#10 Market forces of Supply and Elasticity | Part -2 | Principles Of Economics — Transcript

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1. 0:01Similarly,
2. 0:15if you think from the producer's point of  view, producers are also maintaining some
3. 0:22amount of surplus. Look, for the first unit,  the producer is ready to supply the first unit
4. 0:29if the producer gets minimum this much. But  the producer is actually getting this much.
5. 0:37For the first unit, again P star. So that means  the producer is maintaining some amount of
6. 0:44surplus, which is given by OP star minus this.  For the second unit, this is the amount that
7. 0:50the producer wants to receive. But the producer  is receiving much more than minimum willingness
8. 0:57to receive. For the third unit, this one. For the  fourth unit, this one. But actual payment is this.
9. 1:04So, likewise producers are also  maintaining a surplus given by this area.
10. 1:12So, this area is known as producer  surplus. So, producer surplus
11. 1:31equals to the triangle AOB. And how do you  measure this? Total payment received minus,
12. 1:47total payment received minus minimum  willingness to receive. Total payment
13. 1:54received is this triangle A O Q star and B.  This is the total payment. So, total payment
14. 2:14received minus minimum willingness
15. 2:26to receive. That means area above the  supply curve but below the price line. Area
16. 2:40above the supply curve
17. 2:51but below the price.
18. 2:59That is how we define producer surplus. We have learned consumer surplus. We have
19. 3:08now learned producer surplus as well. So, both  of them are maintaining surplus. Consumers
20. 3:16are maintaining surplus because they are  paying less than what they want to pay.
21. 3:34Producers are also maintaining surplus because  they are receiving more than what they want to
22. 3:42receive. Supply curve gives minimum willingness  to receive to supply a particular unit. But
23. 3:53actual payment that the suppliers are receiving  is much higher because that is given by P star.
24. 4:00As a result of which both the producer and  buyer, they are maintaining a surplus with them.
25. 4:11So, this is what we learned.
26. 4:15Now, so far we understood demand, we understood  supply, demand curve, supply curve, equilibrium,
27. 4:25price, quantity and consumer and producer surplus.  Now the question is if any of these factors that
28. 4:35determine demand and supply, they change,  what would be the new price and quantity?
29. 4:45What would be the new price and quantity?  So that means we will now discuss
30. 4:52movement, we will now discuss the  movement along the demand curve.
31. 5:15So, movement along the demand curve.
32. 5:37So let us say this is your quantity, this  is your price, this is the demand curve.
33. 5:49So as price increases, let us say  initially price and quantity is this,
34. 5:58Q1, this is P1. So when price  increases from P1 to P2,
35. 6:07what will happen? When price increases from P1 to  P2, quantity demanded actually falls from Q1 to
36. 6:16Q2. So that means we are moving along the demand  curve. Similarly, when price falls from P1 to P3,
37. 6:32quantity demanded actually
38. 6:40increases from Q1 to Q3. And that is how  you see when there is a change in price,
39. 6:50then we are getting a movement along the  demand curve either upward or downward.
40. 6:58So a change in price, so a change in price  makes a movement along the demand curve. That
41. 7:08is what I am saying. So, when I am writing  demand function Qd, so this is movement
42. 7:26along the demand curve
43. 7:37happens when price changes.
44. 7:53So, quantity demanded as we said  is a function of price of X,
45. 8:02income, price of related product, taste  and preference. So, when price of X,
46. 8:09PX is changing, we are getting a  movement along the demand curve.
47. 8:16Movement along the demand curve we will  get only when there is a change in price.
48. 8:22Now, what will happen when other factors,  that means parameters, they change?
49. 8:30Either income of the consumer is changing,  price of related product is changing,
50. 8:36or taste and preference is changing. What  will happen? Suppose this is your initial.
51. 8:46This is Q. This is P. This is your  initial demand. Let us say this is AB.
52. 8:55Okay. AB when I equals to I0. Let us say  AB is the demand curve when I equals to I0.
53. 9:11Now let us assume the consumer is  getting an income I equals to I1
54. 9:20and I1 is greater than I0. The  income of the consumer has changed.
55. 9:33That means income of the consumer  has increased. So, obviously,
56. 9:38it is easy to understand for each level of price,  for each price, now the consumer will demand more.
