CHAPTER NO.

01
INTRODUCTION

1.1 Background of the Study

The main purpose of this report is to full fill the requirement of the course of business economics
of MBA program in BUP. This report has been prepared based on market forces in business
economics. In this report the relations of demand, supply, price etc. is derived which are directly
responsible for market forces. Generally condition of markets is affected by supply, demand, price
etc. Market participants consist of all the buyers and sellers of a good who influence its price,
which is a major topic of study of economics and has given rise to several theories and models
concerning the basic market forces of supply and demand. Markets facilitate trade and enables the
distribution and allocation of resources in a society. Markets allow any trade-able item to be
evaluated and priced.
1.2 Problem Statement
In the real world, the market price is affected by the inventory of goods held by the manufacturers
rather than the rate at which manufacturers are supplying goods. Markets can differ by products
(goods, services) or factors (labor and capital) sold, product differentiation, place in which
exchanges are carried, buyers targeted, duration, selling process, government regulation, taxes,
subsidies, minimum wages, price ceilings, legality of exchange, liquidity, intensity of speculation,
size, concentration, information asymmetry, relative prices, volatility and geographic extension.
The geographic boundaries of a market may vary considerably. Markets can also be worldwide.
National economies can be classified. It is very important to know about the features of market
forces to stable the economics of any country.
1.3 Objectives
1.3.1 Broad objective:
The Broad objective of this study is to understand the market forces in business economy.
1.3.2 Specific Objective:
In order to achieve the broad objective following specific objectives are emerged:

To know about the market and market structure.

To define market forces.
To learn the market forces of demand.
To learn the market forces of supply.
To identify the equilibrium condition.

1.4 Scopes and Limitations

The study covers one of the economic factor Market Forces. Therefore, the scope of our report
is limited only to the compliance of those newspapers, brochure, websites, and magazine articles.
In preparing the report, we review and analyze the information published in various journals.
Finally, we consulted with our honorable teacher about all of this information and got his wise
suggestion.
During the study it was not possible to visit the overall market forces. During the study, we have
faced the following limitations:
Time Limitation: To complete the study, time was limited .It was really very short time
to know details about reasons of market forces.
Inadequate Data: Data is inadequate in this. There is very little bit information about
market forces in website.
Lack of Record: The major limitation of this report is that there is no record of data both
in private and govt. sector.

CHAPTER NO. 02
METHODOLOGY

This term paper is only based on secondary data.

Secondary data: Secondary data is the data taken by the researcher from secondary sources,
internal or external. That means the data, which was collected and used previously for another
purpose is called secondary data. Secondary sources are Various web sites
Articles about microeconomics, business economics, supply, demand, economic forces etc.
Published journals.

CHAPTER NO. 03
MARKET STRUCTURE & MARKET FORCES

3.1 Market
A market is a group of buyers and sellers of a particular good or service. The buyers as a group
determine the demand for the product, and the sellers as a group determine the supply of the
product. Markets take many forms. Some markets are highly organized, such as the markets for
many agricultural commodities. In these markets, buyers and sellers meet at a specific time and
place, where an auctioneer helps set prices and arrange sales. More often, markets are less
organized. For example, consider the market for ice cream in a particular town. Buyers of ice
cream do not meet together at any one time. The sellers of ice cream are in different locations and
offer somewhat different products. There is no auctioneer calling out the price of ice cream. Each
seller posts a price for an ice-cream cone, and each buyer decides how much ice cream to buy at
each store. Nonetheless, these consumers and producers of ice cream are closely connected. The
ice-cream buyers are choosing from the various ice-cream sellers to satisfy their cravings, and the
ice-cream sellers are all trying to appeal to the same ice-cream buyers to make their businesses
successful. Even though it is not as organized, the group of ice-cream buyers and ice-cream sellers
forms a market.
There are different types of market:

Physical consumer markets

Physical business markets
Non-physical markets
Financial markets

3.2 Market Structure

Market structure is best defined as the organizational and other characteristics of a market. We
focus on those characteristics which affect the nature of competition and pricing but it is
important not to place too much emphasis simply on the market share of the existing firms in an
industry. In economics, a market that runs under laissez-faire policies is called a free market, it is
"free" from the government, in the sense that the government makes no attempt to intervene
through taxes, subsidies, minimum wages, price ceilings, etc. However, from fig. 3-1 & 3-2 it is
clear that market prices may be distorted by a seller or sellers with monopoly power, or a buyer
with monopsony power. Such price distortions can have an adverse effect on market participant's
welfare and reduce the efficiency of market outcomes. Also, the relative level of organization and
negotiating power of buyers and sellers markedly affects the functioning of the market. Markets
are a system, and systems have structure. The structure of a well-functioning market is defined by
the theory of perfect competition.

