ECONOMICS DEMAND PPT @ MBA 2009.ppt

1. Managerial Economics &
DEMAND

2. Analysis of Demand & Supply
&
Market Equilibrium

3. Concept of Market
 A market is a mechanism by which
buyers and sellers interact to
determine the price and quantity of
a good or service
 Demand side of the market for a
product refers to all its consumers
and the price they are willing to
pay for buying a certain quantity of
a product during a period of time.

4. What is Demand???
 Demand is the desire or want
backed up by money
 Always related to price and time

5. Statement of Law of Demand
“All other things remaining constant,
higher the price of a commodity,
smaller is the quantity demanded
and lower the price, larger the
quantity demanded”
Dx = f (Px)

6. Reasons for Inverse Relationship
 Income effect- the decline in the price of a commodity
leads to an equivalent increase in the income of a
consumer because he has to spend less to buy the same
quantity of goods. The part of the money left can be
used for buying some more units of commodity.
 For e.g.- suppose the price of mangoes falls from Rs.100/- per
dozen to 50/- per dozen. Then with the same amount of 100/- you
can buy one more dozen, i.e.,2 dozens at Rs. 50/-
 Substitution effect- When the price of a commodity
falls, the consumer tends to substitute that commodity
for other commodity which is relatively expensive.
 For e.g. – Suppose the price of the Urad falls, it will be used by
some people in place of other pulses. Thus the demand will
increase.

7. Assumptions Underlying the Law
 No change in Consumer’s Income
 No change in Consumer’s
Preferences
 No change in Fashion
 No change in Price of related goods
 No Expectation of future price
changes or shortages

8. Individual Demand Schedule
Tabular representation of Quantity of a
commodity that an individual is willing
and able to purchase over a given period of
time at each price of the commodity, while
holding constant all other relevant
economic variables on which demand
depends.

9. Individual Demand
Schedule
Price of Com X Quantity demanded
(Rs per kg) of Com X (Qty in kg)
80 2
70 4
60 6
50 10

10. Market demand Schedule
Tabular representation of Quantity of a
commodity that all individuals are willing
and able to purchase over a given period of
time at each price of the commodity, while
holding constant all other relevant
economic variables on which demand
depends.

11. Market Demand Schedule
Price in (Rs) Units of Commodity X Market
demanded per day Demand
by Individuals or Total
A B C
4 1 1 3 5
3 2 3 5 10
2 3 5 7 15
1 5 9 10 24

12. Determinants of Individual Demand
 Income
 Price of Substitute &
Complementary products
 Taste & Preferences
 Advertisement
 Expectation regarding future price
changes
 Climatic Conditions

13. Determinants of Market Demand
 Price of Product
 Distribution of Income & wealth
 Community’s Common Habits and Scale of
Preferences
 Spending Habits of People
 Growth of Population
 Age Structure and Sex ratio of Population
 Future Expectations
 Level of Taxation
 Fashions
 Climate Conditions
 Customs
 Advertisement

14. Multivariate Demand
Function
 Dx = D (Px, Py, Pz, B, W, A, E, T, U)
 Here Dx, stands for demand for item x (say, a car)
 Px, its own price (of the car)
 Py, the price of its substitutes (other brands/models)
 Pz, the price of its complements (like petrol)
 B, the income (budget) of the purchaser (user/consumer)
 W, the wealth of the purchaser
 A, the advertisement for the product (car)
 E, the price expectation of the user
 T, taste or preferences of user
 U, all other factors.

15. Demand equation
 D= a – bP
 Where ‘a’ is constant parameter
signifying initial demand
irrespective of price
 ‘b’ represents slope of demand
curve
 functional relationship between
price and demand, having minus
sign denotes negative function

16. Exceptions to Law of
Demand
 Conspicuous consumption –
 The goods which are purchased for ‘Snob appeal’ are
called as the conspicuous consumption. For e.g.-
diamonds. They are the prestige goods. They would
like to hold it only when they are costly and rare.
 Speculative market:
 in this case the higher the price the higher will be the
demand. It happens because of the expectation to
increase the price in the future.
 For e.g. shares, lotteries

17. Contd…
 Giffens goods:
 It is a special type of inferior goods where the fall in
the price results into the decrease In the quantity
demanded. This happens because of people’s
preference for superior commodity
 Consumer’s Psychological bias:
 Many a times consumer judges the quality of a good
from its price. Such consumers may purchase high
price goods because of the feeling of possessing a
better quality.
 The exceptional demand curve shows a positive
relation between the price and the quantity
demanded.

