3 -understanding demand

7/23/2019 3 -Understanding Demand

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Understanding Demand

Dr.Sunitha. S

Assistant ProfessorSchool of Management Studies,

National Institute of Technology (NIT)alicut


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Overview

Market (who, what, how)

Supply and demand is an economic model

Designed to explain how prices are

determined in certain types of markets What you will learn in this session

ow the model of supply and demandworks and how to use it

!" #he law of demand

$" #he law of supply

%" #he determination of market e&uili'rium

" actors shifting demand or supply cur*es


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Markets

+n economics, a market is not a place 'utrather a group of 'uyers and sellers withthe potential to trade with each other Market is dened not 'y its location 'ut 'y

its participants

irst step in an economic analysis is to deneand characteri-e the market or collection ofmarkets to analy-e

.conomists think of the economy as a

collection of indi*idual markets


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/uyers and Sellers

/uyers and sellers in a market can 'e ouseholds /usiness rms

0o*ernment agencies 1ll three can 'e 'oth 'uyers and sellers in the

same market, 'ut are not always

or purposes of simplication this text willusually follow these guidelines

+n markets for consumer goods, we2ll *iew'usiness rms as the only sellers, andhouseholds as only 'uyers

+n most of our discussions, we2ll 'e lea*ing outthe 3middleman4


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5sing Supply and Demand

Supply and demand model is designed toexplain how!rices are determinedincom!etiti"emarkets

Supply and demand is one of the most*ersatile and widely used models in theeconomist2s tool kit


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Demand

/y denition demand refers todesirefor a commodity 'acked 'yabilityand willingness to pay

for it in a gi*en period of time"#he D.6.7D.7# *aria'le is the

&uantity demanded"

#he +7D.6.7D.7# *aria'le is thegood2s own price"


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Demand

A households&uantity demanded of a good Specic amount household would choose to 'uy

o*er some time period, gi*en

1 particular price that must 'e paid for the good

1ll other constraints on the household Market &uantity demanded (or &uantity

demanded) is the specic amount of a goodthat all 'uyers in the market would choose to'uy o*er some time period, gi*en

1 particular price they must pay for the good

1ll other constraints on households


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#he Demand unction8#he Demand unction8

Some DenitionsSome Denitions

#he relationship 'etween &uantity consumed and the#he relationship 'etween &uantity consumed and thefactors determining that8 D 9 f (6, 6factors determining that8 D 9 f (6, 6SS, 6, 6::, +, ., #, etc"), +, ., #, etc")

;;

PricePrice

of the good in &uestion 6rices of related goods (su'stitutes and complements)6rices of related goods (su'stitutes and complements)

>> +ncome of 'uyers+ncome of 'uyers>>#astes (preferences) of 'uyers#astes (preferences) of 'uyers

>> .xpectations held 'y 'uyers, regarding the future.xpectations held 'y 'uyers, regarding the future

>> =ther matters particular to a certain good=ther matters particular to a certain good


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Demand unctions

6rice of the commodity (Px)

+ncome of the :onsumer (Y)

:onsumer2s taste and preference (T)

6rice of related commodities (Pr)

:onsumer .xpectation

Si-e and composition of population

1d*ertising and Sales 6romotion

=ther actors e"g", natural calamitiesQdx = !Px" Pr "Y " T" #" $)


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Demand Schedule8 a ta'ularpresentation showing di?erent&uantities of a commodity that

would 'e demanded at di?erentprices"


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Demand Scheduleand Demand :ur*e

Price perunit

QuantityDemandedper Week(millions)

a 15 8

b 12 14

c 9 20

d 6 26

e 2


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@aw of Demand

#he law o demandsays that&uantity demanded *ariesin*ersely with price, other things

constant"#hus, the higher the price, the

smaller the &uantity demanded"


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#he Demand :ur*e

Number of packetsper Month

Priceper

packet

A

B

!s 4"00

2"00

D

40#000 60#000

$t !s 2"00 per packet #

60#000 packets are

demanded (point %)"

W&en t&e price is !s

4"00 per packet# 40#000packets are demanded(point $)"


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Why does the demand cur*eSlope Downwards to the

AightB +ncome .?ect 1n increase in

demand on account of

increase in real income isknown as income e?ect"

Su'stitution .?ect

diminishing marginal utility


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.xceptions to the @aw ofDemand

1nti&ue C other collection

0old, diamond etc

0i?en paradox8 +n /ritain, Ao'ert

0i?en o'ser*ed that low paid/ritish wage earners demandedmore potatoes when its price

increased" :onspicuous consumption


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#ypes of Demand

+ndi*idual demand

Market demand

+ncome demand

:ross demand

Direct Demand

Deri*ed Demand


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3Shifts4 *s" 3Mo*ements 1long4#he Demand :ur*e

Mo*e along the demand cur*e rom a change in the priceof the good we

analy-e 1 fall in price would cause a mo*ement to the

right along the demand cur*e (point 1 to /)


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Mo*ement along demand cur*e s" Shift indemand cur*e8

Distinction 'etween change in &uantitydemanded and change in demand"

:hange in &uantity demanded When

&uantity demanded changes ( rise or fall ) asa result of change in price alone, otherfactors remaining the same"

:ontractionEfall in &uantity demanded .xtensionEAise in &uantity demanded The change is depicted% represented by

the mo&ement up or down on a gi&endemand cur&e' This does not re(uiredrawing a new demand cur&e'


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Mo*ements 1long and Shifts of#he Demand :ur*e

