ME Session2

7/23/2019 ME Session2

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Copyright © Amity University1

PAN African eNetwork Project

Diploma in Business Management

Managerial Economic & Analysis

Semester - I

Sonia Singh



Copyright © Amity University

Meaning of Demand

Conceptually, demand can be defined as the desire

for a good backed by the ability and willingness topay for it. The desire without adequate purchasingpower and willingness to pay do not becomeeffective demand and only an effective demandmatters in economic analysis and businessdecisions.




Types of Demand

The demand for various commodities is generallyclassified on the basis of the consumers of the

product, suppliers of the product, nature ofgoods, duration of the consumption of thecommodity, interdependence of demand, period ofdemand and nature of use of the

commodity(intermediate or final.




•!ndividual and Market Demand •"utonomous and derived demand

•Demand for durable and nondurable goods

•Demand for firm#s product and industryproduct

•Demand for consumers and producers goods




!ndividual and Market DemandThe quantity of a commodity which an individual iswilling to buy at a particular price during a specifictime period given his money income, his taste andprices of other commodities is called individual#sdemand for a commodity.$n the other hand market demand of a commodity isthe summation of individual demand by all the

consumers. Market demand is a multivariaterelationship and determined by many factorssimultaneously.




Demand for durable and nondurable goods

Durable goods are those whose total utility is note%hausted in a single or short run use. &uch goods

can be used repeatedly over a period of time.Durable goods may be consumer goods as well asproducer goods.

The demand for nondurable goods depends largely ontheir prices, consumer income and is sub'ect tofrequent change.




"utonomous and derived demand

The demand for a commodity that arises on itsown out of a natural desire to consume orpossesses a commodity independent of the

demand of other commodities, the demand forthe product is termed as independent.

Commodities like tea and vegetables do come onabsolute terms. $n the other hand if thedemand for a product is tied to the demand forsome parent product, the demand is termed asderived demand.


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Demand for firm#s product and industryproduct

irm#s demand denotes the demand for the productsby a particular company or firm whereas industrydemand is the aggregation of demand for the

product of all the firms of an industry as a whole.



Demand for consumers and producersgoods

Consumer goods are those, which are, meant forthe final consumption by the consumers or theend users. )roducer*s goods on the other handare used for the production of consumer goods orthey are intermediate goods, which are furtherprocessed upon to convert them into a form to be

used by the end user. "nother distinction is thatthe demand for producer#s goods is deriveddemand and it indirectly depends on the demandfor the consumer goods which the producer goods

is used to produce.



Determinants of Demand

•$wn )rice•

)rices of related goods→

&ubstitutesand Complements •!ncome•Tastes + )references•

%pectations•)opulation•$ther e%ogenous factors



Demand "nalysis

-aw of Demand There is !nverse relationshipbetween price and quantity demanded ceterisparibus i.e.,other factors remaining constant.

Demand &chedule " list / table showing

quantity demanded of a good at differentprices, all other things being held constant



Demand unction The determinants of quantitydemanded when summari0ed in the form offunctional notations are called a demand

function. " typical demand function can bespecified as follows1

23D 4 f ( p%, p5,6..pn, 7, T, y, p, u

Demand Curve 8epresents the relation betweenprice and quantity demanded of a good, all otherthings being held constant.



Price Qty (D)

1 5

2 4

3 3

4 2

5 1

Demand schedule and demand curve



• The graph shows that the demand curve is downwardsloping.

• A decrease in the price is reflected y a correspondingincrease in the amount of !uantity demanded.

• This inverse relationship etween price and the !uantitydemanded is depicted in the shape of the demandcurve. The downward slope of the demand curve

• reflects the law of demand" which states that other things

remaining• the same" if the price of any good decreases its !uantity

demanded

• increases and vice versa.



#ndividual Demand and $ar%et Demand

& Market demand

& The sum of the demands of all the uyers in a

mar%et.

& The mar%et demand curve is the hori'ontal

sum of the demand curves of all uyers in the

mar%et



$ar%et Demand



()ceptions of law of demand

1. *iffen goods +if the concerned good is a

*iffen good the rational consumer will go

on decreasing his consumption of the

good as the price falls. This is ecause a

*iffen good is such that the consumerpurchase less and less of the good as its

price falls and vice versa.



,.-elen effect+a consumer may udge a

good y its price . Thus" when a price

hi%e ta%es place for a good the

consumer may e misguided to thin% thata !uality improvement has ta%en place

and he consumes more of the product.



