Demand and Supply-II: Managerial Economics: Lecture 2B

Demand and Supply-II
Managerial Economics: Lecture 2B
Ritwik Banerjee
Recap
• What is Demand? Factors that determine Demand?
• Movement along demand curve. Shift in Demand curve
• Substitutes/ Compliments; Normal/ Inferior Goods
Banerjee (IIM Bangalore) ME Lecture 2B : Demand and Supply-II PGP Term I, 2019 Slide 2
Lecture Overview
• Section 1: Supply side of the market
• Section 2: Factors that determine Supply?
• Section 2.1: Own price
• Section 2.2: Input price
• Section 2.3: Other factors
• Section 3: Demonstration problem
• Section 4: Takeaways
Supply Function
• Individual Firm’s Supply Function:

Quantity of a good that an individual firm is willing to sell at a particular
price, ceteris paribus
• Market Supply Function:

The market supply function is derived by summing the quantity of a good
individual firms are willing to sell at a given price, ceteris paribus
Lecture Overview
• Section 2: Factors that determine Demand?
Inside Business: Supply of Coffee in NY
• What are the reasons for price fluctuations?
• Brazil is one of the leading exporters of coffee to
the US.
• Adverse natural conditions in Brazil has a direct effect on
supply of coffee (and price) in NY
• Frost in 1975
• Seven month drought in 1985
• Expectation of future price rise can lead to hoarding
• Change in input prices of fertilizers, machinery etc.
• An Indian agricultural product whose supply
varies greatly?
• A non-weather related factor?
Supply Function
• Quantity supplied for good 𝑥 is given by
𝑞#$ = 𝑓(𝑝# , 𝑝* , 𝑇, 𝐸)
• Where 𝑠# : quantity supplied of commodity x by an individual firm per
time period
𝑝# : price per unit of commodity 𝑥
𝑝* : price of inputs
𝑇 : Technology
𝐸 : Expectations about future prices and other factors
Lecture Overview
Supply Function and Own Price
Given everything else, how is supply of a good related to its own price?
𝑞#$ = 𝑓(𝑝# , 𝑝* , 𝑇, 𝐸)
What do you think is the relation between quantity supplied and the price of the
commodity?
Law of Supply
• Ceteris paribus, when the price of a product decreases, the quantity

supplied of the product decreases, and vice-versa
Price of coffee Quantity Supplied
100 10
Supply Curve 150

200
15
20
250 25
• Supply curve represents 𝑺𝟏

Price
quantity of a product that 200
is supplied at different 150
prices of a product, ceteris

100
paribus. 25
5 10 15 20
Quantity
Features of Supply Curve
• Supply curve generally slopes upwards
• Supply curve assumes, prices of inputs, technology to be constant

• Ceteris paribus
• Supply pertains to a particular time period

• Longer the time period, greater supply
Movement Along Supply Curve
• As price of a good
𝑺𝟏
decreases, quantity Price
supplied of that good
decreases, ceteris paribus 200
• For own price change,
change in supply works 150
through a movement
along the supply curve 100
5 10 15 20 25
Quantity
Lecture Overview
Shift of Supply Curve
𝑺𝟏
𝑺𝟐
• 𝑞#$ = 𝑓(𝑝# , 𝑝* , 𝑇, 𝐸) 𝑺𝟑
Price
• The supply curve shifts 250

when input prices
change, technology 150
improves, or shocks
occur. (i.e. whenever
ceteris paribus is 100
violated)
5 10 15 20 25
Quantity
Shift of Supply Curve: price of input
𝑺𝟏
𝑺𝟐
• 𝑠# = 𝑓(𝑝# , 𝑝* , 𝑇, 𝐸)
Price
• Increase in price of 250

input: shifts to the left
150
• Examples:
• Increase in excise duty of 100
the input
• Increase in price of 5 10 15 20 25
fertilizers, tractors and Quantity
HYV seeds
Lecture Overview
Shift of the Supply Curve : better technology
𝑺𝟏
𝑺𝟐
• 𝑠# = 𝑓 𝑝# , 𝑝* , 𝑇, 𝐸
Price
• Better technology: shifts 250

to the right
150
• Example: 100
• Advent of computers
• Advent of tractors and 5 10 15 20 25
Quantity
other machinery for
farming
Shift of the Supply Curve: Expected Price
𝑺𝟐
𝑺𝟏
• 𝑠# = 𝑓(𝑝# , 𝑝* , 𝑇, 𝐸)
Price
• Increase in expected future

250
price of the product: shifts
to the left
150
• Example: high prices of 100

onions (hoarding behavior)
5 10 15 20 25
Quantity
Lecture Overview
Demonstration Problem
Supply function for TV sets:
𝑄#$ = 2000 + 3𝑃# − 4𝑃; − 𝑃<
Where 𝑃# : price of TV sets
𝑃; : Price of computer monitor
𝑃< : Price of inputs
• Suppose TVs are sold for $400 per unit, computer monitors are sold for $100 per unit, and the price of
an input is $2,000. How many television sets are produced? Why is the coefficient of the price of
computer monitor negative?
Solution
• Substituting the values:
𝑄#$ = 2000 + 3(400) − 4(100) − 1(2000)
• Adding up:
Total quantity of television sets produced = 800
Lecture Overview
Variables that Shift Supply
Variables that Shift Supply
Thank You !
www.ritwikbanerjee.in

Demand and Supply-II: Managerial Economics: Lecture 2B

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Demand and Supply-II: Managerial Economics: Lecture 2B

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Demand and Supply-II

Managerial Economics: Lecture 2B

• What is Demand? Factors that determine Demand?

• Movement along demand curve. Shift in Demand curve

• Substitutes/ Compliments; Normal/ Inferior Goods

• Individual Firm’s Supply Function:

• Market Supply Function:

• Ceteris paribus, when the price of a product decreases, the quantity

Supply Curve 150

• Supply curve represents 𝑺𝟏

quantity of a product that 200

is supplied at different 150

prices of a product, ceteris

• Supply curve assumes, prices of inputs, technology to be constant

• Supply pertains to a particular time period

• The supply curve shifts 250

• Increase in price of 250

• Better technology: shifts 250

• Increase in expected future

• Example: high prices of 100

𝑄#$ = 2000 + 3𝑃# − 4𝑃; − 𝑃<

Where 𝑃# : price of TV sets

𝑃; : Price of computer monitor

𝑃< : Price of inputs

computer monitor negative?

• Substituting the values:

𝑄#$ = 2000 + 3(400) − 4(100) − 1(2000)

Total quantity of television sets produced = 800

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