2. Demand and Supply Analysis

7/28/2019 2. Demand and Supply Analysis

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DEMAND AND SUPPLY ANALYSIS

By:

Prof. Vani Khosla

If you cant pay for a thing, dont buy it.

If you cant get paid for it, dont sell it.


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MEANING OF DEMAND

Demand signifies the ability or the willingness to buy a particular

commodity at a given point of time or at a specified price.

DEMAND

=

DESIRE

+

ABILITY TO PAY+

WILL TO SPEND

Demand for commodity implies on three things:

Demand is the desire or want backed up by

money.

Demand is always related to price & time.

Demand may be viewed ex-ante or ex-post.


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Demand

Consumers

&

Producers

Goods

Demand

Durable

&

Non-Durable

Goods

Demand

Derived

&Autonomous

Demand

Companyor Firm

&

Industry

Demand

Short -Run

&

Long-Run

Demand

CLASSIFICATION OF DEMAND


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Individual Demand

ID....refers to the demand for a product from the individualpersons point of view. It is single consuming entitys demand.

Market Demand

MD.refers to the total demand of all the buyers, taken

together. It is aggregating all individual buyers demand

function in the market.

Two Levels of Consumer Demand


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Factors Influencing Individual Demand

Price of the Product.

Income of the Consumers:

Normal Goods, and

Inferior Goods.

Tastes & Preferences of the Consumers.

Prices of Other Products:

Substitute Goods, and

Complementary Goods.

Consumers Expectations.

Advertisement Effect.


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Factors Influencing Market Demand

Price of the Product.

Distribution of Income & Wealth in the Community.

Communitys Common Tastes & Preferences.

General Standards of Living & their Spending Habits.

Future Expectations.

Inventions & Innovations.

Fashions.

Climate or Weather Conditions.

Customs.

Advertisement & Sales Propaganda.


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LAW OF DEMAND

It is the functional relationship between the quantity demanded of a

particular product and its price in the market. The equation can be

written as:

Statement of the Law:

According to Alfred Marshall

The law of demand states that, .. The amount demanded increases

with a fall in prices & diminishes with a rise in prices.

Qdx = f (Px)


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Assumptions of the Law

Law of Demand based on fundamental assumption ceteris paribus are as

follows:

No change in Consumers Income.

No change in Consumers Tastes & Preferences.

No change in the Prices of related Goods.

No change in Fashions.

No change in Government Policy. No change in the Distribution of Income & Wealth.

No change in Weather Conditions.


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Cont.

DEMAND SCHEDULE ::

A Tabular Statement of price or quantity

relationship is called the demand schedule.

It shows the quantity of goods that a consumerwould be willing and able to buy at specific prices

under the existing circumstances.

DEMAND CURVE ::

A Graphical presentation of a demand schedule isknown as demand curve.

It expresses the relation between the price charged

for a product & the quantity demanded , holding

constant the effects of all other variables.

IndividualDemand Schedule

and Curve.

Market Demand

Schedule and

Curve.


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Price of

Oranges

Quantity

Demanded(Rs. Per kg.) (Qty. in kg.)

30 2

25 4

20 6

15 10

10 16

Quantity Demanded

P

r

i

c

e

D

D

Individual Demand Schedule

& Demand Curve


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Price

Quantity

Demanded

Market

demand

(Rs.) A B C

4 1 1 3 5

3 2 3 5 10

2 3 5 7 15

1 5 9 10 24

D

D

DD is the Market

Demand

Curve , which is the

summation of all

individual demand

curves.

Market Demand Schedule

& Demand Curve


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1. Operation of the law of Diminishing

Marginal Utility

2. Income Effect

3. Substitution Effect

4. Change of Number of Consumers

5. Change of Number of Uses

Why does the Demand Curve Slope

Downwards from Left to Right ??


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Demand

P

r

i

c

e

D

Giffen Goods.

Speculation. Articles of snob appeal

(Expensive Commodities).

Consumers psychological

bias or illusion. Demonstration Effect.

Goods with no substitutes.

