me - demand and supply- final

7/28/2019 ME - Demand and Supply- Final

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Demand and SupplyCA Sonali Jagath Prasad

B.Com., ACMA, CGMA

Module 2

P

Q

D

S


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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 totalmarket or industry demand for a commodity

which in turn is the sum of demands for the

commodity of individual consumers in market


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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


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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 thatconsumers 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


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Types of DemandBusiness decisions1. Individual and Market demand

2. Demand for Firms product and Industrys product

3. Autonomous and derived demand

4. Demand for Durable and Non Durable (Perishable) goods

5. Consumer goods and Producer goods

6. Demand by Market segment and by total market

7. Short run demand and long run demand

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


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Demand Individual demand

The demand of an individual consumer

Market demand Sum of individual demands of all consumers in

the market


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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 utilityLaw of diminishing marginal

utility


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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


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Demand Function Chief characteristics of the Law of demand are:

1. Inverse Relation

2. Price, an independent variable and demand, a dependent

variable

3. Other things remain the same

4. Reasons underlying the Law of Demand

Income effect

Substitution effect


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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 demandedincreases

Creates a downward sloping demand curve


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Exceptions to Law of demand

Status goodsVeblen goods like diamonds, gold, precious

stones, etc

Expectations regarding further pricesspeculative market

Giffen goods - A giffen good may be an inferior commoditymuch cheaper than its superior substitutes, consumed by the

poor households as an essential commodity


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Demand Schedule and Curve

Demand curve:

a curve showing the

relation between the

price of a good andquantity demanded

during a given period,

other things constant.

Suppose we are makingpizza.

Price of

Good

Quantity

Demand

ed$3 200

$4 150

$5 100$6 75

$7 50


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Why?

Substitution Effect

Unlimited wants/scarce resources

When the price of a good falls, consumerssubstitute that good for other goods, which

become relatively more expensive.

Reverse also holds true


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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.


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Demand Curve

Price

Quantity0

$3

$4

$5

$6

50 75 100 150 200

Demand

Point on the line that matches the scheduleEvery 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.


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Market demand curve

Market demand is the horizontal summation of

individual consumer demand curves


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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 goodssubstitutes and complements or

supplements3. Level of consumers income

4. Consumers taste and preference

5. Advertisement of the product

6. Consumers expectations about future price and supply position7. Demonstration effect and band-wagon effect

8. Consumer credit facility

9. Population of the Country

10. Distribution pattern of national income


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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.


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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


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Quantity

Price

0

$5

100

Demand

$6

75

Movement along the Demand Curve

A

B


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Shifts in the Demand Curve

Also known as Increase and Decrease in

demand

A demand curve isolates the relation betweenprices of a good and quantities demanded

when other factors that could affect demand

remain unchanged. Factors called assumptions or determinants


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Shifts in demand curve

Increase in demand

At each and every price

MORE of the good is

demanded

Shifts to the right

D1

$5

D2

A B

Price

Quantity100 150

P Qd1 Qd2

$4 150 200

$5 100 150

$6 75 100


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Change in quantity demanded vs.

change in demandChange in quantity demanded Change in demand

(Shift in Demand Curve)


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SHIFTS IN DEMAND CURVE

INCREASE IN DEMANDANALYSED


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Consumer Income

Increase in consumer

income

Causes consumers to

buy more of the productat each and every price.

Normal goods

Inferior goods


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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
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Changes in Price of Related Goods

Substitutes Goods that are not

consumed jointly

Goods that are related insuch a way that an increasein the price of one shifts thedemand curve for the otherrightward.

Increase in price of Cokeleads to increase indemand for Pepsi
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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 decreasefrom 75 to 100.

D2

$1

100

D1

75


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Changes in the price of related goods

Complements Goods that are

related in a such away that an increase

in the price of oneshifts the demand ofthe other leftward

Two goods that areconsumed jointly.

An decrease in theprice of one willincrease demandfor the other
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Changes in Price of Related Goods Complements

An decrease in theprice of DVD players,increases the demand

for DVDs Suppose that DVD

players decrease inprice from $145 to$100, now thedemand for DVDs

will decrease from750 at $20 to 900.

D

$20

750 900

D2


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Changes in Consumer Expectations

Such as expectations in

Prices and income

Affect how consumersspend their money and

their demand

If product cheaper

today than tomorrow,

then increase in demand
http://www.yahoo.com/


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Changes in consumer tastes Consumer preferences

likes and dislikes inconsumption assumed to

be constant along a given

demand curve assumedconstant along a givendemand curve

Changes in taste will

cause a shift in thedemand curve as differentquantities are demandedat each and every price.
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Changes in taste

Consumers

prefer platform

shoes. At $50, demand

increases from

100 to 200. D

$50

100

D2

200


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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 sumwill be smaller thus shifting the demand curve


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Demand and the no. of buyers

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


36/44

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. Butbeyond this point, a saturation point will be reached.


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Income and demand: inferior goods A good is an inferior good if an increase in

income results in a reduction in the demand forthe good.


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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 thedemand for all normal goods.


39/44


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Elasticity of Demand - pg 34 of E-

book of Atmanand Separate PPT by CA Sonali Jagath Prasad, Asst.

Professor- Dept of Management


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Supply

Producers side

A relation between the price of a good and the

quantity that the producers are willing andable to offer for sale during a given period,

other things constant.


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Law of Supply

The quantity of a good supplied during a

given period is usually directlyrelated to the

price of the good Increase in price leads to increase in quantity

supplied

Decrease in price leads to decrease in quantitysupplied.

Creates upward sloping supply curve


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Supply CurvePrice of

Good

Quantity

Demanded

$3 50

$4 75

$5 100

$6 150

$7 200

Supply

Quantity

Price

6

5

me - demand and supply- final

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