DEMAND AND SUPPLY
Nov 12, 2014
DEMAND AND SUPPLY
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?
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
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
Market
• What constitutes a market is in the eye of the beholder
• How to define a market?
What is a Market?
• Product• Buyers• Sellers • They together (sometimes the Govt.) interact
(invisible hand).• Market is not industry
Coca Cola Inc.
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?
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
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
DEMAND SIDE OF MARKET
Coca Cola Inc.
• Coca Cola is reconsidering the price for Minute Maid
• Would an increase in price lead to an increase in revenues?
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
WHAT IS DEMAND?Individual Demand-The quantity of a product
that an individual will purchase at a particular price, ceteris paribus.
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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.
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 pay16
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?
DEATH OF PC?
• Change in Preferences: Saturation of the market with net-books
• Economic Uncertainty: Affecting future income
• External Disruptions: Japan Earthquake etc
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
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”
Individual Consumer’s Demand
quantity demanded of commodity X by an individual per time period
price per unit of commodity X
consumer’s income
price of related (substitute or complementary) commodity
tastes of the consumer
QdX =
PX =
I =
PY =
T =
QdX = f(PX, I, PY, T)
Coca Cola Inc.
• Coca Cola is reconsidering the price for Minute Maid
• Would an increase in price lead to an increase in demand?
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.
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.
Demand Schedule and Curves
A Demand Schedule and Demand Curve
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.
CHANGE IN DEMAND V/S A CHANGE IN QUANTITY DEMANDED
P
Quantity
25
20
15
10
5
5 10 15 20 25 30
D1D2
10 15 20
The demand curve shifts when income, tastes, the price of related goods, or
expectations change. (i.e.
whenever ceteris paribus is violated)
A change in quantity demanded occurs when you move along the demand curve, it is a result of a change in price of that good alone.
A change in demand (shift in the curve) occurs when something other than the price changes.
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.
CHANGE IN DEMAND V/S A CHANGE IN QUANTITY DEMANDED
P
Quantity
25
20
15
10
5
5 10 15 20 25 30
D1D2
10 15 20
The demand curve shifts when income, tastes, the price of related goods, or
expectations change. (i.e.
whenever ceteris paribus is violated)
A change in quantity demanded occurs when you move along the demand curve, it is a result of a change in price of that good alone.
A change in demand (shift in the curve) occurs when something other than the price changes.
•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.
Variables That Shift Market DemandIncome
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
– Substitutes Goods and services that can be used for the same purpose.– Complements Goods and services that are used together.
Variables That Shift Market Demand
Price of related goods
Consumers can be influenced by an advertising campaign for a product.
Tastes
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?
Demographics The characteristics of a population with respect to age, race, and gender.
Population and demographics
Expected Future PricesConsumers choose not only which products to buy but also when to buy them.
Variables That Shift Market Demand
Variables That Shift Market DemandVariables That Shift Market Demand Curves
Variables That Shift Market DemandVariables That Shift Market Demand Curves (continued)
Market Demand
• Market Demand: Total quantity of a good that would be purchased at a particular price, ceteris paribus
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
Market Demand Function
quantity demanded of commodity X
price per unit of commodity X
number of consumers on the market
consumer income
price of related (substitute or complementary) commodity
consumer tastes
QDX =
PX =
N =
I =
PY =
T =
QDX = f(PX, N, I, PY, T)
SUPPLY SIDE OF MARKET
SUPPLY
Supply-The quantity of a product that an individual
or a group will sell at a particular price, ceteris paribus.
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.
SUPPLYSupply-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
Supply of PCs**
• What were the reasons for the decline in production of PCs ?
SUPPLY OF PCs
• Japan Earthquake• Price of Microchips• Wages and Incomes• and so on..
Individual Firm’s Supply
quantity supplied of commodity X by an individual firm per time period
price per unit of commodity X
Extraneous factors
price of inputs
Technology
QsX =
PX =
E =
PY =
T =
QsX = f(PX, E, PY, T)
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.
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.
Supply Schedule and Curve**
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.
CHANGE IN SUPPLY V. A CHANGE IN QUANTITY SUPPLIEDP
Quantity(cans)
4.00
3.50
3.00
2.50
2.00
5 10 15 20 25 30
S1
10 15 20
S2
The supply curve shifts when resource prices change, technology improves, or shocks occur. (i.e. whenever ceteris paribus is violated)
A change in quantity supplied occurs when you move along the supply curve, it is a result of a price change alone.
A change in supply (shift in the curve) occurs when something other than the price changes.
Variables That Shift SupplyVariables That Shift Market Supply Curves
Variables That Shift Market Supply Curves (continued)
Variables That Shift Supply
Putting Demand and Supply Together
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.
Hudsucker Graphic
S
D2
Price of
Hula Hoop
Quantity of Hula Hoops
$3.99
$1.79
Surplus of hoops before the craze
Free
D1
Market clearing price
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.
Shortage
• When the price is below the equilibrium quantity demanded exceeds quantity supplied
• Shortages put upward pressure on the price
60QS QD
Surplus• When the price is above the equilibrium
quantity supplied is greater than the quantity demanded.
• Surplus puts downward pressure on demand
61QD QS
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.
Markets are never in equilibriumbut they always tend to the
equilibrium
63
Which market can be characterized by the following graph?
P
Q
Which market can be characterized by the following graph?
65
P
Q
The Effect of Demand and Supply Shifts on Equilibrium
The Effect of an Increase in Supply on Equilibrium
The Effect of Shifts in Supply on Equilibrium
The Effect of Demand and Supply Shifts on Equilibrium
The Effect of an Increase in Demand on Equilibrium
The Effect of Shifts in Demand on Equilibrium
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?
Price of Coffee**
The Effect of Demand and Supply Shifts on Equilibrium
How Shifts in Demand and Supply Affect Equilibrium Price (P) and Quantity (Q)
SUPPLY CURVE UNCHANGED
SUPPLY CURVESHIFTS TO THE RIGHT
SUPPLY CURVE SHIFTS TO THE LEFT
DEMAND CURVE UNCHANGED
Q unchangedP unchanged
Q increasesP decreases
Q P
DEMAND CURVESHIFTS TO THE RIGHT Q
P
Q increasesP increases ordecreases
Q P
DEMAND CURVESHIFTS TO THE LEFT
Q decreasesP decreases
Q increases or decreasesP decreases
Q decreasesP decreases orincreases
The Effect of Demand and Supply Shifts on Equilibrium
How Shifts in Demand and Supply Affect Equilibrium Price (P) and Quantity (Q)
SUPPLY CURVE UNCHANGED
SUPPLY CURVESHIFTS TO THE RIGHT
SUPPLY CURVE SHIFTS TO THE LEFT
DEMAND CURVE UNCHANGED
Q unchangedP unchanged
Q increasesP decreases
Q decreasesP increases
DEMAND CURVESHIFTS TO THE RIGHT Q increases
P increases
Q increasesP increases ordecreases
Q increases or decreases P increases
DEMAND CURVESHIFTS TO THE LEFT
Q decreasesP decreases
Q increases or decreasesP decreases
Q decreasesP decreases orincreases
The Effect of Demand and Supply Shifts on Equilibrium
FIGURE 3-11Shifts in Demand and Supply over Time
The Effect of Shifts in Demand and Supply over Time