57. 9:47Whatever be the price, for each level, there would  be an increased demand. And as a result of which,
58. 9:56the entire demand curve will shift rightward.  So, entire demand curve will shift rightward
59. 10:11when there is an increase in income.
60. 10:17Similarly, if there is a fall in  income, this is let us say AB equals to
61. 10:27I equals to I0 and then you have another income  I equals to I2 and let us assume that I2 is
62. 10:46less than I1, sorry
63. 10:54I2 is less than I0, what you initially had.
64. 11:01So what will happen? For each price, consumer  would be able to buy less amount. So demand
65. 11:09curve will shift rightward. Let us say  this is AB, CD and let us say this is EF.
66. 11:25So this causes demand curve to shift
67. 11:38rightward
68. 11:44that means when it is shifting rightward  means consumers are buying more
69. 11:49and this will make when the income is  falling from initial level then demand curve
70. 12:05shifts leftward. Okay?
71. 12:25This is corresponding demand curve,  this is corresponding demand.
72. 12:34So, income which was considered as a parameter  was assumed to be fixed or given when we are
73. 12:45talking about initially the demand and  supply. Now, if we allow income to change,
74. 12:52particularly when the income of the individual  is increasing or decreasing, a change in income
75. 13:01causing the entire demand schedule to shift either  rightward or downward depending on the direction
76. 13:15at which income is changing, depending on  whether income is increasing or decreasing.
77. 13:22A rise in income will cause the demand curve  to shift rightward because at each price,
78. 13:28consumer will now demand more.  A fall in income will cause
79. 13:36demand to shift leftward because at  each price, consumers are buying less.
80. 13:45This is what is happening here, right? So, that means one thing we have learned here,
81. 13:55movement along the demand curve  and shift in demand schedule.
82. 14:16These are the two things. So shift will  happen when the parameters, they change.
83. 14:24Movement along the demand curve will  happen when there is a change in price,
84. 14:30okay, when there is a change in price. Same thing will happen when
85. 14:35price of related product changes. That was  also considered as a parameter. Suppose
86. 14:41we are considering this is demand for  wheat. If the price of rice increases,
87. 14:48what will happen? Let us say that this is  demand for wheat. We will go to next page.
88. 15:02So, what will happen
89. 15:11to demand curve
90. 15:18for rice when price of wheat,
91. 15:34or sorry this is demand curve for wheat we are  considering earlier and let us say price of rice
92. 15:46changes? Let us say this is
93. 15:58Q, this is P and this is the demand for wheat we  are talking about. So now if case 1, price of rice
94. 16:22has increased. What will happen?
95. 16:34This is demand curve for wheat we are considering.
96. 16:51So if we assume wheat and rice, these are the  two substitute products. So we assume, we assume
97. 17:05wheat and rice are substitute
98. 17:18to each other.
99. 17:27Let us make this assumption. So, when  there is a rise in price of rice,
100. 17:33price of rice has increased. So, what will  happen? If they are substitute to each other,
101. 17:41consumer will demand more of wheat for each  level of prices as a result of which demand for
102. 17:52wheat will increase. So that means the entire  demand schedule for wheat will shift rightward.
103. 18:03This is what will happen, okay. So, when the  price of the substitute product increases
104. 18:13that results in more demand for the commodity  we are considering. Here we assume rice is a
105. 18:22substitute for wheat. So when rice price  has increased that will result in demand
106. 18:33for wheat, demand for wheat increases
107. 18:44as a result of which demand  curve shifts rightward.
108. 19:04Similarly, when Py decreases,
109. 19:17that means rice price has  decreased. So, obviously,
110. 19:22consumer will switch their demand from wheat  to rice. So, that means demand for wheat
111. 19:39falls. And as a result of which, demand curve,
112. 19:51demand curve for wheat
113. 19:58shifts leftward
114. 20:06because at each price of wheat,  now the consumers are buying less.
115. 20:12So, there would be a leftward  shift in the demand curve.
116. 20:18So that means what will happen to the demand  for wheat when the price of related product
117. 20:25increases or decreases that depends on what  is the nature of relationship between the
118. 20:31two commodities. Here rice and wheat we  assume to be substitute to each other.
