Yield Management No. 3 Supply and Demand

8/3/2019 Yield Management No. 3 Supply and Demand

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Presentation No. 3DEMAND & SUPPLY

1. Review of demand and supplydefinitions and concepts.

2. Influencing factors of the demandand the supply.

3. Market Equilibrium and MarketIntervention

4. Price Elasticity

Yield Management (5249)


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1. Basic Concepts: Definitions

Market is the social institution in which goods, services andproduction factors (labor, land, capital) are exchanged free andvoluntarily among sellers and buyers.

Place where consumers and producers can freely act (selling orbuying) searching their own interests ( invisible hand A Smith ).Production is the process of transforming available resources intogoods and services which are used to satisfy wants and needscommonly known as consumption .Supply and Demand are the forces that make the market to work.Price system is the mechanism by which buyers and sellersexpress their desires and arrive at an agreement reaching marketequilibrium and the exchange of goods and services.


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Market intervention: Price Control

Rationing: the prices direct (allocate) thestock of a good (service) toward the users thatmore value it. (- rate control )

Assigning: the prices attract resources

toward those sectors in which benefits areproduced, and they deviate them of thesectors in which losses are produced.(capacity management )


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1.a Demand and Demand Chart

It reflects the quantity of a good that thebuyers want and they can buy.

The demand of a good can be expressedby a demand chart where the differentquantities demanded according to theprice are collected.

It reflects the different calculations price-benefit that the buyers of a good do:

Cost : the market price of any good.

Benefit : satisfaction that the goodprovides.


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Demand Curve

The demand curve is thegraphic representation ofthe relation among theprice of a good and thequantity demanded.

Nevertheless, the

demand of a good doesnot depend alone of itsprice. What other factorsinfluence in the demand?


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The demand equation is the mathematical functionthat collects the relation among the quantity demandsof a good and other variables

The demand equation

QA = D (P A, Y, P B, G, N)

PA = Price of analyzed good

Y = Disposable incomeP B = Price of substitute or complementary goods

G = Inclinations and preferences of the consumers N = Scale (size) of the market (population)

E = Expectations (on future levels of income or prices)


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P A = Price of the analyzed good

We have seen that the demand curve has anegative slope.

Demand Law : The quantity demanded of a gooddecreases when its price increases and increases whenprice decreases, being maintained all others variablesconstant (

ceteris paribus). Example of a demand curve equation:

QA = 10,000 200 P A


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It shows the different quantities of a goodthat the producers are willing and canoffer (supply) in exchange for a price.

Similar to the demand, the supply can bespecified inside a chart of offerings thatreflect the different quantities supplied(offered) to different prices.

It reflects the different calculations cost-benefit that the producers of a good do:

Cost : the production cost of goods.

Benefit : the market price of any good.

1.b Supply and the chart of supply


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The supply curve is thegraphic representationof the relation among

the price of a good andthe quantity offered.The offering of themarket can also beexpressed through afunction of offering (supply) where all thefactors that influencethe quantity offered arereflected.

The supply curve


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The supply equation

It collects the existing mathematical relation among the quantityoffered of a good, the price and the others variable that influence inthe decisions of production.

QA = S (P A, P B, r, z, H, E, M)

PA = Price of the analyzed goodP B = Price of substitute or complementary goods

r = The price of the productive factors z = Technology costH = The number of competitor suppliers E = Expectations on variations in the prices M= Weather and environmental changes (i.e. agricultural products)


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P A = Price of the analyzed good

We have seen that the supply curve has apositive slope.

The Law of supply express the direct relationthat exists between the price and the quantitysupplied (offered): upon increasing the price,the quantity supplied also increases. ( ceteris paribus)

Example of a supply curve equation: QA = 500 + 1000 P


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2.a Changes in the demanded quantityversus shifts in the demand curve

The changes in the components of the function of demandcauses different movements in the curve of demand

PA = Price of analyzed good(independent variable)

Y = Disposable income

PB = Price of substitute goodsG = Inclinations and preferencesN = Scale (size) of the marketE = Expectations(ceteris paribus)

Movements along thecurve of demand

Displacements of thecurve of demand


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Changes in the demanded quantity: Movementsalong the curve of the demand

A

B

Price ($)

Quantity

PA

PB

QA QB

D

DCaused by thechanges in theprice ($)


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Shifts in the demand (cont): Displacements of the demand curve


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2.b Changes in the supplied quantity versusshifts in the supply curve

The changes in the components of the function of supplycauses different movements in the curve of supply

PA = Price of analyzed good(independent variable)

PB = Price of substitute goodsr = Price of the productive factors

z = Technology costH = The number of competitorsE = ExpectationsM= Weather(ceteris paribus)

Movements along thecurve of supply

Displacements of thecurve of supply


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Changes on the supplied quantity: Movements along the curve of the supply

PA

PB

QA QB

Caused bychanges in the

price ($)

S

Price ($)

QQuantity


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Changes on the supply: Displacements ofthe curve of supply


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3.a The Market Equilibrium

It will be reached there where concur thedemand of the consumers with the offering ofthe producers. Meet of quantities and prices. The price of equilibrium is that in which itempties the market so that the quantitydemanded and offered is the same one.