There are four major market structure (fig. 3-1). Several market structures in economics are given
below:
Monopolistic competition, a type of imperfect competition such that many producers sell
products or services that are differentiated from one another (e.g. by branding or quality) and
hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged
by its rivals as given and ignores the impact of its own prices on the prices of other firms
Perfect competition, a theoretical market structure that features no barriers to entry, an
unlimited number of producers and consumers, and a perfectly elastic demand curve.
Oligopoly, in which a market is run by a small number of firms that together control the
majority of the market share.
Duopoly, a special case of an oligopoly with two firms.
Monophony, when there is only a single buyer in a market.
Oligopoly, a market where many sellers can be present but meet only a few buyers.
Monopoly, where there is only one provider of a product or service.
Natural monopoly, a monopoly in which economies of scale cause efficiency to increase
continuously with the size of the firm. A firm is a natural monopoly if it is able to serve the
entire market demand at a lower cost than any combination of two or more smaller, more
specialized firms.

Fig. 3-1: Major Market Structures

Fig. 3-2: Characteristics of Different Market Structures

Traditionally, the most important features of market structure are:

The number of firms

The market share of the largest firms
The nature of costs
The degree to which the industry is vertically integrated
The extent of product differentiation
The structure of buyers in the industry
The turnover of customers

3.3 Market Forces

Market Forces means the forces that decide price levels in an economy or trading system whose
activities are not influenced or limited by government: The action of market forces means that the
cost of something rises if demand for it rises and the amount available remains constant. Market
forces are the economic factor that affect the availability of goods or service for consumer. In
general, the way that the behavior of buyers and sellers affects the levels of prices and wages,
without any influence from the government is called the market forces.
Production is the source of demand1. According to Say's Law, when an individual produces a
product or service, he or she gets paid for that work, and is then able to use that pay to demand
other goods and services.
Market forces are the effect of supply and demand on trading within a free market. There exists a
popular thought, especially among economists, that free markets would have a structure of a
competition. The logic behind this thought is that market failures are thought to be caused by other
exogamic systems, and after removing those exogamic systems ("freeing" the markets) the free
markets could run without market failures. For a market to be competitive, there must be more
than a single buyer or seller. It has been suggested that two people may trade, but it takes at least
three persons to have a market, so that there is competition in at least one of its two sides. The
definition of free market has been disputed and made complex by collectivist political philosophers
and socialist economic ideas. In a free market, individuals and firms taking part in these
transactions have the liberty to enter, leave and participate in the market as they so choose. Prices
and quantities are allowed to adjust according to economic conditions in order to reach equilibrium
and properly allocate resources. According to the definition a free market is a system in which the
prices for goods and services are set freely by consent between vendors and consumers, in which
the laws and forces of supply and demand are free from any intervention by a government, pricesetting monopoly, or other authority. It is a result of a need being, then the need being met. A free
market contrasts with a regulated market, in which government intervenes in supply and demand
through non-market methods such as laws creating barriers to market entry or price fixing. In a
free-market economy, prices for goods and services are set freely by the forces of supply and
demand and are allowed to reach their point of equilibrium without intervention by government
policy, and it typically entails support for highly competitive markets and private ownership of
productive enterprises.
There are several reasons for market forces:

Supply and demand for products, currencies and other investments creates a push-pull
dynamic in prices. Prices and rates change as supply or demand changes. If something is
in demand and supply begins to shrink, prices will rise. If supply increases beyond current
demand, prices will fall. If supply is relatively stable, prices can fluctuate higher and lower
as demand increases or decreases.

