q Q1
Price
P
Quantity
X
Y
D D
8/4/2019 frz
65/84
When Demand is Perfectly Inelastic
QQuantity
XO
S
S1
S
S1
E
E1
D
D
Y
Price
P
P1
Effect of Decrease in Supply and
8/4/2019 frz
66/84
pp yno change in Demand
D
D
S
S
S1
S1
P1
P
E1
E
QQ1
Price
O X
Y
QuantityDEMANDED AND SUPPLIED
When Demand is Perfectly Inelastic
8/4/2019 frz
67/84
When Demand is Perfectly Inelastic
S
S1
S1
S
Q
Price
P1
P
O X
Y
E1
E
D
D
Quantity DEMANDED AND SUPPLIED
When Demand is Perfectly Elastic
8/4/2019 frz
68/84
When Demand is Perfectly Elastic
O
Quantity DEMANDED AND SUPPLIED
Price
P
QQ1 X
D
D
S
S
S1
S1Y
E1 E
Simultaneous Change in Demand
8/4/2019 frz
69/84
Simultaneous Change in Demandand Supply
WhenChangesin
DemandandSupplyare Equal
D
D
D1
D1
S
S
S1
S1
E E1
Q Q1Quantit
OX
Y
Price
P
8/4/2019 frz
70/84
Evaluation
Define the equilibrium price ? How does increase in demand effects
equilibrium price when supply is constant?
What will be the change in equilibriumprice, when demand is perfectly elasticand supply increases ?
What will be the change in equilibriumprice, when supply is perfectly inelasticand demand decreases ?
8/4/2019 frz
71/84
8/4/2019 frz
72/84
OBJECTIVES
To know the meaning and components ofAD and AS.
To understand the concepts of inflationary
and deflationary gap through the diagrams
To understand the determination ofincome and employment through AD /AS
and saving and investment.
8/4/2019 frz
73/84
Aggregate demand refers to the sum totalof demand for all the goods and servicesin the economy as a whole. It is measured
in terms of total expenditure on the goodsand services in an economy.
COMPONENTS OF AGGREGATE
8/4/2019 frz
74/84
COMPONENTS OF AGGREGATEDEMAND
AD= C+I+G+(X-M).
C= Household consumption expenditure.
I=Investment expenditure.G=Govt. Expenditure.
(X-M)=Net export (Export- import).
8/4/2019 frz
75/84
AGGREGATE SUPPLY
Aggregate supply refers to the flow ofgoods and services in an economy.
Aggregate supply is the minimum saleproceeds which the producer must get soas to continue production at any given
level of employment
8/4/2019 frz
76/84
AS=C+S.
C=CONSUMPTION.
S=SAVING.
DETERMINATION OF OUTPUT
8/4/2019 frz
77/84
DETERMINATION OF OUTPUT,INCOME AND EMPLOYMENT.
: AS/ AD approach Equilibrium level of output, income andemployment id determined at the point where aggregatedemand and aggregate supply are equal to each other.
Equilibrium : AD -=AS Since , AD = C + I and AS = C + S Equality between (C + I) and (C + S) simply implies the equality
between saving and investment . so that equilibrium occurswhere,
AS = AD or S = I Accordingly determination of output, income and employment
can be explained in two ways : 1.On the basis of equilibrium between aggregate demand and
aggregate supply 2.On the basis of equilibrium saving and investment
AS
8/4/2019 frz
78/84
S
S
II
INCOMEAND EMPLOYMENT
.AD
Y
Y
E
E
INCOMEAND EMPLOYMENT
ADANDAS
SAV.ANDINV.
O
O
8/4/2019 frz
79/84
INCOMEAND EMPLOYMENT
ADANDAS
o
E
Y
FULL EMPLOYMENT LEVEL
AD
AS
EQUILIBRIUM AT
8/4/2019 frz
80/84
EQUILIBRIUM ATUNDEREMPLOYMENT
INCOMEAND EMPLOYMENT
ADANDAS
o
E1
Y1
FULL EMPLOYMENT LEVEL
AD1
AS
Y
ADEUNDEREMPLOYMENT EQ..
EQUILIBRIUM AT
8/4/2019 frz
81/84
EQUILIBRIUM ATUNDEREMPLOYMENT
INCOMEAND EMPLOYMENT
INCOME
AND EMPLOYMENT
ADANDAS
o
E1
Y1
FULL EMPLOYMENT LEVEL
AD1
AS
Y
ADEUNDEREMPLOYMENT EQ..
8/4/2019 frz
82/84
AS
AD
AD1E1
O
OVER EMPLOYMENT EQ.
Y
E
INCOMEAND EMPLOYMENT
ADAND
AS
FULL EMPLOYMENT LEVEL
8/4/2019 frz
83/84
FULLEMPLOYMENT LEVEL SHOWSABSENCE OF UNVOULENTRYUNEMPLOYMENT.
UNDER EMPLOYMENT LEVEL SHOWSDEFICIENT DEMAND ,ALSO CALLEDDEFLATIONARY GAP.
OVER EMPLOYMENT LEVEL SHOWSEXCESS DEMAND, ALSO CALLEDINFLATIONARY GAP .
E l ti
8/4/2019 frz
84/84
Evaluation
Define aggregate demand ?
What do you mean by aggregate supply ?
What are the components of aggregate
demand? Explain the full employment level equilibrium of
out put, income and employment.
Explain the equilibrium of out put, income andemployment through the help of AD/AS andSaving and investment.