Demand and Supply

CA Sonali Jagath Prasad B.Com., ACMA, CGMA Module 2

D Q

Managerial Economics and Demand

In ME, we are concerned with demand for a commodity faced by the firm Which in turn depends upon the size of total market or industry demand for a commodity which in turn is the sum of demands for the commodity of individual consumers in market

Managerial Economics and Demand

From analysis of market demand, business executives can know:

The factors which determine the size of demand How responsive or sensitive is the demand to the changes in its determinants (Elasticity of demand) Possibility of sales promotion through manipulation of prices Responsiveness of demand to advertisement expenses, and Optimum levels of sales, inventories and advertisement cost, etc

Demand

Demand for a commodity refers to the quantity of the commodity which an individual household is willing to purchase per unit of time at a particular price A relation between the price of a good and the quantity that consumers are willing and able to buy during a given period, other things constant. Desire to acquire it Willing: you want to buy the product Able: you can afford the buy the product Everyone desires to possess Rolls Royce but only few have the ability to buy it. So everybody cannot be said to have a demand for the car

Types of Demand Business decisions

1. 2. 3. 4.

5.
6. 7.

Individual and Market demand Demand for Firms product and Industrys product Autonomous and derived demand Demand for Durable and Non Durable (Perishable) goods Consumer goods and Producer goods Demand by Market segment and by total market Short run demand and long run demand

(pg 59 of K.L.Maheshwari or pg 146 of D N Dwivedi)

Demand

Individual demand

The demand of an individual consumer

Market demand

Sum of individual demands of all consumers in the market

Basis of Individual / Consumer Demand (pg 104 of D N Dwivedi)

The consumers demand a commodity because they derive or expect to derive utility from that commodity Utility can be looked upon from 2 angles Commodity angle Consumers angle Total utility Marginal utility Law of diminishing marginal utility

Demand Function

The relation of price to sales is known in economics as the Law of Demand The price- quantity relation is shown arithmetically in the form of a table showing prices and corresponding quantities. This table is known as Demand schedule When law of demand is portrayed graphically in the form of a chart, it is called as Demand Curve it concentrates exclusively on the price-quantity relationship This price-quantity relation is also expressed algebraically in the form of following equation: Q = f(P) which means quantity demanded is a function of price

Demand Function
1. 2.

3.
4.

Chief characteristics of the Law of demand are: Inverse Relation Price, an independent variable and demand, a dependent variable Other things remain the same Reasons underlying the Law of Demand Income effect Substitution effect

Law of Demand

States that a quantity of a good demanded during a given period relates inversely to its price, other things constant. Price increases Quantity Demanded decreases Price decreases Quantity demanded increases Creates a downward sloping demand curve

Exceptions to Law of demand

Status goods Veblen goods like diamonds, gold, precious stones, etc Expectations regarding further prices speculative market Giffen goods - A giffen good may be an inferior commodity much cheaper than its superior substitutes, consumed by the poor households as an essential commodity

Demand Schedule and Curve

Demand curve:

a curve showing the relation between the price of a good and quantity demanded during a given period, other things constant. Suppose we are making pizza.

Price of Quantity Good Demand ed $3 200 $4 150 $5 100 $6 75 $7 50

Why?

Substitution Effect

Unlimited wants/scarce resources When the price of a good falls, consumers substitute that good for other goods, which become relatively more expensive. Reverse also holds true

Why?

Income Effect

Money income: is simply the number of dollars received per period Real income: your income measured in terms of what it can buy. A fall in the price of a good increases consumers real income making consumers more able to purchase goods; for a normal good, the quantity demanded increases.

Demand Curve
Price $6 $5 $4 $3 0 50 75 100 150 Point on the line that matches the schedule Every point on the line matches the schedule. It is a price/quantity demanded that consumers are willing and able to buy. A curve showing the relation between the price of a good and the quantity demanded.

Demand Quantity 200

Market demand curve

Market demand is the horizontal summation of individual consumer demand curves

Determinants of Demand ( pg 149 of D.N.Dwivedi ) - (Factors that Shift Demand Curve)

Factors determining the demand for a product are as follows: 1. Price of the product 2. Price of related goods substitutes and complements or supplements 3. Level of consumers income 4. Consumers taste and preference 5. Advertisement of the product 6. Consumers expectations about future price and supply position 7. Demonstration effect and band-wagon effect 8. Consumer credit facility 9. Population of the Country 10. Distribution pattern of national income

Movement Along the Demand Curve

Also known as Extension and contraction of demand Caused by a change in price

Only a change in price

Move from one point to another on the same graph Called a

Change in quantity demanded.

