Demand & Supply

DEMAND ANALYSIS

Demand Analysis
n

Why Demand analysis is needed?

n n n n n

An anchor for the pricing policy Sales forecasting Demand manipulation Production planning and product improvement Reflects competitive position of the firm in the market

Demand
n

Meaning of Demand
Demand = Desire + Ability + willingness

Types of Demand.
Individual demand Market Demand

Determinants of Demand
n n n n n n n

Price of the commodity Income of Consumers Consumers tastes and preferences Price of related goods Future expectations of a consumer Population Credit and discount facilities

The Demand Function

n

Includes all variables that influence the quantity demanded Q = f( P, Ps, Pc, Y, N, PE)

P is price of the good PS is the price of substitute goods PC is the price of complementary goods Y is income, N is population, PE is the expected future price

Demand Schedule and Demand Curve

Demand schedule :

List or Tabular presentation of

Possible prices Quantity demanded at each price

Demand curve:

Graphical presentation of demand schedule

Downward slope

The demand schedule and demand curve

(a) Demand schedule
15

(b) Demand curve

a b c d e D 0 8 14 20 26 quantity 32

a b c d e

15 12 9 6 3

8 14 20 26 32

The demand D shows the quantity demanded, at various prices, by all consumers. Price and quantity demanded are inversely related.

Price per unit

Price per Unit (Rs.)

Quantity Demanded Per week

12 9

6 3

Law of Demand

If all other factors remain constant, the higher the price of a commodity, the smaller is the quantity demanded and lower the price larger the quantity demanded

Assumptions of law of demand

n n n n n n n n

No change in consumers income No change in consumers preference No change in the fashion No change in the price of related goods No exception of future price changes or shortages No expectation in future demand No change in the size of population No change in climatic or weather conditions

Change in Quantity Demanded

Price An increase in price causes a decrease in quantity demanded.

P1 P0

Q1

Q0

Quantity

Change in Quantity Demanded

Price A decrease in price causes an increase in quantity demanded.

P0 P1 Q0 Q1 Quantity

Market Demand Curve: Horizontal summation of demand curves of individual consumers

The demand curve- movement along demand curve

a)Price Move rightward along the demand curve P A P1 P2 B P B P2 P1 D Q1 Q2 Q Q2 Q1 A b)Price Move leftward along the demand curve

D Q

Shift of the Demand Curve

P c)The Demand curve shifts rightward

D1 Q

D2

Income or wealth Price of substitute Price of complement Population Expected price Tastes shift toward good

Shift of the Demand Curve

P d)The Demand curve shifts leftward

D2 Q

D1

Income or wealth Price of substitute Price of complement Population Expected price Tastes shift away from good

Exceptions to the law of demand

n n n n n

Inferior goods/Giffen goods Articles of Snob appeal/Prestige goods Speculations/Fear Shortage Consumers psychological bias or illusion Fashion

SUPPLY ANALYSIS

Supply Analysis
n

Meaning of Supply
The

Amount of that commodity which the sellers( or producers) are able and willing to offer for sale at a particular price during a certain period of time.

Stock?
Supply comes out of stock Stock determines the potential supply

Determinant of Supply
n n n n

The cost factor of production The state of Technology Factors outside the economic sphere Tax and subsidy

Supply Function
Sx= f(Px, Pf, Py,Pz,O,T,t,s) Where, Sx=supply of commodity Px=the price of X Pf= the set prices of the factor inputs employed for producing X O= factors outside the economic sphere T= technology used, t=Tax, s= subsidy
n

Market Supply
n

Quantity supplied
number of units of a good n all sellers in the market would choose to sell n over some time period n given their constraints
n

Implies
n

a choice

the quantity that firms choose to sell n maximizing profit n given their constraints

The Law of Supply

n

When the price of a good rises, and everything else remains the same, the quantity of the good supplied will rise. Assumptions
Cost of production is unchanged n No change in technique of production n Fixed scale of production n Government policies are unchanged n No change in transport cost n No speculations n Price of other goods are held constant
n

Supply Schedule and Supply Curve

n

Supply schedule
n

list of different quantities supplied at different prices, if other things are constant

Supply curve
relationship between the price of a good and the quantity supplied, with all other variables held constant Each point on the curve n total quantity that sellers would choose to sell at a specific price Slopes upward - Law of Supply

