1 demand supply_analysis

Demand Analysis

What is Demand?

Quantity of a particular good or service that consumers are willing or able to purchase at a given price, during a given period of time

Characteristics of Demand

Demand has three main characteristics.

1. Willingness to pay2. Ability to purchase 3. Demand is always at a price

Quantity Demanded vs. Demand Quantity DemandedQuantity Demanded

The quantities of a good or service that people will purchase at a specific price over a given period of time.

DemandDemandDemand for product is the amount that consumers are willing and able to purchasers good or service at different prices at a given time

Types of Demand

Individual DemandIndividual DemandThe quantity of a good that an individual or firm stands ready to buy at various prices at a given time.

Market DemandMarket DemandThe sum of the individual demands in the marketplace.

Determinants of Demand

Changes in income Price Level Changing Prices of a Substitute

Good Changing Price of a Complement Change in Tastes and Preferences Consumer Expectations.

Determinants of Demand

Changes in income Higher incomes increase in demand Lower incomes decrease in demand

When an individual’s income goes up, their ability to purchase goods and services increases, and this causes an outward shift in the demand curve.

When incomes fall there will be a decrease in the demand for most goods.

Price Level

Higher Price lower Demand for Product.

Lower price Higher demand for product

Changing Prices of a Substitute Good

Substitutes Increase in the price of substitutes increase in demand another product.

.

Changing Price of a Complement

Complements Increase in the price of complements decrease in demandExamples: Pen & Ink

Change in Tastes and Preferences Changing tastes and preferences can have

a huge effect on demand. Example Persuasive advertising is designed to

cause a change in tastes and preferences and thereby create an outward shift in demand.

A good example of this is the recent surge in sales of fruit juice drinks.

LAW OF DEMAND

Inverse relationship Downward sloping DD curve Reasons

Income Effect Substitution Effect

Exception Giffen Paradox – in case of inferior goods

Demand Schedule and Demand Curve

Demand schedule The Demand Schedule is a table of

numbers that shows the relationship between price and quantity demanded by a consumer, ceteris paribus (everything else held fixed).

Demand curve A curve that indicates the number of units

of a good or service that consumers will buy at various prices at a given time

Individual Demand Schedule for CD

Price per CD Rs.

Quantity of CD Demanded per Year

25 20

2030

1535

1040

8 45

Individual Demand Curve

The Individual Demand Curve shows the relationship between the price of a good and the quantity that a single consumer is willing to buy, or quantity demanded.

Individual Demand Curve When price increases, demand for CD falls, when prices falls, demand for CD increases. 25

20

15

10

8

Prices per CDRs .

20 30

35 40

45Demand for CD .

Market Demand We can get Market Demand from Individual

Demand, by adding the quantities demanded by all consumers at each of the various possible prices.

The Market Demand can be described as the horizontal summation of the individuals demand for a commodity at various possible prices in market.

Market Demand Curve is a curve showing the relationship between price and quantity demanded by all consumers together, ceteris paribus (everything else held fixed).

Market Demand Schedule Price per

CD Rs.

Consumer A

Consumer B

Consumer C

Total Market Demand

25 20 1822 50

2030 2631 87

1535 3037102

1040 3541116

8 45 4046 131

Movement along the Demand Curve

If other all factors remains constant and only there is change in the price of the commodity, then we move along the same demand curve.

Shift of the Demand Curve

ELASTICITY OF DEMAND

It measures the responsiveness of quantity demanded of good or service to changes in its own price

Example

Price 25 ,Qd = 20 Price 20 ,Qd = 30

Types of price elasticity

Arc Elasticity of Demand

Point Elasticity of Demand

Total Expenditure Method

Perfectly Inelastic – Ed = 0

Perfectly Elastic – Ed = infinity

Unitary Elastic – Ed = 1

Cross Price Elasticity of Demand

Income Elasticity of Demand

Supply Supply

Quantity supplied of any good or service is the amount that the sellers are willing and able to sell for a price

Individual supply

Quantities offered for sale at various prices at a given time by an individual seller

Market supply Sum of the individual supply schedules in the

marketplace

Determinants of Supply

Changes in the cost of resources Increase in the cost of resources

decrease in supply Technology

Improvements increase in supply Expectations of future prices Prices of related products

Law of Supply

Direct Relation

Producers are more willing to sell greater amounts of a good at a higher price , because this good has become relatively more profitable to produce, compared to other gds

Supply schedule A table showing the various

quantities of a good or service that sellers will offer at various prices at a given time

Supply curve A line showing the number of units

of a good or service that will be offered for sale at different prices at a given time

CHANGES IN THE SUPPLY CURVE

Movement along the Supply Curve

Shift in Supply Curve

ELASTICITY OF SUPPLY

The price elasticity of supply measures how much the quantity supplied responds to changes in price

Price elasticity of supply = % change in quantity supplied / % change in price

MARKET EQUILIBRIUM

EQUILIBRIUM POSITION

CHANGES IN DEMAND AND SUPPLY