1. DEMAND AND SUPPLY

2. Staples and Office Depot Merger
• 1997, Staples and Office Depot wanted to
merge
• FTC analyzed the effect of proposed merger
on consumers.
• How would Staples’ lawyer argue the case?

3. Staples and Office Depot Merger
• Staples’ argued that you could buy office
supplies from any stationary store, Wal-Mart,
Kmart
• Computers from a number of small computer
stores and online
• Thus, merger would lead to a 6% market share

4. Staples and Office Depot Merger
• Would FTC have the same opinion?
• FTC argued that Staples and Office Depot
belonged to “one stop shopping for all office
supplies”.
• Three major players- Staples, Office Depot,
Office Max
• Merger would significantly increase prices

5. Market
• What constitutes a market is in the eye of the
beholder
• How to define a market?

6. What is a Market?
• Product
• Buyers
• Sellers
• They together (sometimes the Govt.) interact
(invisible hand).
• Market is not industry

7. Coca Cola Inc.

8. Coca Cola Inc.
• Coca Cola is reviewing price of Coke. How
should it view its market?
• Coke and Pepsi constitute about 80% of the
soft drinks market.
• So is this Coca Cola’s market?

9. Coca Cola Inc.
• “Stomach Share”- Coke’s share of portable
liquid that a human consumes
• Coca Cola accounts 3% of the total liquid
consumed by humans
• Competing with coffee, tea, hard liquid etc
• SSNIP Test- Small but significant non
transitory increase in price, test

10. SSNIP Test
• Identify smallest relevant market within which
the firm / cartel can exercise price increase
(“Relevant Market”)
• Smallest set of firms (including the concerned
firm/cartel) that can sustain an increase in
price of 5% for around a year

11. DEMAND SIDE OF MARKET

12. Coca Cola Inc.
• Coca Cola is reconsidering the price for
Minute Maid
• Would an increase in price lead to an increase
in revenues?

13. Demand and Managerial Decisions
• How much should a firm produce?
• Should the firm increase its capacity?
• Entry decisions to new markets
• Price/advertising changes
=> All require knowledge of the market demand

14. WHAT IS DEMAND?
Individual Demand-The quantity of a product
that an individual will purchase at a particular
price, ceteris paribus.
14

15. Demand for PC
• Late 1990’s, Price of HP – Rs.
50,000
• Only source of income gives Rs. 1 lakh
annually
• Demand for HP?
• Increase in income – Rs 5 lakh annually
• Sony enters the market.

16. WHAT IS DEMAND?
Individual Demand-The quantity of a product
that an individual will purchase at a particular
price, ceteris paribus.
• Demand influenced by preferences
(Willingness)
• Demand backed by ability to pay
16

17. DEATH OF PC?
• What is the reason for decrease in sales of PCs
since the third quarter of 2010?
• Why did PC sales increase in later part of
2009?
• Why are i-pad sales on the rise?

18. DEATH OF PC?
• Change in Preferences:
Saturation of the market with net-books
• Economic Uncertainty: Affecting future
income
• External Disruptions: Japan Earthquake etc

19. Demand For Big Macs**
• Mc Donald dwarfs competition: 36,000
restaurants in 122 countries. Burger King-
11,200 restaurants in 57 countries
• Sales figures since mid 1980s

20. Reasons
• Price increase- Average check $4 versus 15
cent
• Health concerns
• Proportion of 15-29 years shrunk from 27.5%
to 22.5 %
• Increase competition from other fast food
joints
• Multimillion dollar law suit- “Super Size Me”

21. Individual Consumer’s
Demand
QdX = f(PX, I, PY, T)
QdX = quantity demanded of commodity X by an
individual per time period
PX = price per unit of commodity X
I = consumer’s income
PY = price of related (substitute or complementary)
commodity
T = tastes of the consumer

22. Coca Cola Inc.
• Coca Cola is reconsidering the price for
Minute Maid
• Would an increase in price lead to an increase
in demand?

23. Law of Demand
Law of demand: Ceteris Paribus, when the
price of a product falls, the quantity
demanded of the product will increase, and
visa versa.

24. Demand Schedule and Curve
• Demand Schedule and Curve: Represent
amount of a quantity that will be demanded
at various prices
• Sometimes referred to as the “ demand” of a
consumer.

25. Demand Schedule and Curves
A Demand Schedule and
Demand Curve

26. Pointers on Demand Schedule
• Market demand pertains to a particular time
period. Longer the time period greater
demand
• Demand curve slopes downwards
• Demand curve assumes , other prices, Income,
tastes to be constant.

