The Demand and Supply Curve Economic Model

• Objectives:– Understand the demand curve

– Understand the supply curve

– What happens when supply and demand meet and what causes an increase or decrease in one or the other?

Can of Coke

• How much are you willing to pay for an ice cold can of Coca Cola, that I will allow you to drink in class? 100, 20, 13, 8, 5 , 50 centimos

• Let´s graph the result, and see what we have

Demand for Cusquena

Price Units sold

$1.00 500,000

$1.50 400,000

$2.00 300,000

$2.50 200,000

$3.00 100,000

Cusquena is intending to launch a new citrus flavoured beer onto the market.

They have undertaken market research that has shown them how many units they can expect to sell at a range of different prices. The results can be seen below:

The Demand Curve

• As the price increases (goes up) the quantity demanded decreases (goes down) = MOVEMENT ALONG THE CURVE

• However, some things can actually move the curve, examples:– Changes in income (how much they people get paid)– Changes in consumer preference– Competitor prices

Movement (increase or decrease) of the demand curve

Practice: • In which direction (right = increase or left = decrease) does the

demand curve move in the following situations:

– You have a very successful advertisement on TV

– The government increases income taxes

– Their product is found to be harmful to your health

The Supply Curve

• How much you would have to be paid (in soles, by other students) to be make a Mother´s Day Card that you will make yourself (to sell to other students for their moms)

• For each card? 250 soles, 40 soles, 20 soles,

8 soles, 4 soles, 1 sol What do we have? Go to next slide

The Supply Curve

• As the price increases, supply increases = MOVEMENT ALONG THE CURVE

• However, some things can actually move the supply curve to the right (= increase) or

to the left (= decrease)– Raw materials become cheaper– New machinery– Labor costs go up– Energy costs increase

Putting the Demand and Supply Curves Together

• We drew a demand curve

• We drew a supply curve

• When we put them together we have a model for a MARKET FOR A PARTICULAR GOOD OR SERVICE, WHERE BUYERS (DEMAND) AND SELLERS (SUPPLY) MEET

Demand and Supply Curves meet

• The point of equilibrium, where the two curves meet, or market clearing price (point A) is where the quantity demanded equals the quantity supplied at a certain price

Now, how do the four different possibilities look?

1. Increase in demand - DEMAND CURVE SHIFTS TO THE THE RIGHT INCREASE IN INCOME, DECREASE IN TAXES, INCREASE IN THE PRICE OF FANTA, ESPECIALLY HOT WEATHER

• END UP AT EQUILIBRIUM POINT B, with a higher price and a higher quantity demanded

Decrease in Demand

2. Decrease in demand - DEMAND CURVE SHIFTS TO THE LEFT INCREASE IN TAXES, DECREASE IN INCOME, A NEW JOB THAT PAYS LESSS,

DECREASE IN PRICE OF COMPETITORS PRODUCT (FANTA), COLD WEATHER ALL SUMMER

END UP AT EQUILIBRIUM POINT C, with a lower price and lower quantity demanded

Increase in Supply

• 3. Increase in supply - SUPPLY CURVE SHIFTS TO THE RIGHT RAW MATERIALS TO MAKE THE MOTHERS DAY CARD ARE CHEAPER, YOU

GET SOME NEW SCISSORS OR MARKERS OR TAKE AN ART CLASS ANY OF WHICH MAKE YOU ABLE TO MAKE THE CARDS QUICKER, YOUR TEACHERS GIVE YOU EXTRA TIME TO MAKE THE CARDS IN CLASS, FOR COKE COULD BE A NEW DISCOVERY THAT MAKES THE PROCESSS TO MAKE COKE CHEAPER, OR THE TAXES THEY HAVE TO PAY TO THE GOVERNMENT DECREASE, OR THEIR WORKERS BECOME MORE EFFICIENT IN MAKING COKE

• END UP AT EQUILIBRIUM POINT E, with a higher price and lower quantity demanded

Decrease in Supply

Decrease in supply – SUPPLY CURVE SHIFTS TO THE LEFT THE COST OF THE RAW MATERIALS INCREASE, YOUR SCISSORS BREAK AND YOU HAVE TO USE OLD SCISSORS OR BAD MARKERS, OR YOUR TEACHERS DONT GIVE YOU ANY TIME TO MAKE THE CARDS IN CLASS. FOR COKE, COULD BE INCREASE IN THE TAXES THEY HAVE TO PAY, OR THEIR MACHINERY BREAKS, OR THEIR EMPLOYEES SAY THEY WANT TO BE PAID MORE MONEY..

END UP AT EQUILIBRIUM POINT F, with a lower price and lower quantity demanded

Next Step, Price Elasticity of Demand

• Measures the responsiveness of demand following a change in price =

percentage change in quantity demanded percentage change in price

Price Elasticity of Demand

• Example: % change in demand is 10, % change in price is 25 centimos

PED = 10 = .4 25

This .4 PED means that demand changes .4% for every 1.0% change in price

Things that determine price elasticity

• How necessary the product is

• How many similar products there are

• The level of consumer loyalty to the product

• The price of the product as a proportion of the consumer´s income

Price Elasticity of Demand• If it is zero – NO CHANGE IN DEMAND WITH CHANGES IN PRICE = Perfectly

inelastic demand (in reality, no product has zero elasticity)

• If it is betwen 0 and 1 = CHANGE IN DEMAND IS LESS THAN THE CHANGE IN PRICE = Inelastic demand (insulin for a diabetic, bottled water after an earthquake, electricity, but it also could be something like opera tickets, which wealthy people buy)

• If it is 1 = ONE FOR ONE CHANGE = unitary elasticity (movie theatre tickets, expensive desert at a nice restuarant)

• If it is greater than 1 = CHANGE IN DEMAND IS MORE THAN THE CHANGE IN PRICE = Elastic demand (economy air travel, new shoes, Pepsi or Fanta)

What does it mean?

• Companies can use PEDs for sales forecasts or pricing decisions

• But PEDs can change and they are difficult to calculate

• WE WILL RETURN TO THIS TOPIC WHEN WE TALK ABOUT PRICE (4 Ps of the Marketing Mix)