Economic Analysis Economic Analysis for Business for Business Session IV: Market Forces Session IV: Market Forces of Supply and Demand-I of Supply and Demand-I Instructor Instructor Sandeep Basnyat Sandeep Basnyat 9841892281 9841892281 [email protected][email protected]
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Economic Analysis for Business Session IV: Market Forces of Supply and Demand-I Instructor Sandeep Basnyat [email protected].
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Economic Analysis Economic Analysis for Businessfor Business
Session IV: Market Forces of Session IV: Market Forces of Supply and Demand-ISupply and Demand-I
Two goods are substitutes if an increase in the price of one causes an increase in demand for the other.
Example: pizza and hamburgers. An increase in the price of pizza increases demand for hamburgers, shifting hamburger demand curve to the right.
Other examples: Coke and Pepsi, laptops and desktop computers, compact discs and music downloads
Demand Curve Shifters: Demand Curve Shifters: prices of prices of related goodsrelated goods
CHAPTER 4 THE MARKET FORCES OF
SUPPLY AND DEMAND
Two goods are complements if an increase in the price of one causes a fall in demand for the other.
Example: computers and software. If price of computers rises, people buy fewer computers, and therefore less software. Software demand curve shifts left.
Other examples: college tuition and textbooks, bagels and cream cheese, eggs and bacon
Demand Curve Shifters: Demand Curve Shifters: prices of prices of related goodsrelated goods
CHAPTER 4 THE MARKET FORCES OF
SUPPLY AND DEMAND
Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right.
Example: The Atkins diet became popular in the ’90s, caused an increase in demand for eggs, shifted the egg demand curve to the right.
Summary: Variables That Affect DemandSummary: Variables That Affect Demand
Variable A change in this variable…
Price …causes a movement along the D curve
No. of buyers …shifts the D curve
Income …shifts the D curve
Price ofrelated goods …shifts the D curve
Tastes …shifts the D curve
Expectations …shifts the D curve
AA CC TT II VV E LE L EE AA RR NN II NN G G 11: : Demand curveDemand curve
A. The price of iPods falls
B. The price of music downloads falls
C. The price of compact discs falls
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Draw a demand curve for music downloads. What happens to it in each of the following scenarios? Why?
AA CC TT II VV E LE L EE AA RR NN II NN G G 11: : A. price of iPods fallsA. price of iPods falls
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Q2
Price of music down-loads
Quantity of music downloads
D1D2
P1
Q1
Music downloads and iPods are complements.
A fall in price of iPods shifts the demand curve for music downloads to the right.
Music downloads and iPods are complements.
A fall in price of iPods shifts the demand curve for music downloads to the right.
AA CC TT II VV E LE L EE AA RR NN II NN G G 11: : B. price of music downloads fallsB. price of music downloads falls
23
The D curve does not shift.
Move down along curve to a point with lower P, higher Q.
The D curve does not shift.
Move down along curve to a point with lower P, higher Q.
Price of music down-loads
Quantity of music downloads
D1
P1
Q1 Q2
P2
AA CC TT II VV E LE L EE AA RR NN II NN G G 11: : C. price of CDs fallsC. price of CDs falls
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P1
Q1
CDs and music downloads are substitutes.
A fall in price of CDs shifts demand for music downloads to the left.
CDs and music downloads are substitutes.
A fall in price of CDs shifts demand for music downloads to the left.
Price of music down-loads
Quantity of music downloads
D1D2
Q2
Market Demand Equation and Market Demand Equation and FunctionFunction
Combining Price and Non-price determinants:Total Market demand for a product = f (Price of the Product, Prices of other goods, Income, Tastes and Preferences of Consumers, Expectations and Number of Buyers)
Or, Qd = f (P, Po, I, T, E, B)In a functional form:
Qd = a1P+ a2Po+ a3I+ a4T+ a5E+ a6B
(Q = Parameter x Notation of variable.)
Estimating Industry Demand for New Automobiles
Estimated Valuefor Independent
Parameter Variable duringIndependent Variable Estimate Coming Year
(1) (2) (3)Average Price for New Cars (P) –500 $25,000Average Price for New Luxury Cars(PX) 210 $50,000Disposable Income, per Household (I) 200 $45,000 Population (Pop) (millions) 20,000 300Average Interest Rate (i) (percent) –1,000,000 8%Industry Advertising Expenditures (A) 600 $5,000 million
Find the market (Industry) demand equation (curve) for the new automobile.
1. If there are 400 suppliers with individual supply curves of
Qi = 15 + 2p, then the market supply curve is:
2. If there are 500 suppliers with individual supply curves of Qi = 15+ p and 300 suppliers with individual supply curves of Qi = 30+2p, then the total supply from the market is:
1. If there are 400 suppliers with individual supply curves of
Qi = 15 + 2p, then the market supply curve is:
Qs = 400(15 + 2p) = 6000 + 800p.
2. If there are 500 suppliers with individual supply curves of Qi = 15+ p and 300 suppliers with individual supply curves of Qi = 30+2p, then the total supply from the market is:
Qs = 500(15 + p) + 300(30 + 2p) = 16500 + 1100p.
CHAPTER 4 THE MARKET FORCES OF
SUPPLY AND DEMAND
Supply Curve ShiftersSupply Curve Shifters
The supply curve shows how price affects quantity supplied, other things being equal.