Changes in determinants - Price

Results in changes to the RELATIONSHIP BETWEEN PRICE AND QUANTITY DEMANDED. At each and every price a DIFFERENT quantity is demanded. Results in a shift in the demand curve

New curve must be drawn

Movement along the Demand Curve

Price

$6

$5

Demand 0 75 Quantity

100

Shifts in the Demand Curve

Also known as Increase and Decrease in demand A demand curve isolates the relation between prices of a good and quantities demanded when other factors that could affect demand remain unchanged. Factors called assumptions or determinants

Shifts in demand curve

Increase in demand

At each and every price MORE of the good is Price demanded Shifts to the right
$5 A B D2 D1 100 150 Quantity

Qd1 Qd2

$4 150
$5 100 $6 75

200
150 100

Change in quantity demanded vs. change in demand

Change in quantity demanded Change in demand (Shift in Demand Curve)

SHIFTS IN DEMAND CURVE INCREASE IN DEMAND ANALYSED

Consumer Income

Increase in consumer income

Causes consumers to buy more of the product at each and every price. Normal goods Inferior goods

Change in consumer income

Normal goods

A good for which demand increases as consumer income rise

Inferior goods

A good which demand increases as consumer income falls

Changes in Price of Related Goods

Substitutes

Goods that are not consumed jointly Goods that are related in such a way that an increase in the price of one shifts the demand curve for the other rightward. Increase in price of Coke leads to increase in demand for Pepsi

Changes in Price of Related Goods

Substitutes

Suppose that the price of Coke rises from $1 to $1.50, then the demand for Pepsi will decrease from 75 to 100.
$1

D1 75 100

D2

Changes in the price of related goods

Complements

Goods that are related in a such a way that an increase in the price of one shifts the demand of the other leftward Two goods that are consumed jointly. An decrease in the price of one will increase demand for the other

Changes in Price of Related Goods

Complements

An decrease in the price of DVD players, increases the demand for DVDs Suppose that DVD players decrease in price from $145 to $100, now the demand for DVDs will decrease from 750 at $20 to 900.

$20

D 750 900

D2

Changes in Consumer Expectations

Such as expectations in

Prices and income Affect how consumers spend their money and their demand If product cheaper today than tomorrow, then increase in demand

Changes in consumer tastes

Consumer preferences likes and dislikes in consumption assumed to be constant along a given demand curve assumed constant along a given demand curve Changes in taste will cause a shift in the demand curve as different quantities are demanded at each and every price.

Changes in taste

Consumers prefer platform shoes. At $50, demand increases from 100 to 200.

$50

D 100 200

D2

Change in the number and composition of consumers - Population

The market demand curve is the sum of the individual demand curves. If the number of consumers falls then the sum will be smaller thus shifting the demand curve

Demand and the no. of buyers

An increase in the number of buyers results in an increase in demand.

Advertisement of the product

A certain amount of sales is possible even without any advertising Other things remaining the same, there is a direct relation between the extent of advertisement and the volume of sales Up to a point, an increase in advertisement will lead to a more than proportionate increase in sales. But beyond this point, a saturation point will be reached.

Income and demand: inferior goods

A good is an inferior good if an increase in income results in a reduction in the demand for the good.

Expectations

A higher expected future price will increase current demand. A lower expected future price will decrease current demand. A higher expected future income will increase the demand for all normal goods. A lower expected future income will reduce the demand for all normal goods.

Review of Demand

A change in quantity demanded is not a change in demand Change in quantity demanded is caused by a change in price Change in quantity demanded is a movement along the demand curve Change is demand is caused by a change in the determinants Change in demand shifts the demand curve

Elasticity of Demand - pg 34 of Ebook of Atmanand

Separate PPT by CA Sonali Jagath Prasad, Asst. Professor- Dept of Management

Supply

Producers side A relation between the price of a good and the quantity that the producers are willing and able to offer for sale during a given period, other things constant.

Law of Supply

The quantity of a good supplied during a given period is usually directly related to the price of the good Increase in price leads to increase in quantity supplied Decrease in price leads to decrease in quantity supplied. Creates upward sloping supply curve

Determinants for the Supply Curve

Changes in technology Changes in prices of relevant resources Changes in the prices of alternative goods Changes in Producer Expectations Changes in the number of producers

Supply Curve
Price

Price of Good $3 $4 $5

Quantity Demanded 6 50 75 100

Supply

$6
$7

150
200
Quantity