Demand, Supply

and
the Market

 Pepper remains hot as demand

outstrips supply
Service tax will be lower for travel by
AC train and air
Power demand in Delhi touches new
high, blackouts continue

Sequence of discussion
What are demand and supply
What determines demand and supply
What is the relationship between
demand, supply and price
How does the price mechanism
transmit information to economic
agents
How responsive are demand and
supply to market incentives
3

The market
A group of firms and individuals in touch with
each other in order to buy or sell some goods,
vary in their size, arrangement and procedures.

Case-Cokes perception of market

share
Diet, caffeine free, diet caffeine free coke varieties
and also Sprite and Minute Maid Orange Juice
competing with Pepsi
For carbonated cola soft drinks, Coke and Pepsi
share 80%
Coke views as Stomach Share for its market for
potable liquids
64 ounces of fluids to be consumed to survive each
day
Coke accounts for less than 2 ounces i.e. 3%
market

 100 tons of steel are demanded by

Maruti Suzuki
Diesel demand is going to be robust
due to economic growth
Gold demand increases in India
during festivals

Demand is defined as the

amount of money customers are
willing to pay during a specific
period and under a given set of
economic
conditions-demand
which is backed up by the ability
to pay

Rational consumers

Demand Function

Demand function
with ceteris paribus condition
Qdx = f (Px) cet. par.
Demand and Derived Demand
The Law Of Demand

Case- Law of demand solves

environmental
problem
1960-American discarded an avg. of

2.6 pounds per person per day

(ppppd)
Residents of Percasie, Penn paying
annual fee of $120 per person
2.2 pound of trash pppd
Percasie
Municipality
provided
special bags for 40p-1.5$
MC increased from 0-4% per pound
Trash picked up in approved bags
only
Recycling for cans, bottles and
newspapers
Trash reduced by 1 ppppd, 40% less
Paid 30% less
10

Demand function
QdX = f (Px, Ox, Ax, Stx, Pz, Oz, Az, Stz, Y, T, E, Cr, G,
Pop,W,--)
Where Qdx = the qty. demanded of good x in a
given time period
Px = the own price of the product or service x
Ox = the number of outlets through which x is
distributed
Ax= the level of advertising or promotion for x
Stx = the style or design of x
Pz = the price of a related good, a substitute or
complement
11

Oz = the number of outlets for a competitor

product/service
As = the level of advertising for the related
product
Stz = the style or design of related product.
Y = the income of consumers and distribution.
T = the tastes or preferences of consumers
E = the expectations of consumers with regard to
price, etc.
Cr = the cost and availability of credit
G = government policy
Pop = the change in the population composition
W = weather conditions
12

Px, Ox, Ax, Stx - strategic variables

Pz, Oz,AzStz -_competitors variables
Y, T, E - consumer variables
W, Pop, G, Cr - other variables

13

Positively Sloped Demand Curve

indicator of quality, economic cycles
Change In the Quantity Demanded
Change In Demand
Individual and market demand

14

Internet affects demand and

supply
Enemy of high prices and high profit
margins by eliminating geographical
boundaries > increasing price elasticity
of demand
Olx, futurebazar, flipkart, amazon
Bargain prices, broad assortment of
attractive products and speedy delivery,
returns and after sales services
Traditional retailers to compete and use
internet
15

Exercise
An economic
consultant for x corporation
recently provided the firms marketing
manager with this estimate of demand function
for the firms product.
Qdx = 12,000 3Px + 4Py 1Y + 2Ax
Suppose X sells for Rs. 200 per unit, Y for Rs.
15 per unit, the company utilizes Rs. 2,000 of
advertising and consumer income is Rs.10,000.
How much of good X do consumer purchase?
Are goods X and Y substitute or compliments?
Is good X a normal or an inferior good?
16

Supply
A quantity of a commodity that a
producer or a supplier is willing
to sell at various given prices
over a specific time period.

17

Supply function
with ceteris paribus condition
Qsx = f ( Px ) cet. par.

18

Law of Supply
When price of a good rises the
quantity supplied will also rise.
Why?

19

 Higher Cost
Higher Profit Levels
New Producers
Complete supply function

20

Supply function
Qsx
=
f(Px,Fe,Fp,Po,G,W,E,Cn,N,C,T----------)
Qsx = quantity supplied of x
Px = product price
Fe = factor productivities (efficiencies)
or the
state of technology
Fp = factor price
Po = prices of other related product
G = firms goals
21

T = time lag
E = firms expectations about future
prospects for prices, costs, sales and the
state of economy in general.
Cn = Porter- Consumers sophisticated and
knowledgeable demands at home (Japanese
cameras, Nokia of Finland, Ericsson of
Sweden)
N = number of firms
C = character of the firms in the industry
Nr=natural shocks
(weather, diseases, wars, machine
breakdown, industrial disputes, fire, flood,
earthquake)
22

Exercise
Find out possible reasons for
increasing supply of butter.

23

Exercise
Qsx = 200 + 80P 20a1 15a2 + 30j
Where

Qsx - quantity supplied of X, P is price

of X, a1, a2 are profitability of two
alternative goods that could be
supplied instead, and
j is the
profitability of a good in joint supply.
Explain why P and j terms have a
positive sign, whereas a1 and a2 have
a
negative
sign?
24

25

Equilibrium price and quantity

Monthly price
(Rs. Per kg)

Md (tons)

Ms (tons)

700

100

500

195

11

450

450

16

400

540

19

190

810
26

Equilibrium in the market

Market equilibrium
Demand and supply in wrong
direction
Marshallian
and
Walrasian
equilibrium and disequilibrium
Metastable equilibrium
General Equilibrium
Do you see a relationship between the
markets of nitrogen and butter?
27