These “other things” are non-price determinants of supply.
Examples of input prices: wages, prices of raw materials.
A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts to the right.
CHAPTER 4 THE MARKET FORCES OF
SUPPLY AND DEMAND
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
0 5 10 15 20 25 30 35
P
Q
Suppose the price of milk falls. At each price, the quantity of Lattes supplied will increase (by 5 in this example).
Suppose a firm expects the price of the good it sells to rise in the future.
The firm may reduce supply now, to save some of its inventory to sell later at the higher price.
This would shift the S curve leftward.
CHAPTER 4 THE MARKET FORCES OF
SUPPLY AND DEMAND
Summary: Variables That Affect Summary: Variables That Affect SupplySupply
Variable A change in this variable…
Price …causes a movement along the S curve
Input prices …shifts the S curve
Technology …shifts the S curve
No. of sellers …shifts the S curve
Expectations …shifts the S curve
AA CC TT II VV E LE L EE AA RR NN II NN G 2G 2: : Supply curveSupply curve
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Draw a supply curve for tax return preparation software. What happens to it in each of the following scenarios?
A. Retailers cut the price of the software.
B. A technological advance allows the software to be produced at lower cost.
C. Professional tax return preparers raise the price of the services they provide.
AA CC TT II VV E LE L EE AA RR NN II NN G G 22: : A. fall in price of tax return softwareA. fall in price of tax return software
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The S curve does not shift.
Move down along the curve to a lower P and lower Q.
The S curve does not shift.
Move down along the curve to a lower P and lower Q.
Price of tax return software
Quantity of tax return software
S1
P1
Q1Q2
P2
AA CC TT II VV E LE L EE AA RR NN II NN G G 22: : B. fall in cost of producing the softwareB. fall in cost of producing the software
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The S curve shifts to the right:
at each price, Q increases.
The S curve shifts to the right:
at each price, Q increases.
Price of tax return software
Quantity of tax return software
S1
P1
Q1
S2
Q2
AA CC TT II VV E LE L EE AA RR NN II NN G G 22: : C. professional preparers raise their priceC. professional preparers raise their price
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This shifts the demand curve for tax preparation software, not the supply curve.
This shifts the demand curve for tax preparation software, not the supply curve.
Price of tax return software
Quantity of tax return software
S1
Market Supply Equation and Market Supply Equation and FunctionFunction
Combining Price and Non-price determinants:Total Market Supply for a product = f (Price of the Product, Input Prices, Technology, Expectations and Number of Sellers)
Or, Qs = f (P, Pi, T, E, S)In a functional form:
Qd = a1P+ a2Pi+ a3T+ a4E+ a5S
(Q = Parameter x Notation of variable.)
Estimating Industry Supply for New Automobiles
Estimated Valuefor Independent
Parameter Variable duringIndependent Variable Estimate Coming Year
(1) (2) (3)Average Price for New Cars (P) 2,000 $25,000Average Price for SUV(Psuv) -400 $35,000Average Hourly Wage Rate (W) -100,000 $85 Average Cost of Steel/Ton (S) -13,750 800Average Cost of Energy/mcf (E) –125,000 $4Average Interest Rate (i) in percent -1,000,000 8%
1. Find the market (Industry) supply equation (curve) for the new automobile.
2. Work out Practice: What happens to supply curve if any of the variable such as hourly wage rate changes.
Therefore, P = $25000Q = 20,500,000 – 500(25000) = 8,000,000
Numerical Problem on Demand and Numerical Problem on Demand and SupplySupply1) Suppose:Demand eqn. for a product: Qd = 286 −
20pSupply eqn. For a product: Qs = 88 +
40pFind Equilibrium Quantity and Price:
Numerical Problem on Demand and Numerical Problem on Demand and SupplySupply1) Suppose:Demand eqn. for a product: Qd = 286 − 20pSupply eqn. For a product: Qs = 88 + 40pFind Equilibrium Quantity and Price:Solution:
Qd = Qs
286 − 20p = 88 + 40p
60p = 198
P = $3.30
Q = 286 – 20(3.3) = 220
Some variations-Solved ProblemSome variations-Solved ProblemMarket Demand and Supply Case:
Given:
500 consumers with individual demand curves of Qi = 15−p
300 consumers with individual demand curves of Qi = 30−2p
Total demand from the market is: QM = 16500 − 1100p.
Find:
a) The total quantity buyers want to buy at price of $10:
b) The quantity that the 500 and 300 buyers want to buy at $10.
Some variations-Solved ProblemSome variations-Solved ProblemMarket Demand and Supply Case:
Given:
500 consumers with individual demand curves of Qi = 15−p
300 consumers with individual demand curves of Qi = 30−2p
Total demand from the market is: QM = 16500 − 1100p.
Find:
a) The total quantity buyers want to buy at price of $10:
At a price of $10, the buyers want to buy 16500− 1100 ・ 10 = 5500 units.
b) The total quantity that 500 and 300 buyers want to buy.
Each of the 500 buyers with an individual demand curves of
Qi = 15 − p wants to buy 15 − 10 = 5 units, for a total of 2500.
And each of the 300 buyers with individual demand curves of Qi = 30 − 2p wants to buy 30 − 2 ・ 10 = 10 units, for a total of 3000.