27. CHANGE IN DEMAND V/S A CHANGE IN
QUANTITY DEMANDED
P
A change in quantity 25
The demand curve
demanded occurs when shifts when income,
20 tastes, the price of
you move along the related goods, or
expectations
demand curve, it is a change. (i.e.
15 whenever ceteris
result of a change in price paribus is violated)
of that good alone.
10
A change in demand (shift
5
in the curve) occurs when
something other than the D1 D 2
price changes. 5 10 15
15 20 25 30
Quantity

28. Demand for Samsung Galaxy S3
• Priced at Rs 40,000
• Your current income is Rs 50,000 p.a.
• How much will you demand at this price?
• Now assume your income increased to Rs 12
lakhs p.a.

29. CHANGE IN DEMAND V/S A CHANGE IN
QUANTITY DEMANDED
P
A change in quantity 25
The demand curve
demanded occurs when shifts when income,
20 tastes, the price of
you move along the related goods, or
expectations
demand curve, it is a change. (i.e.
15 whenever ceteris
result of a change in price paribus is violated)
of that good alone.
10
A change in demand (shift
5
in the curve) occurs when
something other than the D1 D 2
price changes. 5 10 15
15 20 25 30
Quantity

30. Variables That Shift Market
Demand
Income
•Normal good: A good for which the demand
increases as income rises and decreases as income
falls.
•Inferior good: A good for which the demand
increases as income falls and decreases as income
rises.

31. Normal and Inferior Goods
• A particular good may be normal for one
segment but inferior for the other
• Increase in income:
- Normal Good: Shifts the demand curve
outside
- Inferior Good: Shifts the demand curve inside

32. Variables That Shift Market
Demand
Price of related goods
– Substitutes Goods and services that can be used for
the same purpose.
– Complements Goods and services that are used
together.
Tastes
Consumers can be influenced by an advertising
campaign for a product.

33. Demand for Samsung Galaxy
• What if Apple slashed the price of 4S model?
From Rs 41,000 to Rs 30,000
• What happens to the demand of Samsung
Galaxy if the tariff rates of 3G plan increases?

34. Variables That Shift Market
Demand
Population and demographics
Demographics The characteristics of a population with
respect to age, race, and gender.
Expected Future Prices
Consumers choose not only which products to buy
but also when to buy them.

35. Variables That Shift Market Demand
Variables That Shift Market Demand Curves

36. Variables That Shift Market Demand
Variables That Shift Market Demand Curves (continued)

37. Market Demand
• Market Demand: Total quantity of a good
that would be purchased at a particular price,
ceteris paribus

38. Market Demand Curve
• Horizontal summation of demand curves of
individual consumers
• Exceptions to the summation rules
– Bandwagon Effect
• collective demand causes individual demand
– Snob (Veblen) Effect
• conspicuous consumption
• a product that is expensive, elite, or in short supply
is more desirable

40. Market Demand Function
QDX = f(PX, N, I, PY, T)
QDX = quantity demanded of commodity X
PX = price per unit of commodity X
N = number of consumers on the market
I = consumer income
PY = price of related (substitute or complementary)
commodity
T = consumer tastes

41. SUPPLY SIDE OF MARKET

42. SUPPLY
Supply-
The quantity of a product that an individual
or a group will sell at a particular price,
ceteris paribus.

43. Supply of PCs
• Assume the price of PC is
Rs 50,000 (pre determined)
• How many PC s would you as HP would be
willing to sell?
• Assume that you sell whatever you produce.

44. SUPPLY
Supply-
The quantity of a product that an individual
or a group will sell at a particular price,
ceteris paribus.
• Depends upon available resources
• Depends upon available technology

45. Supply of PCs**
• What were the reasons for
the decline in production of PCs ?

46. SUPPLY OF PCs
• Japan Earthquake
• Price of Microchips
• Wages and Incomes
• and so on..

47. Individual Firm’s Supply
QsX = f(PX, E, PY, T)
QsX = quantity supplied of commodity X by an individual
firm per time period
PX = price per unit of commodity X
E = Extraneous factors
PY = price of inputs
T=
Technology

48. Law of Supply
Law of supply: Ceteris Paribus, when the price
of a product rises, the quantity supplied of the
product will increase, and visa versa.

49. Supply Schedule and Curve
• Supply Schedule and Curve: Represent
amount of a quantity that will supplied at
various prices.
• Sometimes referred to as the “ supply” of a
firm.