Quantity

Price

P2

Q2

Q1

Q3

P1

P3

Price increase mo'es usletard alongdemand

cur'e

Price decrease mo'esus ri*&tardalong

demand cur'e


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3Shifts4 *s" 3Mo*ements 1long4 #heDemand :ur*e

Shift of demand cur*e a change in other things than price of the

good causes a shift in the demand cur*eitself, for example, income

+n igure $ Demand cur*e has shifted to the right of the

old cur*e (from igure !) as income has risen

1 change in any *aria'le that a?ects demand


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1 Shift of #he Demand :ur*e

B C2"00

60#000 80#000

D1

D2

$n increase in incomes&its t&e demand cur'e

rom D1to D

2"

Number ofPackets per

Month

Priceper

packet

$t eac& price# morepackets are demanded

ater t&e s&it


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3:hange in Fuantity Demanded4 *s"3:hange in Demand4

When a change in the price of a goodmo*es us along a demand cur*e, it isa change in &uantity demand

When something other than pricechanges, causing the entire demandcur*e to shift, it is a change in demand


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+ncome8 actors #hat Shift #he Demand:ur*e

1n increase in income has e?ect ofshifting demand for normal goods to theright owe*er, a rise in income shifts demand for

inferior goods to the left 1 rise in income will increase the demand

for a normal good, and decrease thedemand for an inferior good

7ormal good and inferior good aredened 'y the relation 'etween demandand income


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Wealth8 actors #hat Shift #heDemand :ur*e

Gour wealth


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6rices of Aelated 0oods8 actorsthat Shift the Demand :ur*e

Su'stitute


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=ther actors #hat Shift theDemand :ur*e

6opulation 1s the population increases in an area

7um'er of 'uyers will ordinarily increase Demand for a good will increase

.xpected 6rice 1n expectation that price will rise (fall) in the future

shifts the current demand cur*e rightward (leftward) #astes

:om'ination of all the personal factors that go intodetermining how a 'uyer feels a'out a good

When tastes change toward a good, demandincreases, and the demand cur*e shifts to the right

When tastes change away from a good, demanddecreases, and the demand cur*e shifts to the left


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Small SummaryHH actors 1?ecting Demand Income (depends on good2s nature8

normal or inferior)

Wealth (depends on good2s nature)

Prices ofsu#stitutes(positi*ely related) Prices of com!lements(negati*ely

related)

Po!ulation (positi*ely related)

$%!ected !rice(positi*ely related)

Tastes(positi*ely related)


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Quantity

Price

D2

D1

+ntire demand cur'e s&itsri*&tard &en,

-income or ealt& -price o su.stitute /

-price o complement -population /

-epected price /-tastes s&it toard *ood


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Quantity

Price

D1

D2

+ntire demand cur'e s&itsletard &en,

-income or ealt& -price o su.stitute

-price o complement /-population

-epected price -tastes s&it toard *ood


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Supply

1 rm2s &uantity su!!liedof a good is thespecic amount its managers would chooseto sell o*er some time period, gi*en 1 particular price for the good

1ll other constraints on the rmMarket&uantity supplied (or &uantity

supplied) is the specic amount of a goodthat all sellers in the market would chooseto sell o*er some time period, gi*en

1 particular price for the good 1ll other constraints on rms


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#he @aw of Supply

#he la' of su!!lyholds that otherthings e&ual, as the price of a goodrises, its &uantity supplied will rise,

and *ice *ersa" Why do producers produce more

output when prices riseB

#hey seek higher prots

#hey can co*er higher marginal costsof production


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Supply :ur*e

#he supply cur*e has a positi*e slope,consistent with the law of supply"


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Shift in the Supply :ur*e

or an gi*en rental price, &uantity supplied is nowlower than 'efore"


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Fuantity Supplied

+mplies a choice Fuantity that gi*es rms the highest possi'le prots when

they take account of the constraints presented to them 'ythe real world

+s hypothetical

Does not make assumptions a'out rms2 a'ility to sell the

good ow much would rms2 managers want to sell, gi*en the

price of the good and all other constraints they mustconsiderB

Stresses price

#he price of the good is Iust one *aria'le among many that

inJuences &uantity supplied We2ll assume that all other inJuences on supply are heldconstant, so we can explore the relationship 'etween priceand &uantity supplied


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#he @aw of Supply

States that when the price of a good risesand e*erything else remains the same,the &uantity of the good supplied will rise#he words, 3e*erything else remains the

same4 are important +n the real world many *aria'les changesimultaneously

owe*er, in order to understand the economy wemust rst understand each *aria'le separately

We assume 3e*erything else remains the same4

in order to understand how supply reacts to price


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#he Supply Schedule and #heSupply :ur*e

Supply schedule


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#he Supply :ur*e

F

G

2"00

S

40#000 60#000

!s4"00

$t !s 4"00 per packet#uantity supplied is

60#000 packets(pointG)"

W&en t&e price is !s 2"00 perpacket# 40#000 are supplied

(point F)"

Number ofPackets per

Month

Priceper

Packet


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Shifts *s" Mo*ements 1long theSupply :ur*e

1 change in the price of a good causes amo*ement along the supply cur*e

1 rise (fall) in price would cause a rightward(leftward) mo*ement along the supply cur*e

1 drop in transportation costs will cause a shift inthe supply cur*e itself +n igure K

Supply cur*e has shifted to the right of the oldcur*e (from igure ) as transportation costs ha*edropped

1 change in any *aria'le that a?ects supply

3 -understanding demand

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