119. 20:39Okay. That is why when there is a rise in price of  rice consumer will switch their demand from rice
120. 20:48to wheat, demand curve of wheat shifts entirely  rightward. When there is a fall in price of rice,
121. 20:58consumers will shift their demand from wheat to  rice. Demand for wheat falls, the demand curve for
122. 21:07wheat shifts leftward. So, this is the case when  we assume two goods are substitute to each other.
123. 21:18Now, let us assume a case  when goods are complementary
124. 21:34to each other.
125. 21:41Can you give some example of this? Complementary  goods are those we have to consume them jointly.
126. 21:50Individual consumption does not give much  satisfaction. Think about tea and sugar.
127. 22:03Tea and sugar, they are complementary to  each other. And now assume the demand curve,
128. 22:14Q and P, this is the demand curve, demand for tea.
129. 22:26So, what happens when the sugar  price increases? Case 1, sugar price
130. 22:36has increased.
131. 22:43When sugar price has increased, obviously I  have to consume less tea because I cannot get
132. 22:53tea without sugar. So when price of complementary  product increases, that will result in less demand
133. 23:03for the good we are talking about. So when sugar  price increased, demand for tea falls as a result
134. 23:13of which this demand curve shifts leftward  because at each price, consumer will now
135. 23:21buy less tea. Please keep in mind, even though my  drawing is not proper, this is a parallel shift
136. 23:28actually. This is a parallel shift because for  each price of tea, consumer will buy less tea. So,
137. 23:37this is a parallel shift. So, when sugar price  has increased, that will result in a reduction in,
138. 23:50reduction in tea demand and demand curve shifts  leftward. Similarly, when sugar price decreased,
139. 24:13what will happen? Consumer will  buy more tea. Consumer will consume
140. 24:19more tea. So demand curve will shift rightward,  okay, so this is the movement rightward,
141. 25:07okay. So one thing we learned here,  when there is a change in the parameter,
142. 25:13the entire demand schedule will shift either  rightward or leftward. But movement of the
143. 25:22demand curve, whether it is left or right,  that depends on the nature of the two goods,
144. 25:29relationship of the two goods. If the goods are  substitute, then we will get one type of movement
145. 25:36or shift. If the goods are complementary, then  we will get another type of movement or shift.
146. 25:44But whatever happens in these cases entire  demand schedule is shifting. Earlier we were
147. 25:52getting only a movement along the  demand curve, a movement along the
148. 26:03demand curve. A change in price will result  in a movement along the demand curve, while
149. 26:19a change in the parameters like price of  related product, income, taste and preference,
150. 26:26all these things will result in a shift in the  entire demand schedule. That is what we have now.
151. 26:37Same thing will happen for  the supply function as well.
152. 26:51So, for the supply function that  means movement along the supply curve
153. 27:10and shift in supply curve. Again, let us say this  is Q, this is P, this is the initial supply curve
154. 27:34SS1 and what we have assumed that supply for a  commodity X is a function of first of all P of X,
155. 27:46then P of Y, then technology, input prices,  let us say this is, this is price of input,
156. 28:00weather, so on and so forth. Now, let us  assume that price of input has changed.
157. 28:12If we consider ice cream, let us  say that one of the inputs is sugar.
158. 28:18So, sugar price has increased. What will  happen? Cost of production will increase.
159. 28:25So, for each price, now seller has less  incentive to supply because ice cream
160. 28:33production becomes less profitable because there  is an increase in sugar price. So, what will
161. 28:40happen? Supplier will supply less. So, this is  again a parallel shift. Please keep in mind.
162. 28:50This is case 1 we are talking  about. What is the case 1? That
163. 28:56this is supply of ice cream we are talking about.
164. 29:07When sugar price increases,
165. 29:23what will happen? Cost of production increases
166. 29:33as a result of which supply curve shifts upward
167. 29:45because there would be less supply. Upward shift  means less supply. So, when there is a change in
168. 29:53input price, entire supply schedule is shifting  upward, indicating the fact that there will be
169. 30:01less supply of ice cream. Similarly, if there is  a fall in sugar price, maybe in a particular year,
170. 30:11there is a huge production of sugarcane, what will  happen? Sugar price will fall. Since sugar is one
171. 30:19of the important inputs in ice cream production,  supplier will then supply more. So this is the
172. 30:27case where Pi is increasing, Pi is increasing. So
173. 30:41now we can assume a case, case 2, where
174. 30:45input price that means price of sugar is  falling. That will lead to more supply,
175. 31:01more supply of ice cream.