50. Supply Schedule and Curve**

51. Pointers on Supply Schedule
• Market supply pertains to a particular time
period. Longer the time period greater supply
• Supply curve slopes upwards
• Supply curve assumes , prices of resources and
inputs, Technology to be constant.

52. CHANGE IN SUPPLY V. A CHANGE IN
QUANTITY SUPPLIED P
4.00 S2
A change in quantity S1
3.50
supplied occurs when
you move along the
3.00
supply curve, it is a
The supply
result of a price change curve shifts
2.50 when resource
alone. prices change,
technology
improves, or
A change in supply 2.00 shocks occur.
(i.e. whenever
(shift in the curve) ceteris paribus
is violated)
occurs when something 5 10 15 20 25 30
other than the price Quantity
changes. (cans)

53. Variables That Shift Supply
Variables That Shift Market Supply Curves

54. Variables That Shift Supply
Variables That Shift Market Supply Curves (continued)

55. Putting Demand and Supply
Together

56. Market Coordination
• Check out the following
clip from the
“Hudsucker Proxy.”
• The clip nicely shows
how markets coordinate
prices and eliminate
excess supply and
excess demand.

57. Hudsucker Graphic
S
Price of
Hula
Hoop Market
clearing price
$3.99
$1.79
Free D2
Surplus of hoops Quantity of Hula Hoops
before the craze D1

58. Market Equilibrium
• Market equilibrium is determined at the
intersection of the market demand curve and
the market supply curve.
• At equilibrium price there is no tendency to
change the price.

60. Shortage
• When the price is below the equilibrium
quantity demanded exceeds quantity
supplied
• Shortages put upward pressure on the price
QS QD 60

61. Surplus
• When the price is above the equilibrium
quantity supplied is greater than the quantity
demanded.
• Surplus puts downward pressure on demand
QD QS 61

62. Equilibrium Price
• Only at $1 per pound would there be no
tendency for price change.
• At any point in time, observed price may not
be the equilibrium price.
• Market forces always push the market price
towards equilibrium.

63. Markets are never in equilibrium
but they always tend to the
equilibrium
63

64. Which market can be characterized by
the following graph?
P
Q

65. Which market can be characterized by
the following graph?
P
Q
65

66. The Effect of Demand and Supply Shifts
on Equilibrium
The Effect of Shifts in Supply on Equilibrium
The Effect of an Increase in
Supply on Equilibrium

67. The Effect of Demand and Supply Shifts on
Equilibrium
The Effect of Shifts in Demand on Equilibrium
The Effect of an Increase in
Demand on Equilibrium

68. Price of Personal Computers**
• From 1986- 2006, massive increase in demand
for PCs
• For the same period, surge of PC producers
and their production.
• Increase in supply more than the demand
• What is the effect on the equilibrium price
and demand?

70. Price of Coffee**

71. The Effect of Demand and Supply
Shifts on Equilibrium
How Shifts in Demand and Supply Affect
Equilibrium Price (P) and Quantity (Q)
SUPPLY CURVE SUPPLY CURVE SUPPLY CURVE
UNCHANGED SHIFTS TO THE RIGHT SHIFTS TO THE LEFT
DEMAND CURVE Q unchanged Q increases Q
UNCHANGED P unchanged P decreases P
DEMAND CURVE Q increases Q
SHIFTS TO THE RIGHT Q P increases or P
P decreases
DEMAND CURVE Q decreases Q increases or Q decreases
SHIFTS TO THE LEFT P decreases decreases P decreases or
P decreases increases

72. The Effect of Demand and Supply
Shifts on Equilibrium
How Shifts in Demand and Supply Affect
Equilibrium Price (P) and Quantity (Q)
SUPPLY CURVE SUPPLY CURVE SUPPLY CURVE
UNCHANGED SHIFTS TO THE RIGHT SHIFTS TO THE LEFT
DEMAND CURVE Q unchanged Q increases Q decreases
UNCHANGED P unchanged P decreases P increases
DEMAND CURVE Q increases Q increases or
SHIFTS TO THE RIGHT Q increases P increases or decreases
P increases decreases P increases
DEMAND CURVE Q decreases Q increases or Q decreases
SHIFTS TO THE LEFT P decreases decreases P decreases or
P decreases increases

73. The Effect of Demand and Supply
Shifts on Equilibrium
The Effect of Shifts in Demand and Supply over Time
FIGURE 3-11
Shifts in Demand and Supply
over Time