Says Law

Governments hold much sway over the free markets. If government spending increases or
contracts, this is known as fiscal policy, and can be used to help ease unemployment or
stabilize prices.
By altering interest rates and the amount of dollars available on the open market,
governments can change how much investment flows into and out of the country.
The flow of funds between countries impacts the strength of a country's economy and its
currency. The more money that is leaving a country, the weaker the country's economy and
currency.
Speculation and expectation are integral parts of the financial system. Where consumers,
investors and politicians believe the economy will go in the future impacts how we act
today.
Unmet customer needs
New competitors, especially nontraditional competitors from other industries. Mergers and
acquisitions that may strengthen a competitor or cause to lose a supplier or distributor.
Changes in the supply chain and distributors

3.4 Effect of Market Forces in Bangladesh

In Bangladesh economic development remains hampered by the fragile rule of law. Corruption
and marginal enforcement of property rights have driven people and enterprises out of the formal
sector. The governments inability to provide basic public goods further limits opportunities for
business development and job growth. Because of an adverse economic development in
Bangladesh, a poor consumer will fail to follow the same rational consumption path as that implied
in price stabilization if left alone to face market forces. The state-owned Bangladesh Power
Development Board, which is responsible for electricity generation and distribution, faces ongoing
financial difficulties as it continues to purchase electricity at higher prices than it charges the
public. Bangladesh has shown remarkable macroeconomic resilience, and its economy has grown
steadily over the past five years. Nonetheless, overall entrepreneurial activity is disadvantaged by
an uncertain regulatory environment, poor infrastructure, and the absence of effective long-term
institutional support for private-sector development. Despite ongoing reform of the financial
sector, government ownership and interference remain considerable, undermining much-needed
increases in efficiency. Governments may attempt to create social equality or equality of outcome
by intervening in the market through actions such as imposing a minimum wage (price floor) or
erecting price controls (price ceiling).

CHAPTER NO. 04
MARKET FORCES OF DEMAND AND SUPPLY

4.1 Market Forces of Demand

Demand is a buyer's willingness and ability to pay a price for a specific quantity of a good or
service. Demand refers to how much (quantity) of a product or service is desired by buyers at
various prices. The quantity demanded is the amount of a product people are willing or able to buy
at a certain price; the relationship between price and quantity demanded is known as the demand.
The term demand signifies the ability or the willingness to buy a particular commodity at a given
point of time, ceteris paribus (fig. 4-1). Utility preferences and choices underlying demand can be
represented as functions of cost, benefit, odds and other variables.

Fig 4-1: Demand Curve

The law of demand is a microeconomic law that states, all other factors being equal, as the price
of a good or service increases, consumer demand for the good or service will decrease, and vice
versa. The law of demand says that the higher the price, the lower the quantity demanded, because
consumers opportunity cost to acquire that good or service increases, and they must make more
tradeoffs to acquire the more expensive product.
4.1.1 The Demand Curve: The Relationship between Price and Quantity Demanded
As we will see, many things determine the quantity demanded of any good, but in our analysis of
how markets work, one determinant plays a central rolethe price of the good. If the price of ice
cream rose to $20 per scoop, consumer would buy less ice cream. Consumer might buy frozen
yogurt instead. If the price of ice cream fell to $0.20 per scoop, consumer would buy more. This
relationship between price and quantity demanded is true for most goods in the economy
economists call it the law of demand: Other things equal, when the price of a good rises, the
quantity demanded of the good falls, and when the price falls, the quantity demanded rises.
9

The figure 4-2 shows how many ice-cream cones consumer buys each month at different prices of
ice cream. If ice cream is free, consumer eats 12 cones per month. At $0.50 per cone, consumer
buys 10 cones each month. As the price rises further, she buys fewer and fewer cones. When the
price reaches $3.00, she doesnt buy any ice cream at all. This table is a demand schedule, a table
that shows the relationship between the price of a good and the quantity demanded, holding
constant everything else that influences how much of the good consumers want to buy.

Fig. 4-2: The Relationship between Price and Quantity Demanded

The graph in uses the numbers from the table to illustrate the law of demand. By convention, the
price of ice cream is on the vertical axis, and the quantity of ice cream demanded is on the
horizontal axis. The downward-sloping line relating price and quantity demanded is called the
demand curve.

