SHIFTS IN DEMAND

D D P2 P1 P0 S 0 D 0 1 2 D D S

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SNIPPETS

Demand for maize is expected to rise further and the price of maize Which was 6800 to 7000 a tonne is also likely to go up Farmers encouraged by a good price realisation may increase area under cultivation of maize (ET 8th June)
Jewellery demand constituted about 67% of the total demand for gold In 2006 with India being the major jewellery buying countries of the world . The demand for jewellery has picked up recently after witnessing An average fall of 20% in the recent few quarters on account of postponement of purchases due to high prices has resulted in a marginal drop in prices by 0.9% Supply side:However gold prices are likely to grow up due to reduced Production of gold to the extent of 2471 metric tonnes (3 yr low) (ET 4TH June)

Coke and Pepsi suffer their worst summer this year with a sales dip Of 15-17%. A relatively mild summer in April-May coupled with shifting consumer preferences towards functional beverages like juices And juice based drinks ARE THE REASONS FOR THIS Daburs real and pepsi CoS Tropicana -18% growth (ET-6TH June}

Demand for and production of imitation jewellery increases owing to fluctuation in prices Of gold and silver ET-7TH June After being highly popular in Japan , Italy and Germany Today there are nearly 160 retailers in India as compared to 12 in 2003 for PLATINUM . A record 300% rise in demand in platinum. Jewellery . Shift in taste for the more elegant and durable metal. Tanishq and Kiah have come out with platinum range to satisfy Customers

Of the annual TV sales of about 10 million in India 90 people had Shifted from curved to flat and now manufactures are advertising the slim model to resemble the far costlier LCD.Slim category has grown 30-35% already due to advertisement-LG,Samsung and Haier. ET 4TH June Strong economic growth witnessed in emerging economies and demand for biofuels leads to increase in demand for oilseeds in india- ET 28t

A SIMPLE NUMERICAL EXAMPLE-WORLD OIL MARKET

Short run demand for oil D= 35.5 -0.03P Short run competitive supply of oil S= 18.0 +0.04P

Calculate the following (ALTERNATE SCENARIOS) Equilibrium price

in the market currently If OPEC supplies 14bb/year If demand for oil drops by 5bb/ year Quantity supplied by Saudi Arabia stops due to political upheaval (They contribute 3bb per year to OPEC)

1) GIVEN BELOW IS THE WEEKLY DEMAND AND SUPPLY FOR MILK PRICE 9 10 11 12 13 14 DEMAND 18 16 14 12 10 8 SUPPLY 18 20 22 24 26 28

(A) DERIVE THE DEMAND AND SUPPLY FUNCTION (B) AT WHAT PRICES WILL NO MILK BE DEMANDED (C) FIND THE EQUILIBRIUM PRICE & QUANTITY (D) INDICATE AN INCREASE IN BOTH DEMAND AND SUPPLY (BY 6lts each) GRAPHICALLY SOLUTION FORM OF A LINEAR DEMAND FUNCTION Q = + bP = Qty demanded when price = 0
6

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Q= bP b = Q = -2 = -2 P 1 Q = - 2P (1) PUTTING THE VALUE OF b IN eq (1) WE GET 10 = -2 (13) = 36

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SUPPLY FUNCTION : FOR EVERY ONE RS. IN PRICE LEVEL SUPPLY OF MILK ses BY 2 LAKH Qs = + 2 P (3) ( in this case =0) (B) WHEN NO MILK IS DEMANDED DEMAND FUNCTION IS AS FOLLOWS Q=0 Q= 36-2P 2P = 36 P = 36/2 =18

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Responsiveness of QUANTITY DEMANDED to

a) Price b) Income c) Advertisement outlay d)Cross elasticity

Price elasticity
Ep = Percentage change in quantity demanded
Percentage change in price

Income elasticity
Percentage change in Quantity demanded Percentage change in Income

Advertisement Elasticity :
Percentage change in Quantity demanded Percentage change in Advertisement expenditure
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CROSS ELASTICITY
PERCENTAGE CHANGE IN QUANTITY DEMANDED OF X PERCENTAGE CHANGE IN PRICE OF Y WHERE X&Y ARE RELATED GOODS

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RESPONSIVESS OF THE QUANTITY DEMANDED TO CHANGE IN PRICE

ep = PERCENTAGE in Qty demanded PERCENTAGE in PRICE USING CALCULAS WE GET

Q P P Q
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Q P = = = =

Q INFINITISMAL IN QTY INFINITISMAL IN PRICE ORIGINAL PRICE OF GOOD

ORIGINAL QTY OF GOOD

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WITHOUT USING CALCULAS

LET
ep

Q1 & P1 Q 2 & P2
= Q 2 - Q1 P2 - P1 P1 Q1

BE ORIGINAL VALUES BE NEW VALUES

EG ASSUME P1 Q1

= 5 , P2 = 20 , Q 2 5 20

= 10 = 10 = -0.5

ep

10 - 20 10 - 5

So As PRICE

ses Qty DEMANDED FALLS BY (-0.5) 50%

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= Y2 - Y1

Q1

THE FOLLOWING TABLE SHOWS THE QUANTITY DEMANDED OF MEAT AT VARIOUS INCOME LEVELS . FIND ey BETWEEN SUCCESSIVE LEVELS OF INCOME

INCOME 4000 6000 8000 16000 18000

QUANTITY (kg/ MONTH) DEMANDED ey 10 20 30 35 25 2 1.5 0.67 0.33 -2.29

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APPLY

Q1

Q2 - Q1 . 2 - 1 10 2000 -

1 Q11 4000 10 = 2

CROSS ELASTICITY (ecxy)

FIND THE CROSS ELASTICITY OF DEMAND BETWEEN (a) COKE (X) AND PEPSI (Y) (b) COKE (X) AND SUGAR (Z)

exy = Qx . Py Py Qx exZ = Qx . Pz Pz Qx
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BEFORE COMM PEPSI (Y) COKE (X) SUGAR (Z) COKE(X) P 13 8 10 8 . Py Qx Pz Qx Q 30 15 10 15 = (10 -15) X 13 11-13 15 =

AFTER P 11 8 11 8 Q 40 10 9 12

xy

= Qx Py
=

= 2.17

exz

Qx . Pz

(12 -15) 11-10

10 15

= -2

x& = x &z =

SUBSTITUTES COMPLEMENTS

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RELATIONSHIP BETWEEN AR, MR AND ELASTICITY

TOTAL REVENUE ( TR)= PRICE(P) X QUANTITY (Q)

AVERAGE REVENUE (AR) =TOTAL REVENUE PER UNIT AR= R/Q =PQ/Q MARGINAL REVENUE ( MR) = ADDITIONAL REVENUE WHICH A SELLER OBTAINS BY SELLING AN ADDITIONAL UNIT MR= R Q R = P.Q ..eq1 Differentiating both sides of the equation we get MR= R Q P+ Q
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=P Q Q X P Q

+Q P ...eq2 Q

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P(1+ Q X P) P Q ELASTICITY OF DEMAND =/ep/= P Q . Q .eq3 P

Substituting the value of ep in MR Eq WE GET.Note that elasticity Of demand has a negative sign so when modulus is removed then Minus sign appears in the formula as shown below

(Since 1/e= 1/P . - Q ) Q P MR=P( 1-1/e) MR= AR(1-1/e)

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RELATIONSHIP BETWEEN ep , MR ,P and TR

E=1,MR=0,

Ep>1,MR>0, Ep<1,MR<0

TR is max and it remains same when p rises TR falls as price rises TR Rises when p rises

MR=P(1-1/E)

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