Therefore, the equilibrium is found in theintersection of the curve of demand with thecurve of supply.


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The Market Equilibrium


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When the price is over theprice of equilibrium, itgenerates a surplus (excessof supply).

The market will seek

the equilibrium reducingthe quantity supplied andincreasing the quantitydemanded.

The Market Equilibrium: Situations out ofequilibrium (Surplus)

Surplus


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When the price is lower tothe price of equilibrium, it

generates a shortage(excess of demand)

The market will seek theequilibrium increasing thequantity offered andreducing the quantity

demanded.

The Market Equilibrium: Situations out ofequilibrium (Shortage)

Shortage


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A hotel manager has studied the supply and demand behavior of the market andas a result he (she) has generated the following results (shown in the next tableof Price ($ per room per night) vs Number of Rooms Supplied and Demanded).

Price Supply Demand($ / room) (rooms) (rooms)

0.00 0 7050.00 0 6065.00 10 5080.00 15 4095.00 20 30

110.00 25 25125.00 30 20140.00 40 15155.00 50 10

1 . Based on these results, draw the supply and demand curves andshow the equilibrium point of the market2. If the manager use a price of $80 /room, what is the shortage of rooms?3. If the manager use a price of $140 /room, what is the surplus of rooms?

EXAMPLE


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In the hospitality industry, the demand is generated by the customers and the supply is controlled by the hoteliers.

A. Scenario: when Prices are increasing

Prices are adju sted UP ($/night/room)

High P.

Low P.

Qo < Qd

Quantity (Rooms)Shortage

The supplyincreases

The demanddecreases


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In the hospitality industry, the demand is generated by the customers and the supply is controlled by the hoteliers.

B. Scenario: when Prices are decreasing

Qo > Qd

Quantity (Rooms)

Prices are adjusted DOWN ($/night/room)

Low P.

High P.

Surplus

The supplydecreases

The demandincreases


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Both (supply and demand) curves can displace at thesame time to reach market equilibrium


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3.b Market intervention

The fact that the results of equilibrium are efficient doesnot mean that they are desirable in absolute terms. Forinstance, it could occur that the markets get in

equilibrium but many people have not access todetermined goods of first need. (i.e. food)

The worry by the population welfare can motivate thegovernment to alter the results of the market: byimplementing :

Policy of price control (price floor and price ceiling)

Taxes


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P

Q

O

PE

QE

D

P MINSurplus

QD QO

Policy of price control:Floor (minimum) Price

It is the price of a goodestablished by law and

supported by the offeringof the State to buy thatgood to that floor price established.

The floor price is overthe price of equilibrium, asurplus is produced (excess of offering) that isbought by the State.


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P

Q

O

PE

QE

E

DP MAX

Shortage

QO QD

Policy of price controlCeiling (maximum) Price

Level above which the

law does not permit torise the price of a good.

The maximum orceiling price is lower tothe price of equilibrium,shortage is produced(excess of demand).


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4. Price Elasticity

Definition: the measure of responsiveness in the quantitydemanded for a good as a result of change in price of the samegood. It is a measure of how consumers react to a change in price.

Formula: the formula used to calculate price elasticity for a givenproduct is:

Point-price elasticity = (P/Q) * ( Q/P) Where Q = Quantity P = Price. (Q/P) = is the derivative of the demand function.


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Elasticity - Example

Suppose a certain good (say, laserjet printers) has a demand curve Q = 1,000 0.6P . We wish to determine the point-price elasticity ofdemand at P = $80 and P =$40.

First, we take the derivative of the demand function (Q vs P):

Next, we apply the equation for point-price elasticity, to the orderedpairs ($40, 976) and ($80, 952).We have at P=40, point- price elasticity e = 0.6(40/976) = 0.02. and at P=80, point- price elasticity e = 0.6(80/952) = 0.05.


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Elasticity

In simpler words, demand for a product can be said to be veryinelastic if consumers will pay almost any price for the product, andvery elastic if consumers will only pay a certain price, or a narrowrange of prices, for the product.

Inelastic demand means a producer can raise prices without muchhurting demand for its product, and elastic demand means thatconsumers are sensitive to the price at which a product is sold andwill not buy it if the price rises by what they consider too much.Drinking water is a good example of a good that has inelasticcharacteristics in that people will pay anything for it (high or low priceswith relatively equivalent quantity demanded), so it is not elastic.On the other hand, demand for sugar is very elastic because as theprice of sugar increases, there are many substitutions whichconsumers may switch to.
http://en.wikipedia.org/wiki/File:Perfectly_Inelastic_Demand.GIF


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Elasticity - Summary

Value Meaning n = 0 Perfectly inelastic.

(1 < n < 0) Relatively inelastic.

n = 1 Unit (or unitary) elastic.( < n < 1) Relatively elastic.

n = Perfectly elastic.

Perfectly elastic demandPerfectly inelastic demand
http://en.wikipedia.org/wiki/File:Perfectly_Inelastic_Demand.GIFhttp://en.wikipedia.org/wiki/File:Perfectly_Elastic_Demand.GIF


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The end !!!

Yield Management No. 3 Supply and Demand

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