The Supply Curve movement along the supply curve

Price When the price is 2.00 , 40,000 units are supplied S

4.00

G At 4.00, quantity supplied is 60,000 units

2.00

40,000

60,000

Quantity

Shifts of the Supply Curve

n

A change in any variable that affects supplyexcept for the goods price causes the supply curve to shift.
Sell

a greater quantity at any price

n

The supply curve shifts rightward (increase in supply) The supply curve shifts leftward (decrease in supply)

Sell

a smaller quantity at any price

n

Shifts of the Supply Curve

Price A decrease in transportation costs shifts the supply curve for goods from S1 to S2. At each price, more Quantity are S1 supplied after the shift. J S2

4.00

60,000

80,000

Quantity

Factors that Shift the Supply Curve

1.Input Prices
A

fall in the price of an input

lower cost of production n increase in supply (rightward shift)
n

2.Price of Alternatives
Other
n

goods that a firm could produce A rise in the price for an alternative
decrease in supply (leftward shift)

Factors that Shift the Supply Curve

3.Technology
technological
n

advances

increase the supply of a good

4.Number of Firms
An

increase in the number of sellers

n

increase supply

7.Expected price
An

expected rise in price

n

decrease the current supply (leftward shift)

Factors that Shift the Supply Curve

6.Changes in Weather/Other Natural Events
Favorable
n

weather

increases crop yields n increases the supply (rightward shift)

Unfavorable
n

weather

destroys crops, shrinks yields, n decreases the supply (leftward shift)

The Supply Curve

a)Price Move leftward along the supply curve P S b)Price Move rightward along P the supply curve

P1 P2 B

P2 P1

Q2 Q1

Q1

Q2

The Supply Curve

P S1 S2 Price of input Price of alternatives Number of firms Expected price Technological advance Favorable weather c)The Supply curve shifts rightward

The Supply Curve

P S2 S1 Price of input Price of alternatives Number of firms Expected price Unfavorable weather Q d)The Supply curve shifts leftward

Market Equilibrium
n

Equilibrium
both

P and Q have settled into a state of rest

Equilibrium price and quantity

once

achieved - remain constant until either the demand curve or supply curve shifts

Equilibrium
Price S E 3.00

1.00 D 25,000 50,000 75,000 Quantity

Excess Demand
n

The amount by which quantity demanded exceeds quantity supplied - at a given price
Buyers

compete with each other to get more of the good than is available The price will rise Equilibrium is reached

Excess Demand
Price 2. causes the price to rise . . S E 3.00 3. shrinking the excess demand until price reaches its equilibrium value of 3.00

1.00

Excess Demand 25,000 50,000 75,000

J D

1. At a price of 1.00 per Bottle, an excess demand of 50,000 bottles . . .

Quantity

Excess Supply
n

The amount by which quantity supplied exceeds quantity demanded - at a given price
Sellers

compete with each other to sell more than buyers want The price will fall Equilibrium is reached

Excess Supply
Price 1. At a price of 5.00 per bottle an excess supply of 30,000 bottles . . . Excess Supply 5.00 K E L 4. until price reaches its equilibrium value of 3.00 3. shrinking the excess supply . . . S

3.00

D 2. causes the price to drop 35,000 50,000 65,000 Quantity

What Happens When Things Change

Income rises n normal good n the demand increases (rightward shift of the demand curve)
n
Rightward

curve Equilibrium price rises Equilibrium quantity rises

movement along the supply

Income rises, causing an increase in D

Price 4. equilibrium price increases 3. to a new equilibrium S 4.00 3.00 E E' 1. An increase in demand . . . D2 D1 5. equilibrium quantity increases too 50,000 60,000 Quantity 2. moves us along the supply curve

What Happens When Things Change

Example - Weather changes will shift the supply curve

Decrease in supply (the supply curve shifts leftward)

Equilibrium

price rises Equilibrium quantity falls

Bad weather hits, decreasing the S

Price 5.00 S2 E' S1

3.00

D 35,000 50,000 Quantity

Both Curves Shift

n

Just one curve shifts (D or S)

we

can determine the direction that BOTH equilibrium price AND quantity will move

Both curves shift (D and S)

we

can determine the direction that EITHER equilibrium price OR equilibrium quantity will move direction of the other which curve shifts by more

Income rises and Bad weather hits

Price 6.00 S2 E' S1

3.00

E D2 D1 Quantity

Thank You