Exceptions to the Law Of Demand

(Upward Sloping Demand Curve)


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Elasticity of Demand = % age Change in Quantity Demanded% age Change in Determinant of Demand

ELASTICITY OF DEMAND Alfred Marshall defines::

The Elasticity of Demand in a market is .

Great or small according to the amount demanded... Increases much

or little for a given fall in price, and diminishes much or little for a given

rise in price.


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ELASTICITY

OFDEMAND

Price

Elasticity of

Demand

Cross

Elasticity of

Demand

Income

Elasticity of

Demand

KINDS OF ELASTICITY OF DEMAND


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Price Elasticity of Demand = Proportionate Change in Quantity Demanded

Proportionate Change in Price

PRICE ELASTICITY OF DEMAND Price elasticity of demand is a measure used in economics to show the

responsiveness of the quantity demanded of a good or service to a change in

its price.

Types of Price Elasticity of Demand::

Perfectly Elastic Demand.

Perfectly Inelastic Demand.

Unitary Elastic Demand.

Relatively Elastic Demand.

Relatively Inelastic Demand


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Quantity Demanded

P

r

i

c

e

Q Q

DD

When the demand

for a product changes

increases or

decreases even when

there is no change in

price, it is

known asperfect elastic

demand.

e =

1. Perfectly Elastic demand


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Quantity Demanded

P

r

i

c

e

D

P

P

D

e = 0When a change in

price how so ever

large or small, there

is no change in

quantity demanded,

it is

known asperfect inelastic

demand.

2. Perfectly Inelastic demand


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Quantity Demanded

P

r

i

c

e P

P

D

e = 1

When the

proportionate

change in demand

is equal to

proportionate

changes in price, it

isknown as

unitary elastic

demand.Q Q

D

3. Unitary Elastic demand


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Quantity Demanded

Pr

i

c

eP

P

D

e > 1

When the

proportionate change

in demand is more

than the proportionate

changes in price, it is

known as

relatively elasticdemand.

Q Q

D

4. Relatively Elastic demand


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Quantity Demanded

P

r

i

c

e

P

P

D

e < 1

When the


in demand is less than

the proportionate


known as

relatively inelasticdemand.

Q Q

D

5. Relatively Inelastic demand


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Income Elasticity of Demand = Percentage Change in Quantity Demanded

Percentage Change in Income

INCOME ELASTICITY OF DEMAND Income elasticity of demand measures how much the quantity demanded of a

good responds to a change in consumers income.

Types of Income Elasticity of Demand::

Unitary Income Elasticity.

Income Elas. Greater than Unity.

Income Elas. Less than Unity.

Zero Income Elasticity.

Negative Income Elasticity.


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Quantity Demanded

I

n

c

o

m

e

Y

Y

e = 1

Q Q

D

D

When an increase in

income brings about a

proportionate increasein quantity demanded,

then it is

known as

unitary incomeelasticity.

1. Unitary Income Elasticity


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Quantity Demanded

I

n

c

o

m

e

Y

Y

e > 1

Q Q

D

D

When an increase in

income brings about a

more than proportionate

increase in quantity

demanded, it is

known as

income elasticity greaterthan unity.

2. Income Elasticity Greater than Unity


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Quantity Demanded

I

n

c

o

m

e

Y

Y

e < 1

Q Q

D

D

When income

increases .. quantity

demanded alsoincreases but less than

proportionately, it is

known as

income elasticity lessthan unity.

3. Income Elasticity Less than Unity


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Quantity Demanded

I

n

c

o

m

e

D

Y

Y

D

e = 0When quantity

demanded remains

the sameeventhough income

increases, it is

known as

zero income elasticity.

4. Zero Income Elasticity


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Quantity Demanded

Y

Y

D

e < 0

Q Q

D

I

n

c

o

m

e

When there is

increase in

incomethenquantity demanded

falls, it is

known as

negative elastic

demand.

5. Negative Elastic demand


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The cross elasticity of demand or cross-price elasticity of demand

measures the responsiveness of the demand for a commodity to a given

change in the price of some another commodity.

