SUPPLY AND DEMAND: HOW MARKETS WORK

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

9781473725331 © CENGAGE EMEA 2017
Value Chain in Sugar
Industry

sugar market
Flow Chart of Sugarcane
Processing

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

9781473725331 © CENGAGE EMEA 2017
Monthly sugar sales quota for Aug’20 fixed at 20.5 LT
Jul 31, 03:34 : The monthly quota has been released for Aug’20 and
allocated 20.5 LT of sugar sales limit to each 547 mills which is 0.5 LT
less compared to the previous month’s sales quota.
Government mulls raising minimum
selling price of sugar
NEW DELHI: The government is considering a proposal to increase the minimum selling
price (MSP) of sugar from Rs 31 per kg in order to help millers clear cane dues of about
Rs 22,000 crore to farmers, Food Secretary Sudhanshu Pandey said on Thursday. He
said the measures being taken by the government will ensure early clearance of
substantial cane arrears to farmers.
"We have received views from state governments on the matter. Even Niti Aayog has
recommended a hike. We are looking into the matter. We will take a balanced approach in
the interest of both farmers and consumers," Pandey told reporters.
But the official did not say by how much the MSP will be increased.
However, a task force constituted by Niti Aayog on sugarcane and sugar industry has
recommended a one-time increase of Rs 2 per kg.
The increase is also likely because the Commission for Agricultural Costs and Prices has
recommended raising the fair and remunerative price (FRP) of sugarcane by Rs 10 a quintal
to Rs 285 for 2020-21.
Last year, the government increased the price at which mills sell sugar to bulk buyers by Rs
2/kg to Rs 31/kg.
Government mulls raising minimum selling price of sugar
The minimum selling price of sugar is fixed taking into account the components of FRP and
minimum conversion cost of the most
efficient mills.
As per the official data, mills have to pay total Rs 72,000 crore for sugarcane purchased from
farmers during the 2019-20 season
(October-September). Maximum has been paid and the arrears left are about Rs 22,000 crore.
Arrears comprise payments to be made on the basis of FRP fixed by the Centre, and State
Advisory Price (SAP) determined by states.
Of the Rs 22,000 crore arrears, about Rs 17,683 crore is based on the FRP rate, while the rest
is based on SAP rates. Mills have
produced 27 million tonnes of sugar so far in the ongoing 2019-20 season, lower than 33.1
million tonnes achieved last year, as per the
official data.
 Each output has its own market
 The size of the market depends on its supply and
demand
 There are different factors that affect supply and
demand
 There is also interrelationship between markets
 Market for one raw material can affect other
markets in the value chain
 Functioning of all markets is important for a
vibrant growth of the economy
Market Forces Of Supply
And Demand
Supply and demand are the forces that
make market economies work.
 Supply and demand determine prices in a
market economy and how prices, in turn,
allocate the economy’s scarce resources.
 The model of the market based on supply
and demand, like any other model, is based
on a series of assumptions.

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

9781473725331 © CENGAGE EMEA 2017
The Assumptions Of The Market
Model
The terms supply and demand refer to the
behaviour of people as they interact with one
another in markets.
A market is a group of buyers and sellers of a
particular good or service.
A competitive market is a market in which
there are many buyers and sellers so that each
has a negligible impact on the market price.

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

9781473725331 © CENGAGE EMEA 2017
Demand
Quantity demanded is the amount of a good
that buyers are willing and able to purchase.
Law of Demand is the claim that, other things
equal, the quantity demanded of a good falls
when the price of the good rises.

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

9781473725331 © CENGAGE EMEA 2017
The Demand Curve: The Relationship
between Price and Quantity Demanded
Demand schedule is a table that shows the
relationship between the price of the good and
the quantity demanded.

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

9781473725331 © CENGAGE EMEA 2017
Law of Demand
A decrease in the price of a good, all other things
held constant, will cause an increase in the
quantity demanded of the good.
An increase in the price of a good, all other things
held constant, will cause a decrease in the quantity
demanded of the good.
Demand of Sugar
Prices (Rs/kg) Demand (gm/day)

30 35.5

40 33.0

50 30.5

60 28.0

70 25.5

80 23.0

90 20.5

100 18.0
 Shift in Demand

120

100

80
Prices

60 Demand

40

20

0
0.0 10.0 20.0 30.0 40.0

Qty
When the price of Walnut is Rs
1200/kg the demand was 16,000
kg. As price increased to Rs
1800/kg the demand decreased to
4000 kg

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

9781473725331 © CENGAGE EMEA 2017
Demand Shift
Prices Demand Demand1

30 35.5 42.5

40 33.0 40.0

50 30.5 37.5

60 28.0 35.0

70 25.5 32.5

80 23.0 30.0

90 20.5 27.5

100 18.0 25.0

 Shift in Demand

120
100
80
Demand
60
Prices

Demand1
40
20
0
0.0 10.0 20.0 30.0 40.0 50.0
Qty
Change in Demand
An increase in demand refers to a
Price
rightward shift in the market
demand curve.