176. 31:11Supply curve will shift downward. That  means more supply. Supply curve shifts
177. 31:30downward,
178. 31:34okay. So, again shift in the entire supply curve.
179. 31:42Now, if we bring demand and supply together  in a single diagram, we can easily understand
180. 31:51what will happen to equilibrium price and  quantity when any of these factors affecting
181. 31:59either demand or supply or both is changing. Suppose we want to analyze, we are discussing
182. 32:07about demand and supply of ice cream and let us  say there is an increase in consumer's income.
183. 32:15What will happen to the equilibrium price and  quantity of ice cream? So, what happens to,
184. 32:27happens to ice cream price and  its demand or supply when income
185. 33:00changes?
186. 33:04Let us assume this is the
187. 33:09initial demand curve for ice cream and  this is initial supply of ice cream.
188. 33:15This is the equilibrium
189. 33:23price and quantity. Now as income increases, what  we have learned earlier is that the entire demand
190. 33:31curve will shift rightward. So if the entire  demand curve shifts rightward, what will happen?
191. 33:48Equilibrium price increases. Equilibrium  quantity also increases. So that means a
192. 33:54change in consumer's income results in both  equilibrium price and quantity increasing.
193. 34:08Similarly, a fall in consumer's income will  result in shifting the demand curve leftward. So
194. 34:15this is the movement when there is an increase in  demand, okay. An increase in demand will result in
195. 34:24more quantity demanded and supplied  and price also to increase,
196. 34:33right.
197. 34:37This is how we can analyze what will happen. Similarly, if we think about what happens
198. 34:58to demand, sorry, to price P and  quantity Q when price of sugar
199. 35:21increases. So we are considering  demand and supply of ice cream.
200. 35:33Let us see initially this is the demand for  ice cream and this is the supply of ice cream.
201. 35:41This is initial price and quantity  equilibrium. What will happen when there is an
202. 35:51increase in sugar price? So, price of sugar has  increased means what we have learned earlier,
203. 35:58that cost of production will go up. When cost  of production increases, what will happen to the
204. 36:04supply curve? Will it shift rightward or leftward  or downward or upward? That we have to remember.
205. 36:11Obviously, when sugar price increases, cost  of production for ice cream will increase.
206. 36:19So, ice cream production  becomes less profitable now.
207. 36:24So ice cream supplier will supply less of  ice cream. So supply curve will shift upward.
208. 36:38That means what is happening here? At the new  equilibrium then quantity demanded and supplied
209. 36:45falls and price increases. Initial equilibrium  was P star and Q star. Now, as a result of
210. 37:09cost of production increasing due to  change in price of sugar, we see that
211. 37:16equilibrium price increases  and equilibrium quantity falls.
212. 37:22So, as a result of sugar price increase, what is  happening? Price increases and quantity decreases,
213. 37:44okay. So that means using simple demand and supply  tool, we can easily understand what will happen to
214. 37:57the new price and quantity when certain things  change which were assumed to be constant earlier,
215. 38:08okay, which were assumed to be constant earlier. A change in price, let us say government is
216. 38:16now imposing a tax on ice cream  consumption. What will happen?
217. 38:23This is P and this is Q. This is  the demand. Initially you are here.
218. 38:36So when there is a change in price due to
219. 38:41tax imposition, you will get a  movement along the demand curve.
220. 38:52Price will increase and quantity demanded will  fall. That is a movement along the demand curve.
221. 39:02But when other things are  changing, that will lead to a shift
222. 39:09in the entire demand and supply schedule,
223. 39:18okay. So this is how it happens. So far we have discussed only
224. 39:27either the change in demand or either  the shift in demand or shift in supply.
225. 39:35But it may so happen both the things are happening  together. Consumer's income is increasing and let
226. 39:43us say cost of production is also increasing. That  will result in then an increase in demand due to
227. 39:52increase in income and at the same time fall in  supply due to increase in cost of production,
228. 40:02right? So, we will discuss those  cases later in our next class when
229. 40:09demand curve and supply curve shift  together what will happen to the
230. 40:15new equilibrium price and quantity that we  will discuss in our next class. Thank you.