Demand and Supply Analysis

Demand and Supply Analysis 1. Demand indicates how much of a good consumers are willing and able to buy at each possible price during a given time period, other things constant. 2. The process to satisfy human wants/ needs/desires. * Want: having a strong desire for something * Need: lack of means of subsistence * Desire: an aspiration to acquire something 3. Demand: effective desire 4. Demand is that desire which backed by willingness and ability to buy a particular commodity. 5. Amount of the commodity which consumers are willing to buy per unit of time, at that price. 6.

Things necessary for demand: * Time * Price of the commodity * Amount (or quantity) of the commodity consumers are willing to purchase at the price Demand Analysis Demand for a particular commodity implies: 1. Desire of the customer to buy the product; 2. The customers willingness to buy the product; 3. Sufficient purchasing power in the customers possession to buy the product. The analysis of market demand enables business executives know: 1. The factors determining the size of consumer demand for their products; 2. The degree of responsiveness of demand to changes in its determinants; 3.

The possibility of sales promotion through manipulation of prices; 4. Responsiveness of demand to advertisement expenditures; and, 5. Optimum levels of sales, inventories, and advertisement expenditures. Demand & Supply 1. Supply and Demand analysis is in many ways the cornerstone of economics. 2. The relationship between demand and supply underlie the forces behind the allocation of resources. In market economy theories, demand and supply theory will allocate resources in the most efficient way possible. Demand Curves and Schedules 1.

Demand curves isolate the relationship between quantity demanded and the price of the product, while holding all other influences constant (in latin: ceteris paribus) 2. Demand Schedule: A table that illustrates the alternative quantities of a commodity demanded at different prices. Demand Schedule: 1. A demand schedule is a numerical tabulation that shows the quantity of demeaned commodity at different prices. 2. The demand schedule may be of 2 types : 3. Individual demand Schedule 4. Market demand Schedule. Demand Schedule & Demand Curve for Pizza (a) Demand Schedule (a) Demand Schedule Price per Quantity Demanded

Pizza per Week (millions) a) $15 8 b) 12 14 c) 9 20 d) 6 26 e) 3 32 (b) Demand Curve e d c b $0 $3 $6 $9 $12 $15 $18 8 14 20 26 32 Millions of Pizzas per week Price per Pizza a The demand schedule lists possible prices, along with quantity demanded at each price. The demand curve at the right shows each price / quantity combination listed in the demand schedule as a point on the demand curve. * Interdependence between demand for a product and its determinants can be shown in a mathematical functional form * Dx = f(Px, Y, Py, T, A, N) Independent variables: Px, Y, Py, T, A, N * Dependent variable: Dx * Px: Price of x * Y: Income of consumer * Py: Price of other commodity * T: Taste and preference of consumer * A: Advertisement * N: Macro variable like inflation, population growth, economic growth Law of demand Says that quantity demanded varies inversely with price, other things constant. The higher the price, the smaller the quantity demanded. The lower the price, the larger the quantity demanded. Types of Goods A. Related to Income 1. Inferior good 2. Normal good 3. Superior good 4. Luxury good 2. Related to Price . Ordinary good 2. Giffen good 3. Veblen good (or ostentatious goods) Types of Demand 1. Direct and Derived Demands 2. Domestic and Industrial Demands 3. Autonomous and Induced Demand 4. Perishable and Durable Goods’ Demands 5. New and Replacement Demands 6. Final and Intermediate Demands 7. Individual and Market Demands 8. Total Market and Segmented Market Demands 9. Short-term and Long-term Demand 10. Complementary and Competing Demand Determinants of demand: 1. Price of the product * Single most important determinant * Negative effect on demand * Higher the price-lower the demand . Income of the consumer * Normal goods: demand increases with increase in consumer’s income * Inferior goods: demand falls as income rises 3. Price of related goods * Substitutes * If the price of a commodity increases, demand for its substitute rises. * Complements * If the price of a commodity increases, quantity demanded of its complement falls. Law of demand may not operate due to the following reasons: 1. Giffen Goods 2. Snob Appeal (Veblen effect) 3. Bandwagon effect (Demonstration effect) 4. Future Expectation of Prices (Panic buying) * Addiction * Neutral goods Life saving drugs * Salt Demand curve focuses on the relationship between the price of a good and the quantity demanded when other factors that could affect demand remain unchanged * Money income of consumers * Prices of related goods * Consumer expectations * Number and composition of consumers in the market * Consumer tastes Suppose income increases: some consumers will now be able to buy more pizza at each price ? market demand increases ? demand shifts to the right from D to D’ A decrease in demand will mean demand shifts to the left from D’ to D. Supply 1.

Supply indicates how much of a good producers are willing and able to offer for sale per period at each possible price, other things constant 2. Indicates the quantities of a good or service that the seller is willing and able to provide at a price, at a given point of time, other things remaining the same. * Supply of a product X (Sx) depends upon: * Price of the product (Px) * Cost of production (C) * State of technology (T) * Government policy regarding taxes and subsidies (G) * Other factors like number of firms (N) * Hence the supply function is given as: Sx = (Px, C, T, G, N) 3.

Supply refers to the relation between the price and quantity supplied as reflected by the supply schedule or the supply curve 4. Quantity supplied refers to a particular amount offered for sale at a particular price, a particular point on a given supply curve 5. The relationship between the price of a product and the quantity supplied, holding all other things constant is generally sloping upwards. Supply is represented by the entire curve and not just one point on the curve. Supply Schedules 1. A table that contains values for the price of a good and the quantity that would be supplied at that price. . If the data from the table is charted, it is known as a supply curve. Law of Supply 1. Law of Supply states that other things remaining the same, the higher the price of a commodity the greater is the quantity supplied. 2. Price of the product is revenue to the supplier; therefore higher price means greater revenue to the supplier and hence greater is the incentive to supply. 3. Supply bears a positive relation to the price of the commodity. Supply Schedule Point on Supply Curve| Price (Rs. Per cup)| Supply (‘000 cups per month)| A| 15| 10| B| 20| 20| C| 25| 30| D| 30| 45|

E| 35| 60| Factor that Influences Supply The major factor that influences supply is the “cost of production”, and includes: * Input prices * Technology * Individual supply refers to the supply of an individual producer * Market supply is the sum of individual supplies of all producers in the market * Unless otherwise noted, we will be referring to market supply Determinants of supply other than the price of the good 1. State of technology 2. Prices of relevant resources 3. Prices of alternative goods 4. Producer expectations 5. Number of producers in the market Demanders and suppliers have different views of price * Demanders, consumers, pay the price * Suppliers, sellers, receive the price * As price rises, consumers reduce their quantity demanded along the demand curve, and producers increase their quantity supplied along the supply curve * Sort out the conflicting price perspectives of individual participants – buyers and sellers * Represent all arrangements used to buy and sell a particular good or service * Reduce transaction costs of exchange –costs of time and information required for exchange

Equilibrium 1. When the quantity consumers are willing and able to pay equals the quantity producers are willing and able to sell, the market reaches equilibrium 2. Independent plans of both buyers and sellers exactly match 3. Market forces exert no pressure to change price or quantity Changes in Equilibrium Concept Map of the Supply and Demand Model

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