18. Shifts in Demand Curve
 Extension and Contraction of Demand occurs
due to changes in price, other factors remaining
constant
 When more of a commodity is purchased with a fall in price
then it is known as extension of Demand and vice versa
 Refer to movement along same demand curve
 Increase and Decrease in Demand refers to
changes in demand due to factors other than price
 An increase in demand signifies that more will be purchased
at a given price than before .
 Refer to movement from one demand curve to another

19. Reasons for shifts (increase or
decrease in Demand)
 Changes in Income
 Changes in Taste, habits and Preferences
 Change in Fashions and Customs
 Change in Distribution of Wealth
 Change in Substitutes
 Change in demand for Complementary
goods
 Advertisement and Publicity Persuasion
 Change in level of taxation

20. Nature of Demand
 Demand for Consumer’s goods &
Producer's goods
 Autonomous & Derived Demand
 Demand for Durables and Non-
Durables (Perishables)
 Joint Demand and Composite
Demand

21. Supply Analysis
 Supply during a given period of time means
the quantities of goods which are offered
for sale at particular prices
 Supply is what seller is able and willing to
offer for sale
 Supply and Stock are related but distinct
terms-Supply comes out of Stock
 Stock determines potential supply
 Stock is outcome of production

22. Determinants of Supply
 Cost of factors of production
 State of Technology
 Factors outside Economic Sphere
such as weather conditions, natural
calamities, etc
 Tax and Subsidy

23. Law of Supply
“Other things remaining same ,
supply of a commodity rises with a
rise in price and falls with a fall in
price”

24. Supply schedule

25. Assumptions :
 Cost of production is unchanged
 Technology is constant
 Govt policies are unchanged
 No change in Transport costs
 No speculation
 Prices of other goods constant

26. Positions: Supply Curve
 Extension and Contraction : refer to
change in supply due to price, other
things remaining same.
 Movement along the supply curve
 Increase and Decrease in Supply: refer
to change in supply due to determinants
other than price
 Shifts in Supply Curve

27. Causes for change in
Supply
 Change in Cost of Production
 Supply also depends on Natural
Factors
 Change in Technique of Production
 Policies of Government
 Business Combines

28. When market is in
Equilibrium?
 Equilibrium price of a commodity is
price at which quantity demanded
of commodity equals quantity
supplied and market clears
 Equilibrium is condition which once
achieved tends to persist in time.

29. Equilibrium of Supply and Demand
Price
S
Excess
Supply
E
Excess D
Demand
D&S

30. Effect of Shift in Supply or Demand
Demand & Effect on price
Supply shifts and quantity
If demand Demand curve Both P & Q
rises shifts to right increases
If demand falls Demand curve Both P & Q
shifts to left falls
If supply rises Supply curve P falls but Q
shifts to right increases
If supply falls Supply curve P increases &
shifts to left Q decreases

31. Simultaneous shifts of Supply and
Demand
 New equilibrium price and quantity may be
greater than, equal or even less than initial
equilibrium levels depending on the
magnitude and direction of two curves
 If both D & S shift to right by same amount
, the equilibrium point shifts to right by
same amount and hence equilibrium price
remains same.

32. Impact of Excise tax on Price and
Quantity
 An excise is a tax on each unit of
commodity
 If collected from sellers tax causes
supply curve to shift upward by the
amount of tax
 Result is that consumers purchase
a smaller quantity at a higher price
while sellers receive a smaller net
price after payment of tax

33. Impact of Excise tax on Price and
Quantity
S1
S0
T
E1 Tax
P1
Po E0
D
Q1 Q0

34. Impact of Rent Control on Housing
Markets
 Rent control is a type of price
ceiling or maximum rent set below
equilibrium price that government
use for making rented housing
affordable, however the effect has
been opposite ie shortage of
apartments

35. Rent Control create
shortages
S
$1400
Monthly
Rent E
$1000
$600 Shortage
D
1.2 1.6 2
Millions of Apartments

36. Thank You