Demand Analysis Ppt @ MBA BECDOMS

8/3/2019 Demand Analysis Ppt @ MBA BECDOMS

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Demand analysis

Firms sell goods/services to buyers

Consumers (individuals) : utility

Firms : make profits Willingness to pay: maximum price buyer

will pay for a good

Point of indifference between buying and not

buying

Lower price always preferred by buyer

Willingness to pay is determined by

Buyer¶s tastes or needs

Income and wealth Normal/inferior goods

Cyclical/acyclical demand

Substitutes

Complementary goods

Demand curve for an

individual buyer

Willingness to pay for

different quantities of the

Or, quantity demanded at

each price

Usually downward sloping:

lower willingness to pay for

additional units

Lower utility of

consumption for consumers

Lower productivity of

resources for firms

Shifts in demand curve

Market demand

Sum of individual demand curves

Aggregate quantity demanded at each price

Arrays individual buyers in order of willingness to pay

Identical goods? Product differentiation?

Market segments / Price discrimination

Different segments willing to pay different prices

Consumer surplus Can firms exploit this?

Feasible?

Price sensitivity of demand

Slope of market demand curve Flat demand curve: very price sensitive: Elastic

Goods with good substitutes

Luxury items ?

Steep demand curve: less sensitive: Inelastic Necessities

Time-frame: easier to

find substitutes over

long run

Demand curves

Accept as given?

Seek to modify?

Supply analysis

Supply curve

How much the firm will sell at each price

Assumption: price-taking firm Time-frame of supply decision

Long run: compete in the market at all?

Short run: how much to produce & sell?

Short run supply

Based on costs

Fixed costs: incurred regardless of volume

µheadquarter¶ costs, depreciation, rent, labor«.

Variable or marginal costs: cost per additional unit

produced

Raw materials, electricity, labor«.

In the short run, fixed costs are inevitable

Should not affect short run supply decisions (?)

Marginal costs

Cash costs: out-of-

pocket

Opportunity costs:foregone profits

Marginal cost curve :

Short run supply curve

Long run supply: entry & exit

Recover both fixed and variable costs

Fixed costs Out-of-pocket costs

Opportunity costs: return on capital

Shifts in supply curve

Input costs

Technology

Market supply curve Sum of individual supply curves

Usually slopes upward

Less efficient firms enter market when price is high

Arrays firms from most efficient to least

Market equilibrium

Interesection of marketdemand and supply curves

Disequilibrium will cause price to adjust and yield

new equilibrium

Real world: series of smalldisequilibriums, series of

price adjustments

Currency markets: rapid,continuous adjustments

Supply elasticity

Flat supply curve: very sensitive to price: Elastic

Steep supply curve: less sensitive: Inelastic Varies over the range of output

Elastic when spare capacity is available

Inelastic when capacity constrained

Profit calculation based on equilibrium price

Average and marginalcosts

Marginal costdetermines supply

volume Average costs at that

volume

Market adjustment

Shifts in demand and supply curves

Increase: shift to the right

Decrease: shift to the left

Impact on quantity and price

Inelastic curves: adjustment largely through price

Elastic curves: adjustment largely through quantity

Short run versus long run

Perfect competition

Three assumptions:

1. Identical products

any small price-taking buyers and sellers3. Full information

Excess profits more firms enter

increased supply lower price zero

excess profits

Three more

conditions:

1. Identical sellers

2. Free entry

3. Free exit

Zero excess profits

Long run profitability?

Departures from perfect competition

Most markets have far from perfect competition

Exceptions: commodities

Secret of long run profitability: deviations from

perfect competition

Few sellers or buyers

Extreme case: monopoly or monopsony

Oligopoly Collusion

Cartels: incentives to cheat the cartel

Societal impact: anti-trust regulation

Entry and exit barriers

First mover advantage

Headstart on learning curve

Economies of scale

Reputation and branding

High exit costs

May lead to firms accepting sustained losses

Product differentiation

Special attributes: Real or imaginary

Differences among

sellers

Least cost producer

Innovation

Imperfect information

Search costs protect

existing relations and

discourage competition

Demand Analysis Ppt @ MBA BECDOMS

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