P0

Quantity
Q0 Q1
Change in Demand
A decrease in demand refers to a
Price
leftward shift in the market
demand curve.

P0

Quantity
Q1 Q0
Shifts in Demand
Preferences
Consumer Information
Consumers’ Income
Expectations of Future Prices
Price of related goods
Number of Consumers in the Market

Changes in the quantity demanded and

changes in demand
Supply
Prices Supply

30 25.5

40 28

50 30.5

60 33

70 35.5

80 38

90 40.5

100 43
 Supply
50
45
40
35
30
Prices (Rs/lt)

25
20
15
10
5
0
0 50 100 150
Supply (billion lt)
Supply Curve
Relationship between the quantity of a good that
producers are willing to sell and the price of the good
– slopes upwards
Qs = Qs(P)
Ex: Q = c+ dP
For the previous example the supply curve is
Q=18+ 0.25 P
 Problem
When the price of Walnut is Rs 1200/kg the supply was 8000 kg. As price
increased to Rs 1800/kg the supply increased to 12000 kg
What is the relationship between price and quantity supplied?
Change in Quantity Supplied
An increase in price causes
Price an increase in quantity
supplied.

P1

P0

Quantity
Q0 Q1
Change in Quantity Supplied
A decrease in price causes a
Price decrease in quantity
supplied.

P0

P1

Quantity
Q1 Q0
Law of Supply
A decrease in the price of a good, all other things held constant, will
cause a decrease in the quantity supplied of the good.
An increase in the price of a good, all other things held constant, will
cause an increase in the quantity supplied of the good.
Shifts in Supply
Prices Supply Supply1

30 25.5 32.5

40 28 35

50 30.5 37.5

60 33 40

70 35.5 42.5

80 38 45

90 40.5 47.5

100 43 50
 Shift in Supply
120
100
80
Supply1
Prices

60
Supply
40
20
0
0 20 40 60
Qty
Change in Supply
An increase in supply refers to a
rightward shift in the market supply
Price curve.

P0

Quantity
Q0 Q1
Shift in Supply
Technology
Number of Firms in the Market
Input Prices
Expectation of futures prices
Government, taxes, subsidies, regulations
Market Equilibrium
Market equilibrium is determined at the intersection of the market
demand curve and the market supply curve.
The equilibrium price causes quantity demanded to be equal to
quantity supplied.
 Market Demand and Supply

Prices Demand Demand1 Supply Supply1 Prices

30 35.5 42.5 25.5 32.5 30
40 33 40 28 35 40
50 30.5 37.5 30.5 37.5 50
60 28 35 33 40 60
70 25.5 32.5 35.5 42.5 70
80 23 30 38 45 80
90 20.5 27.5 40.5 47.5 90
100 18 25 43 50 100
Market Equilibrium
Price

D S

Quantity
Q
 Change in Market Equilibrium
120
100
80 Demand
Price

60 Supply

40 Supply1

20
0
0 20 40 60
Qty
Market Equilibrium
Price

D0 D1 S0

An increase in demand will

cause the market equilibrium
P1 price and quantity to increase.
P0

Quantity
Q0 Q1
Market Equilibrium
Price

D1 D0 S0

A decrease in demand will

cause the market equilibrium
P0 price and quantity to
decrease.
P1

Quantity
Q1 Q0
Market Equilibrium
Price An increase in
supply will cause
D0 the market
S0 S1
equilibrium price
to decrease and
quantity to
increase.

P0

P1

Quantity
Q0 Q1
Market Equilibrium
Price A decrease in
supply will cause
D0 the market
S1 S0
equilibrium price
to increase and
quantity to
decrease.