4.1.2 Market Demand versus Individual Demand

The demand curve in Figure 4-3 shows an individuals demand for a product. To analyze how
markets work, we need to determine the market demand, the sum of all the individual demands for
a particular good or service. The table in Figure 4-3 shows the demand schedules for ice cream of
the two individuals in this marketCatherine and Nicholas.

10

At any price, Catherines demand schedule tells us how much ice cream she buys, and Nicholass
demand schedule tells us how much ice cream he buys. The market demand at each price is the
sum of the two individual demands.

Fig. 4-3: Market Demand VS Individual Demand

The graph in Figure 4-3 shows the demand curves that correspond to these demand schedules.
Notice that we sum the individual demand curves horizontally to obtain the market demand curve.
That is, to find the total quantity demanded at any price, we add the individual quantities, which
are found on the horizontal axis of the individual demand curves. Because we are interested in
analyzing how markets function, we work most often with the market demand curve. The market
demand curve shows how the total quantity demanded of a good varies as the price of the good
varies, while all the other factors that affect how much consumers want to buy are held constant.

4.1.3 Shifts in the Demand Curve

People usually want only so much of a good. Acquiring additional increments of a good or
service in some time period will yield less and less satisfaction2. As a result, the demand for a
product at low prices is limited by taste and is not infinite even when the price equals zero.
2

Law of Diminishing Marginal Utility

11

As the price increases, the same amount of money will purchase fewer products. When the price
for a product is very high, the demand will decrease because, while consumers may wish to
purchase a product very much, they are limited by their ability to buy.
Because the market demand curve holds other things constant, it need not be stable over time. If
something happens to alter the quantity demanded at any given price, the demand curve shifts.
For example, suppose the Igloo Company discovered that people who regularly eat ice cream
live longer, healthier lives. The discovery would raise the demand for ice cream.
At any given price, buyers would now want to purchase a larger quantity of ice cream, and the
demand curve for ice cream would shift. Figure 4-3 illustrates shifts in demand. Any change that
increases the quantity demanded at every price, such as our imaginary discovery by the American
Medical Association, shifts the demand curve to the right and is called an increase in demand. Any
change that reduces the quantity demanded at every price shifts the demand curve to the left and
is called a decrease in demand.

Fig. 4-4: Shift in Demand Curve

There are many variables that can shift the demand curve. Here are the most important.

Income: A lower income means that consumer has less to spend in total. If the demand for a
good falls when income falls, the good is called a normal good. Not all goods are normal
goods. If the demand for a good rises when income falls, the good is called an inferior good.
An example of an inferior good might be bus rides. As consumers income falls, he is less
likely to buy a car or take a cab and more likely to ride a bus.

Prices of Related Goods: Suppose that the price of frozen yogurt falls. The law of demand
says that consumer will buy more frozen yogurt. At the same time, he will probably buy less
ice cream. Because ice cream and frozen yogurt are both cold, sweet, creamy desserts, they
12

satisfy similar desires. When a fall in the price of one good reduces the demand for another
good, the two goods are called substitutes. .Substitutes are often pairs of goods that are used
in place of each other, such as hot dogs and hamburgers, sweaters and sweatshirts, and movie
tickets and DVD rentals. Now suppose that the price of hot fudge falls. According to the law
of demand, consumer will buy more hot fudge. Yet in this case, he will buy more ice cream
as well because ice cream and hot fudge are often used together. When a fall in the price of
one good raises the demand for another good, the two goods are called complements.
Complements are often pairs of goods that are used together, such as gasoline and
automobiles, computers and software, and peanut butter and jelly.

Tastes: The most obvious determinant of consumers demand is tastes. If he likes ice cream,
he will buy more of it. Economists normally do not try to explain peoples tastes because
tastes are based on historical and psychological forces that are beyond the realm of economics.
Economists do, however, examine what happens when tastes change.

Expectations: Consumers expectations about the future may affect his demand for a good or
service today. If he expects to earn a higher income next month, he may choose to save less
now and spend more of his current income buying ice cream. If he expects the price of ice
cream to fall tomorrow, he may be less willing to buy an ice-cream cone at todays price.

Number of Buyers: In addition to the preceding factors, which influence the behavior of
individual buyers, market demand depends on the number of these buyers.

