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Demand, Supply and the Market

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Coverage 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 do prices act as incentives How responsive are demand and supply to

those incentives

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The significanceIn decision making on price, use of existing

resources, planning for future resources usage, advertising evaluation, manipulating demand, determination of profit, predicting future trends

Evaluating the impact of government price controls, minimum wages, price support and production incentives

Determining how subsidies, taxes, tariffs and import quotas affect consumers and producers

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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.

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Case Coke’s perception of market shareDiet, 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

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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

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Demand Function

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Demand function with ceteris paribus condition

Qdx = f (Px) cet. Par.

Demand and Derived DemandThe Law Of Demand

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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 pppdPercasie Municipality provided special bags for

40p-1.5$MC increased from 0-4% per poundTrash picked up in approved bags onlyRecycling for cans , bottles and newspapersTrash reduced by 1 ppppd, 40% lessPaid 30% less

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Demand functionQdX = 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 periodPx = the own price of the product or service xOx = the number of outlets through which x is

distributedAx= the level of advertising or promotion for xStx = the style or design of xPz = the price of a related good,a substitute or

complement

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Oz = the number of outlets for a competitor product/service

As = the level of advertising for the related productStz = the style or design of related product.

Y = the income of consumers and distribution.T = the tastes or preferences of consumersE = the expectations of consumers with regard to price, etc.Cr = the cost and availability of credit

G = government policyPop = the change in the populationW = weather conditions

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Px, Ox, Ax, Stx - strategic variables

Pz, Oz,AzStz -_competitor’s variables

Y, T, E - consumer variablesW, Pop, G, Cr - other variables

Dependent and independent variablesGovt. raises income tax

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Positively Sloped Demand Curve – indicator of quality (1970 UK tea retailers), economic cycles

Change In The Quantity Demanded Change In Demand

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ExerciseAn economic consultant for x corporation recently

provided the firm’s marketing manager with this estimate of demand function for the firm’s 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?

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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.

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Supply function with ceteris paribus condition

Qsx = f ( Px ) cet. Par.

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Law of Supply

when price of a good rises the quantity supplied will also rise.

Why?

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Higher Cost Higher Profit Levels New Producers

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Supply functionQsx = f(Px,Fe,Fp,Po,G,W,E,Cn,N,C,T-------------)Qsx = quantity supplied of xPx = product priceFe = factor productivities (efficiencies) or the

state of technologyFp = factor pricePo = prices of other related productG = firm’s goals

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C = character of the firms in the industryT = time lagE = firm’s expectations about future prospects for prices, costs, sales and the state of economy in general.Cn = Porter- Consumer’s sophisticated and knowledgeable demands at home (Japanese cameras, Nokia of Finland, Ericsson of Sweden)N = number of firmsNr=natural shocks(weather, diseases, wars, machine breakdown, industrial disputes, fire, flood, earthquake)

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ExerciseThe supply of oil for central heating will

increase or decrease?- New oil fields start up in production- the demand for central heating rises- the price of gas falls- oil companies anticipate an upsurge in demand for central-heating oil- the demand for petrol rises- new technology decreases the costs of oil refining- all oil products become more expensive

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Exercise

Find out possible reasons for increasing supply of butter

Do you see the relationship between the markets of nitrogen and butter?

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ExerciseQsx = 200 + 80P – 20a1 – 15a2 + 30jWhere 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?

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Equilibrium price and quantity Monthly price

(Rs. Per kg)Md (tons) Ms (tons)

4 700 100

8 500 195

11 450 450

16 400 540

19 190 810

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Equilibrium in the market

Market equilibriumShifts in demand and supply and their

effects on equilibrium conditionsDemand and supply curves in wrong

directions. Metastable equilibrium – state of apparent

equilibrium Walrasian and Marshallian stable and unstable

equilibrium Market with general equilibrium approach

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General equilibrium

price of nitrogen, technology, subsidies,

profit of skimmed milk powder and other cream products, weather, prices in future.