Cross Elasticity of Demand =

Percentage Change in Quantity Demanded of X

Percentage Change in Price of Y

CROSS ELASTICITY OF DEMAND


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Quantity Demanded

P

r

i

c

eP

P

e > 0

Q Q

D

D

A substitute good is a

good with a positive cross

elasticity of demand. This

means a good's demand isincreased when the price

of another good is

increased.

For example: Tea and

Coffee

1. Substitute Goods


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Quantity Demanded

P

P

D

e < 0

Q Q

D

P

r

i

c

e

A complementary good is a

good with a negative cross

elasticity of demand. This

means a good's demand is

increased when the price of

another good is decreased.

For example:Bread and Butter.

2. Complementary Goods


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Quantity Demanded

P

r

i

c

e

D

P

P

D

e = 0The unrelated goodshave zero cross elasticity

of demand. This means a

change in the price of

one good has no effect

on the demand of

another good.

For example:

Razor Blade & Petrol

3. Unrelated Goods


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CASE STUDY DISCUSSION

(Pricing Game by a Game Marketer)


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SUPPLY

ANALYSIS


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MEANING OF SUPPLY

The supply of a commodity means the

amount of that commodity which

producers are able and willingness to offer

for sale at a given prices in specific period

of time.

The supply of a product can be

mathematically expressed as:

Sx = f (Px,Py,Pi,T,Mi,G,N etc.)

which includes Total supply

of product x, Price of product x, Price of

related products, Prices of inputs, Change

in technology, Time periods etc.


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DETERMINANTS OF SUPPLY

Price of the Product (Own Price).

Price of Related Products.

Cost of Factors of Production.

Change in Technology.

Time Periods.

Government Policy.

The Natural Factors.

Self Consumption.

Sellers Expectations.

Motives of Producer.


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LAW OF SUPPLY

The Law of Supply simply expresses the relation between the quantity

of product supplied & its price and other things remaining constant.

According to S.E.Thomas,a rise in price tends to increase supply and a

fall in price tends to reduce it.

Sx = f (Px)


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Assumptions of Law of Supply

Cost of production is unchanged.

Fixed scale of production.

Government policies are unchanged. No change in the technique of production.

No speculation.

No change in transportation cost.

The prices of all other goods remains constant.


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INDIVIDUAL SUPPLY SCHEDULE

& SUPPLY CURVE

Price of

Product (Rs.)

Quantity

Supplied

(units)10 100

15 200

20 270

25 350

30 450

40 600

P

R

I

C

E

QTY. SUPPLIED

S

S


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Price

Quantity

Supplied

Market

Supply

(Rs.) A B C

5 10 20 30 60

15 20 40 50 110

25 30 50 80 160

35 50 90 100 240

S

S

SS is the Market

Supply Curve.

P

R

I

C

E

QTY. SUPPLIED

MARKET SUPPLY SCHEDULE

& SUPPLY CURVE


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EXCEPTIONS TO THE LAW OF SUPPLY

Labor Supply

Immediate Need

For Cash

Hoardings

Rare Goods

Self

Consumption

Future

Expectation


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ELASTICITY OF SUPPLY

Elasticity of supply is the responsiveness of producers to changes in

the price of their goods or services .

Elasticity is measured as the percent change in quantity divided by

the percent change in price.

Elasticity of Supply = %age Change in Quantity Supplied%age Change in Price


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Perfectly Elastic

Supply

Perfectly InelasticSupply

Unitary Elastic

Supply

Relatively Elastic

Supply

Relatively InelasticSupply

Types of Elasticity of Supply


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Quantity Supplied

P

r

i

c

e

Q Q

SS

When the supply

for a product changes

increases ordecreases even when

there is no change in

price, it is

known asperfectly elastic

supply.

1. Perfectly Elastic Supply


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Quantity Supplied

P

r

i

c

e

S

P

P

SWhen there is a

heavy change in price

level, but there isno change in quantity

supplied, it is

known as

perfectly inelasticsupply.

2. Perfectly Inelastic Supply


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Quantity Supplied

P

r

i

c

e P

P

S

When the


in supply is exactlyequal to

proportionate


known asunitary elastic supply.