13

4.2 Market Forces of Supply

Supply is a fundamental economic concept that describes the total amount of a specific good or
service that is available to consumers. Supply can relate to the amount available at a specific price
or the amount available across a range of prices. Willingness and ability to supply goods determine
the sellers actions (Fig. 4-5). At higher prices, more of the commodity will be available to the
buyers. This is because the suppliers will be able to maintain a profit despite the higher costs of
production that may result from short-term expansion of their capacity.

Fig. 4-5: Supply Curve

The suppliers are individuals, who try to sell (supply) their labor for the highest price. The
consumers are businesses, which try to buy (demand) the type of labor they need at the lowest
price. As more people offer their labor in that market, the equilibrium wage decreases and the
equilibrium level of employment increases as the supply curve shifts to the right. The opposite
happens if fewer people offer their wages in the market as the supply curve shifts to the left.
4.2.1 The Supply Curve: The Relationship between Price and Quantity Supplied
There are many determinants of quantity supplied, but price plays a special role in our analysis.
When the price of ice cream is high, selling ice cream is profitable, and so the quantity supplied is
large. Sellers of ice cream work long hours, buy many ice-cream machines, and hire many workers.
By contrast, when the price of ice cream is low, the Business is less profitable, so sellers produce
less ice cream. At a low price, some sellers may even choose to shut down, and their quantity
supplied falls to zero. This relationship between price and quantity supplied is called the law of
supply: Other things equal, when the price of a good rises, the quantity supplied of the good also
rises and when the price falls, the quantity supplied falls as well. The figure 4-6 shows the quantity
of ice-cream cones supplied each Month an ice-cream seller, at various prices of ice cream.

14

The table and figure 4-6 shows the quantity of ice-cream cones supplied each Month an ice-cream
seller, at various prices of ice cream. At a price below $1.00, ice cream does not supply at all. As
the price rises, supplies a greater and greater quantity.

Fig. 4-6: Relationship between the Price of a Good and the Quantity Supplied
This is the supply schedule, a table that shows the relationship between the price of a good and the
quantity supplied, holding Constant everything else that influences how much producers of the
good want to sell.
The graph uses the numbers from the table to illustrate the law of supply. The curve relating price
and quantity supplied is called the supply curve. The supply curve slopes upward because, other
things equal, a higher price means a greater quantity supplied.
4.2.2 Market Supply versus Individual Supply
Just as market demand is the sum of the demands of all buyers, market supply is the sum of the
supplies of all sellers. The table shows the supply schedules for the two ice-cream producers in the
marketBen and Jerry. At any price, Bens supply schedule tells us the quantity of ice cream Ben
supplies, and Jerrys supply schedule tells us the quantity of ice cream Jerry supplies. The market
supply is the sum of the two individual supplies.

15

The graph 4-7 shows the supply curves that correspond to the supply schedules. As with demand
curves, we sum the individual supply curves horizontally to obtain the market supply curve. That
is, to find the total quantity supplied at any price, we add the individual quantities, which are found
on the horizontal axis of the individual supply curves.

Fig. 4-7: Market Supply versus Individual Supply

The market supply curve shows how the total quantity supplied varies as the price of the good
varies, holding constant all the other factors beyond price that influence producers decisions
about how much to sell.
4.2.3 Shifts in Supply Curve
In a real market, when the inventory is less than the desired inventory, manufacturers will raise
both the supply of their product and its price. The short-term increase in supply causes
manufacturing costs to rise, leading to a further increase in price. The price change in turn
increases the desired rate of production. A similar effect occurs if inventory is too high. Because
the market supply curve holds other things constant, the curve shifts when one of the factors
changes.
Suppose the price of sugar falls. Sugar is an input into producing ice cream, so the fall in the
price of sugar makes selling ice cream more profitable (fig. 4-8).
16

This raises the supply of ice cream: At any given price, sellers are now willing to produce a
larger quantity. The supply curve for ice cream shifts to the right.

Fig. 4-8: Shift in Supply Curve

There are many variables that can shift the supply curve. Here are some of the most important.