P1

P0

Quantity
Q1 Q0
 Changes in Market Equilibrium
120

100
Price

80 Demand
Demand1
Supply
60 Supply1

40

20

0
0 20 Qty 40 60
Three Steps to Analyzing Changes
in Equilibrium
Shifts in Curves versus Movements along
Curves
◦ A shift in the supply curve is called a change in
supply.
◦ A movement along a fixed supply curve is called a
change in quantity supplied.
◦ A shift in the demand curve is called a change in
demand.
◦ A movement along a fixed demand curve is called a
change in quantity demanded.

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

9781473725331 © CENGAGE EMEA 2017
 How a Decrease in Supply Affects the
Equilibrium?
Price of
milk 1. An increase in the
animal feed reduces
the supply of milk. .
S2
S1

New
€ 0.80 equilibrium

0.60 Initial equilibrium

2. . . . resulting
in a higher
price of milk
Demand

0 4 7 Quantity of milk
3. . . . and a lower
quantity sold.
Market Equilibrium
Price
D2 D3 S1
D1 S2
P4
P3
P1
P2

Quantity
Q1 Q2 Q3
Table: What Happens to Price and Quantity
When Supply or Demand Shifts?

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

FOR USE WITH9781473725331
MANKIW AND TAYLOR, ECONOMICS
© CENGAGE 4TH EDITION
EMEA 2017
9781473725331 © CENGAGE EMEA 2017
 Demand-Supply Analysis
D-S analysis can be applied to a variety of interesting and
important problems
◦ Impact of changing world economic conditions on market price and
production
◦ Assessing impact of government policies
◦ Price controls
◦ Minimum wages
◦ Price supports
◦ Production incentives
◦ Taxes, subsidies
◦ Tariffs and import quotas
◦ Forecasting Demand, Supply and Prices
Market Mechanism: D-S
Price
S1
D1
P3

P1
P2

Quantity
Q2 Q1 Q3
Market Mechanism: D-S
Price
S1
P6
D1
P4
P2

P1

P3
P5
P7

Q1 Q3 T3 T4 T5 T6
Qty/
T7
Q2 T1 T2
Time
FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION
9781473725331 © CENGAGE EMEA 2017
Spot prices of rubber
Market Mechanism
Market Mechanism: Tendency in a free market for price to change until
the market clears
Equilibrium Price: Price that equates the quantity supplied to the
quantity demanded
Shifts in demand and supply changes prices
 Problem
When the price of Walnut is Rs 1200/kg the
demand was 16,000 kg and supply was 8000 kg.
As price increased to Rs 1800/kg the demand
decreased to 4000 kg and supply increased to
12000 kg
Construct linear demand and supply curve and
find out the equilibrium price and quantity.
Problem
Demand for Oil is Q = 18- 3P
Supply of Oil Q = -6+ 9 P
Find equilibrium price and quantity

Supply of Gas Q= 140+ 4 Pg + 0.5 Po

Demand for Gas Q= -3 Pg + 14.5 Po
Po is Rs 30
Summary
① Economists use the model of supply and
demand to analyse competitive markets.
② In a competitive market, there are many
buyers and sellers, each of whom has
little or no influence on the market price.

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

9781473725331 © CENGAGE EMEA 2017
Summary
③ The demand curve shows how the
quantity of a good depends upon the
price.
◦ According to the law of demand, as the price of a good falls, the
quantity demanded rises. Therefore, the demand curve slopes
downward.
◦ In addition to price, other determinants of how much consumers want
to buy include income, the prices of complements and substitutes,
tastes, expectations, and the number of buyers.
◦ If one of these factors changes, the demand curve shifts.

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

9781473725331 © CENGAGE EMEA 2017
Summary
④ The supply curve shows how the quantity
of a good supplied depends upon the
price.
◦ According to the law of supply, as the price of a good rises, the
quantity supplied rises. Therefore, the supply curve slopes
upward.
◦ In addition to price, other determinants of how much producers
want to sell include input prices, technology, expectations, and
the number of sellers.
◦ If one of these factors changes, the supply curve shifts.

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

9781473725331 © CENGAGE EMEA 2017
Summary
⑤ Market equilibrium is determined by the
intersection of the supply and demand
curves.
⑥ At the equilibrium price, the quantity
demanded equals the quantity supplied.
⑦ The behaviour of buyers and sellers
naturally drives markets toward their
equilibrium.

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

9781473725331 © CENGAGE EMEA 2017
Summary
⑧ To analyse how any event influences a
market, we use the supply and demand
diagram to examine how the even affects
the equilibrium price and quantity.
⑨ In market economies, prices are the signals
that guide economic decisions and thereby
allocate resources.

FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION

9781473725331 © CENGAGE EMEA 2017