Q Q

S

3. Unitary Elastic Supply


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Quantity Supplied

P

r

i

c

e

P

P

S

When the

proportionate

change in supply is

greater than the

proportionate


known as

relatively elasticsupply.

Q Q

S

4. Relatively Elastic Supply


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Quantity Supplied

P

r

i

c

eP

P

S

When the


in supply is less thanthe proportionate


known as

relatively inelasticsupply.

Q Q

S

5. Relatively Inelastic Supply


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MARKET

EQUILIBRIUM


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MEANING OF MARKET EQUILIBRIUM

Market equilibrium is that state in which

the quantity that firms want to supply

equals the quantity that consumers want

to buy.

According to Marshall,

Just As the two blades of a

pair of scissors are required t cut the cloth, so

also the two blades of demand & supply are

required to determined the price in the

market.
http://www.shutterstock.co.in/subscribe.mhtml


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Market for Denim PantsPrice of Denim Pants

Quantity Demanded

Quantity Supplied

0 8 050 7 1

100 6 2150 5 3200

4

4

250 3 5300 2 6350 1 7400 0 8

Example of Market Equilibrium


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E

Market Equilibrium in Diagrammatical Form


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At prices abovetheequilibrium price, quantity

supplied is greater than quantity

demanded, resulting in atemporary surplus.

At prices below the equilibriumprice, consumers desire to buy

more products than are available,creating a temporary shortage.

Market Disequilibrium


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Quantity

Price

P

Q0 2 4 6 8

100

200

300

400S

Market Disequilibrium in Diagrammatical Form


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GOLD:

The Supply-DemandEquilibrium


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Recent News..Gold

Why gold had been going through a phenomenal bull run for the past

11 years.

Gold went up when the market went up. It went further up when the

market went down - and it's still moving closer to the top.

What are the logical reasons behind this increasing valuation?

Gold demand is rising faster than its supply.

Central banks around the world are hoarding gold and are buying more. Inflationary Pressures and Fear


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The Demand and Supply Equation In the commodities market, traders buy and sell

commodities based on their expectation aboutfuture supply and demand equations, thus pushingthe price higher or lower.

There are two primary ways in which Gold is supplied: Mines and Recycled Gold.

Recycled gold supply will depend on gold priceexpectation, cost and availability.

The three primary drivers of gold demand areJewellery, manufacturing technology products suchas semiconductors, and Investments.


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Why central banks hold gold All Central banks need some reserve assets that are readily available to

them and are buying more gold in order to reduce their dependency on the

dollar or euro.

Gold is liquid and not correlated closely to any other asset class, not even to

its own supply demand equation.

In India,

The gold holding is 557.5 tonnes which is least among the major

economies.

RBI is known to buy International Monetary Fund gold and considers

investment in gold as a safe investment.

But India is the largest country with a gold demand of 933.4 tonnes,

which is a quite significant figure considering fact that fluctuating and

increasing gold prices and rupee weakening against U.S. dollar.


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Inflationary Pressures and Fear Though no one says gold prices are going up only because of inflation, it

does play an indirect role in the price rise.

With most central banks around the world engaged in monetary easing,inflationary fears and the expectation of weakening local currency pushes

investors and banks to hedge their position using gold.

Inflation or deflation, as long as economic concerns and fear remain,

investment demand for gold will remain steady.


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Current Situation of India in Gold Market

In 2011, India and China accounted for 61% of total demand of gold.

When a country's economy grows..the more the growth, the more thedemand for gold will be. If these economies slow down, then the demand

for gold will automatically dive.

But there is one more problem, the price rise.people are not able toafford that much money. The strength of local currency can also pay amajor role here.

For example, the Indian currency weakened steadily against the dollarthis year. While the price of gold dropped around 10% in the globalmarket this year, the price of gold kept moving higher in India due to thecountry's weak local currency.


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Todays Gold Rate in India:

10 gram gold Rate in

India = Rs.32320.00

24 carat gold per gram

Rate in India =

Rs.3232.00

22 carat gold per gram

Rate in India =Rs.3022.00

(Updated On 10-09-2012)

Cont..

2. Demand and Supply Analysis

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