Managerial Economics & DEMAND
Analysis of Demand & Supply &
Market Equilibrium
Concept of Market A market is a mechanism by which
buyers and sellers interact to determine the price and quantity of a good or service
Demand side of the market for a product refers to all its consumers and the price they are willing to pay for buying a certain quantity of a product during a period of time.
What is Demand??? Demand is the desire or want
backed up by money
Always related to price and time
Statement of Law of Demand“All other things remaining constant, higher the price of a commodity, smaller is the quantity demanded and lower the price, larger the quantity demanded”
Dx = f (Px)
Reasons for Inverse Relationship Income effect- the decline in the price of a commodity
leads to an equivalent increase in the income of a consumer because he has to spend less to buy the same quantity of goods. The part of the money left can be used for buying some more units of commodity. For e.g.- suppose the price of mangoes falls from Rs.100/- per
dozen to 50/- per dozen. Then with the same amount of 100/- you can buy one more dozen, i.e.,2 dozens at Rs. 50/-
Substitution effect- When the price of a commodity falls, the consumer tends to substitute that commodity for other commodity which is relatively expensive. For e.g. – Suppose the price of the Urad falls, it will be used by
some people in place of other pulses. Thus the demand will increase.
Assumptions Underlying the Law No change in Consumer’s Income No change in Consumer’s
Preferences No change in Fashion No change in Price of related goods No Expectation of future price
changes or shortages
Individual Demand Schedule
Tabular representation of Quantity of a commodity that an individual is willing and able to purchase over a given period of time at each price of the commodity, while holding constant all other relevant economic variables on which demand depends.
Individual Demand Schedule
Price of Com X(Rs per kg)
Quantity demanded of Com X (Qty in kg)
80 2
70 4
60 6
50 10
Market demand ScheduleTabular representation of Quantity of a commodity that all individuals are willing and able to purchase over a given period of time at each price of the commodity, while holding constant all other relevant economic variables on which demand depends.
Market Demand SchedulePrice in (Rs) Units of Commodity X Market
demanded per day Demand by Individuals or Total A B C
4 1 1 3 53 2 3 5 102 3 5 7 151 5 9 10 24
Determinants of Individual Demand Income Price of Substitute & Complementary
products Taste & Preferences Advertisement Expectation regarding future price
changes Climatic Conditions
Determinants of Market Demand Price of Product Distribution of Income & wealth Community’s Common Habits and Scale of
Preferences Spending Habits of People Growth of Population Age Structure and Sex ratio of Population Future Expectations Level of Taxation Fashions Climate Conditions Customs Advertisement
Multivariate Demand Function
Dx = D (Px, Py, Pz, B, W, A, E, T, U)
Here Dx, stands for demand for item x (say, a car) Px, its own price (of the car) Py, the price of its substitutes (other brands/models) Pz, the price of its complements (like petrol) B, the income (budget) of the purchaser (user/consumer) W, the wealth of the purchaser
A, the advertisement for the product (car) E, the price expectation of the user T, taste or preferences of user U, all other factors.
Demand equation D= a – bP Where ‘a’ is constant parameter
signifying initial demand irrespective of price
‘b’ represents slope of demand curve functional relationship between price
and demand, having minus sign denotes negative function
Exceptions to Law of Demand
Conspicuous consumption – The goods which are purchased for ‘Snob appeal’ are
called as the conspicuous consumption. For e.g.- diamonds. They are the prestige goods. They would like to hold it only when they are costly and rare.
Speculative market: in this case the higher the price the higher will be the
demand. It happens because of the expectation to increase the price in the future.
For e.g. shares, lotteries
Contd… Giffens goods: It is a special type of inferior goods where the fall in
the price results into the decrease In the quantity demanded. This happens because of people’s preference for superior commodity
Consumer’s Psychological bias: Many a times consumer judges the quality of a good
from its price. Such consumers may purchase high price goods because of the feeling of possessing a better quality.
The exceptional demand curve shows a positive relation between the price and the quantity demanded.
Shifts in Demand Curve Extension and Contraction of Demand occurs
due to changes in price, other factors remaining constant When more of a commodity is purchased with a fall in price
then it is known as extension of Demand and vice versa Refer to movement along same demand curve
Increase and Decrease in Demand refers to changes in demand due to factors other than price An increase in demand signifies that more will be purchased
at a given price than before . Refer to movement from one demand curve to another
Reasons for shifts (increase or decrease in Demand)
Changes in Income Changes in Taste, habits and Preferences Change in Fashions and Customs Change in Distribution of Wealth Change in Substitutes Change in demand for Complementary
goods Advertisement and Publicity Persuasion Change in level of taxation
Nature of Demand Demand for Consumer’s goods &
Producer's goods Autonomous & Derived Demand Demand for Durables and Non-
Durables (Perishables) Joint Demand and Composite
Demand
Supply Analysis Supply during a given period of time means
the quantities of goods which are offered for sale at particular prices
Supply is what seller is able and willing to offer for sale
Supply and Stock are related but distinct terms-Supply comes out of Stock
Stock determines potential supply Stock is outcome of production
Determinants of Supply Cost of factors of production State of Technology Factors outside Economic Sphere
such as weather conditions, natural calamities, etc
Tax and Subsidy
Law of Supply“Other things remaining same , supply of a commodity rises with a rise in price and falls with a fall in price”
Supply schedule
Assumptions : Cost of production is unchanged Technology is constant Govt policies are unchanged No change in Transport costs No speculation Prices of other goods constant
Positions: Supply Curve Extension and Contraction : refer to
change in supply due to price, other things remaining same. Movement along the supply curve
Increase and Decrease in Supply: refer to change in supply due to determinants other than price Shifts in Supply Curve
Causes for change in Supply
Change in Cost of Production Supply also depends on Natural
Factors Change in Technique of Production Policies of Government Business Combines
When market is in Equilibrium?
Equilibrium price of a commodity is price at which quantity demanded of commodity equals quantity supplied and market clears
Equilibrium is condition which once achieved tends to persist in time.
Equilibrium of Supply and Demand
S
D
E
D&S
Price
Excess Supply
Excess Demand
Effect of Shift in Supply or Demand Demand & Supply shifts
Effect on price and quantity
If demand rises
Demand curve shifts to right
Both P & Q increases
If demand falls Demand curve shifts to left
Both P & Q falls
If supply rises Supply curve shifts to right
P falls but Q increases
If supply falls Supply curve shifts to left
P increases & Q decreases
Simultaneous shifts of Supply and Demand
New equilibrium price and quantity may be greater than, equal or even less than initial equilibrium levels depending on the magnitude and direction of two curves
If both D & S shift to right by same amount , the equilibrium point shifts to right by same amount and hence equilibrium price remains same.
Impact of Excise tax on Price and Quantity
An excise is a tax on each unit of commodity
If collected from sellers tax causes supply curve to shift upward by the amount of tax
Result is that consumers purchase a smaller quantity at a higher price while sellers receive a smaller net price after payment of tax
Impact of Excise tax on Price and Quantity
D
S0
S1
E0
TaxE1
Q0Q1
T
PoP1
Impact of Rent Control on Housing Markets
Rent control is a type of price ceiling or maximum rent set below equilibrium price that government use for making rented housing affordable, however the effect has been opposite ie shortage of apartments
Rent Control create shortages
Shortage
S
D
E
1.2 1.6 2Millions of Apartments
$1400Monthly Rent$1000
$600
Thank You
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