Technology: The technology for turning inputs into ice cream is another determinant of
supply. The invention of the mechanized ice-cream machine, for example, reduced the
amount of labor necessary to make ice cream. By reducing firms costs, the advance in
technology raised the supply of ice cream.
Expectations: The amount of ice cream a firm supplies today may depend on its
expectations about the future. For example, if a firm expects the price of ice cream to rise
in the future, it will put some of its current production into storage and supply less to the
market today.
Number of Sellers: In addition to the preceding factors, which influence the behavior of
individual sellers, market supply depends on the number of these sellers.

17

4.3 Supply and Demand Together:

After discussing market force of demand and supply separately, we can join them together. This
term is called Market Equilibrium.

4.3.1. Equilibrium:
When the demand and supply curves intersect together, its called market in equilibrium.
Equilibrium means that the amount demanded equals the amount supplied. That is, at the
equilibrium price consumers will not demand more or less of the product and producers likewise
will not produce more or less of the product.
We can define Equilibrium as, a situation in which the market price has reached the level at which
quantity supplied equals quantity demanded.
Equilibrium is, Qd = Qs
Markets naturally tend toward equilibrium. That is because when prices are above the equilibrium
price consumers will demand less of the product, pushing the price down. For producers, when the
price is above the equilibrium price they will make more of the product than can be sold. Therefore,
they will see their inventories go up, increasing their costs of storage and reducing their profits. In
such a situation, to be able to move their inventories they will have to reduce prices. Thus, there
will be pressure to decrease prices as much from the demand side, that is, from consumers, as form
the supply side which is represented by suppliers.

For example: We can give an example of equilibrium by using a graphical situation.

Each point on the graph represents a point on the table. The top points show that when the price
of a bottle of red wine is $20, producers are willing and able to sell 45,000 cases of wine but
consumers are only willing to buy 30,000 cases. Using the terminology presented above, the
"quantity supplied" of wine is 45,000 and the "quantity demanded" is 30,000 when the price of a
bottle of wine is $20. The bottom point shows that when the price of a case of red wine is $10,
producers are only willing and able to supply 25,000 cases of red wine but consumers are willing
to buy 50,000 cases of red wine. When the price of a case of red wine is $16.25, producers are
willing and able to sell 37,500 cases of red wine and consumers are willing to buy 37,500 cases of
red wine. At this point the supply and demand curves intersect, this point also represents market
equilibrium.

18

Figure: 4.9. The equilibrium of demand and supply.

4.3.2. Equilibrium price:

The equilibrium price is the market price where the quantity of goods supplied is equal to the
quantity of goods demanded. This is the point at which the demand and supply curves in the market
intersect.
From the above graph (fig:4.9) We can see that, when the prices of red bottle wine increase, the
quantity of demand also increase, this is basic law of demand. The demand and supply curve
intersect each other at the price level of $16.25. this point is called equilibrium price.

4.3.3. Equilibrium quantity:

The quantity that exists when a market is in equilibrium. Equilibrium quantity is simultaneously
equal to both the quantity demanded and quantity supplied. In a market graph, the equilibrium
quantity is found at the intersection of the demand curve and the supply curve. Equilibrium
quantity is one of two equilibrium variables. The other is equilibrium price.
In the graph (fig:4.9), the equilibrium quantity is 37,500.

19

Sometimes the market is not in equilibrium-that is quantity supplied doesn't equal quantity
demanded. When this occurs there is either excess supply or excess demand.

4.3.4. Surplus:
A Market Surplus occurs when there is excess supply- that is quantity supplied is greater than
quantity demanded. In this situation, some producers won't be able to sell all their goods. This
will induce them to lower their price to make their product more appealing. In order to stay
competitive many firms will lower their prices thus lowering the market price for the product. In
response to the lower price, consumers will increase their quantity demanded, moving the market
toward an equilibrium price and quantity. In this situation, excess supply has exerted downward
pressure on the price of the product.

Price

Surplus

Supply

demand

Qd

Qs

Quantity

Figure:4.10. Market Surplus.

Conversely, consider a situation where the price in a market is higher than the equilibrium price.
If the price is higher than P*, the quantity supplied in that market will be higher than the quantity
demanded at the prevailing price, and a surplus will result.

Surplus means,
Quantity supplied > quantity demanded
Excess supply
Downward pressure on price

20

4.3.5. Shortage:
A Market Shortage occurs when there is excess demand- that is quantity demanded is greater than
quantity supplied. In this situation, consumers won't be able to buy as much of a good as they
would like. In response to the demand of the consumers, producers will raise both the price of
their product and the quantity they are willing to supply. The increase in price will be too much
for some consumers and they will no longer demand the product. Meanwhile the increased
quantity of available product will satisfy other consumers. Eventually equilibrium will be reached.
The figure 4.11 illustrates the shortage that occurs when a price ceiling is imposed on suppliers.
Consumers demand QD while Suppliers are only willing to supply QS. If the price ceiling is set
above the equilibrium, consumers would demand a smaller quantity than suppliers are producing.

Figure: 4.11. The shortage in market.

Shortage means,
Quantity demanded > quantity supplied
Excess demand
Upward pressure on price

21

Three steps to analyzing changes in equilibrium

1.Decide whether the event shifts the supply curve, the demand curve, or, in some cases, both
curves
2.Decide whether the curve shifts to the right or to the left
3.Use the supply-and-demand diagram
Compare the initial and the new equilibrium
Effects on equilibrium price and quantity

4.3.6. Change in market equilibrium:

While analyzing changes in a supply and demand equilibrium is fairly straightforward when
there is only a single shock to either supply or demand, it is often the case that multiple factors
affect markets at the same time. Therefore, it's important to think about how market equilibrium
changes in response to multiple shifts in supply and demand as well.

Analyzing Changes in Market Equilibrium

Market change
Supply

Effect on price
Price -down

Effect on quantity
Quantity -up

Supply

Price up

Quantity -down

Price -up

Quantity up

Price -down

Quantity -down

Demand
Demand

Table: Effect in market price and quantity

22

4.3.6.1. Change in market equilibrium due to shift in demand:

Shifts in the demand curve and/or the supply curve will cause equilibrium to change. In some
cases, both the equilibrium price and quantity will change as well, and in other cases only one
changes. The amount of change can be determined rather easily if only one curve shifts but if
both shift, it is sometimes difficult to tell whether either the price or quantity has changed.

Figure :4.12. Change in Shifting demand

In left graph shows an increase in demand resulting in both a higher price and a higher quantity
and right side graph shows, demand decreases lowering both the price and quantity.

23

4.3.7.2. Shifts in Supply:

Figure: 4.13. Change in shifting supply.

From the above graph we can see that an increase in supply will cause the price to decline and
the quantity to rise. And from the other graph, supply decreases thus causing an increase in price
and a decrease in quantity.

24

4.3.7.3. Shift in both supply and demand:

When both supply and demand change their shift, the following situation occur,
Graphically shown the situation through four panel:

Panel (a)

panel (b)

Panel (c)
Panel (d)

Figure; 4.14. Shifting demand and supply simultaneously

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Above it was mentioned that sometimes it will be unable to tell whether price or quantity
increases or decreases depending on the shifts in supply and demand. In panel ( a and b), supply
is increased and demand is decreased. In this case, it is easy to see that the price has decreased,
but it is hard to tell how the quantity has changed. In panel c both supply and demand are
decreased thus decreasing the quantity but leaving it hard to tell if the price has changed. panel d
shows, decrease in supply and an increase in demand resulting in an obvious increase in price,
but yet again is it hard to determine how the quantity has changed. In panel d both supply and
demand are increased also increasing the quantity but leaving the price unable to discern a
change. This changes that cannot be seen on these graphs will determine on the amount of the
relative shifts in either supply or demand.

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CHAPTER NO. 05
CONCLUSION

Marketers require buying power as well as people. Classical economic theory presents a model of
supply and demand that explains the equilibrium of a single product market. The economic
environment consists of factors that affect consumers purchasing power and spending power/
patterns. Government intervention in the free market can hamper economic growth,
entrepreneurship and a healthy economy by disrupting the natural allocation of resources
according to supply and demand. Marketers must pay close attention to major trends and
consumers spending patterns. Market forces are those that affect the supply, demand, and price
of products, and they come in many forms. A change in any of the forces normally requires a
business unit to re-assess the marketplace given the overall change in industry information. For a
market to be competitive, there must be more than a single buyer or seller. It has been suggested
that two people may trade, but it takes at least three persons to have a market, so that there is
competition in at least one of its two sides.

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