/.Consumer e)pectations+

0.$ar%et trend+ in the share mar%et it is

noted that when the price of a particular

share rises its demand also increases to

some people and vice versa.



hat 2appens to Demand if34

SITUATION: You’re the ower o! " hot #o$ %"&i$

co%'"y:

(") 'eo'e ch"$e their 're!erece !ro%

h"%ur$er* to hot #o$*+





co%'"y:

() Your coutry e$oti"te* " #e" w, -hi"

to tr"#e hot #o$* !or e$$ ro*+





co%'"y:

(c) the 'rice o! $rou# ee! icre"*e*+





co%'"y:

(#) the %ii%u% w"$e ri*e*+





co%'"y:

(e) the tr"#e uio thre"te* " *tri&e i!

ower* !"i to %eet their #e%"#*+





co%'"y:

(!) ue%'oy%et hit* " ".ti%e hi$h+





co%'"y:

($) the 'rice o! u* icre"*e* #ue to "

whe"t *hort"$e+




Changes in Demand

& Change in the quantity demanded

& A change in the !uantity of a good that people

plan to uy that results from a change in the

price of the good. & Change in demand

& A change in the !uantity that people plan to

uy when any influence other than the price ofthe good changes




A Change in 5uantity Demanded

• A change in

quantity

demanded is

caused y achange in the price

of the good" which

causes a

movement along

the demand curve.

Shift i th D d C




D,

D6

D1

5uantity

6

7 r i c e

Shifts in the Demand Curve




Shifts in the demand curve

• hen the demand curve shifts from D0 to D1"

more is demanded at each price.

• hen the demand curve shifts from D0 to D2 " less

is demanded at each price.




• Such and increase8decrease in demand can

e caused y+

• A rise 8fall in the price of a sustitute

• A fall8rise in the price of a complement• A rise8fall in income

• A redistriution of income towards those

who favour the commodity

• A change in tastes that favours the

commodity




hat #s Supply4

• Supply of a commodity refers to the various

!uantities of the the commodity which a seller is

willing and ale to sell at different prices in a

given mar%et" at a point of time.

• Supply is related to scarcity. #ts only the scarce

goods which have a supply price9 *oods which

are freely availale have no supply price.




Factor affecting the supply of commodity

1/ !e price of commo"ity#- The *u''y o!

co%%o#ity 0ery %uch #e'e# u'o it* 'rice/ There i*

#irect "# 'o*iti0e re"tio*hi' etwee 'rice o!

co%%o#ity "# *u''y/




2/ !e price of t!e su$stitutes#-The *u''yo! " '"rticu"r co%%o#ity i* i0er*ey

re"te# with the 'rice o! other

co%%o#itie**uch "* the *u''y o! whe"t

wi !" with the ri*e i 'rice o! rice/Thi* i*

#ue to the !"ct th"t ri*e i 'rice o! rice wi

ecour"$e the 'ro#ucer* to 'ro#uce %ore

rice/co*euety "re" u#er whe"t wi ee**er "# the *u''y wi o! #ecie/

/




/.Change in technology:-#f the change in

technology or new discoveries ring

reduction in price and increase in

production"this will increase the level ofsupply also.




• 0.Goals of firm:-*enerally the aim of firmis ma)imi'e the profit. :eside thisma)imum sales"ma)imum output or

ma)imum employment is also ta%en as thegoal s of firm..This goals change in themaffect the supply of commodity.sometimesthe producer may continue to ma)imi'e

the supply of commodity without profitsimply to uild the their image and prestigein society




5/E%pecte" c!ange in price#-I c"*e 'ro#ucer e'ect " icre"*e

i the 'rice they wi try to with#r"w $oo#* !ro% the

%"r&et/-o*euety*u''y wi re#uce /I! 'rice i* e'ecte# to !"i the %"r&et *u''y wi "tur"y icre"*e/

'Natural factors #- Su''y o! $oo# i* " '"rt o! $oo# 'ro#uce/It %e"

th"t %ore 'ro#uctio o! $oo# wi re*ut it* %ore *u''y "# 0ice 0er*"//A$ricutur" 'ro#uctio #e'e#* u'o the "tur" !"ctor* *uch "*

r"i!ertiityci%"tic co#itio etc/ 'ro#uctio %"y e "#0er*ey "!!ecte#

y #rou$ht "# he"0y r"i* "# !oo# etc/




('Means of transportation an"

communication#-A#eu"te *u''y o!

co%%o#itie* i* %"it"ie# I! the %e"* o!

tr"*'ort"tio "# co%%uic"tio "re

#e0eo'e#/Sc"rcity o! $oo# wi e e** i the

#o%e*tic %"r&eti! the %e" o! thetr"*'ort"tio "# co%%uic"tio "re

'ro'ery #e0eo'e#/




8.Taation !olicy:-The production of commodity is

discouraged "if heavy duty in on its products is

imposed .#n the same way ta) concession

encourage producer to increase supply. ".#greement among !roducer:-Sometime all the

firms producing the same commodity forms an

association" pool or a syndicate and regular

supply of the goal in such way "so that they mayget ma)imum profit.




Law of Supply says, supply of the commodity will increasewith increase in price and decrease with decrease in price,other things remaining the same. In other words, price ofany commodity is directly related with the quantity supplied .

According to Dooley, ”the law of supply states thatother things remaining the same , higher the price, the

greater the quantity supplied or lower the price, thesmallest the quantity supplied”.




When we are talking of supply, we are bound to viewwith the eyes of producers , not the consumers,because it’s producers who are the suppliers.

It is quite natural that in case of increase in prices

producers will like to multiply their prot. For thisthey will be required to sell more quantity of goodsand thus the supply of goods will increase. igherprice in this way induces the sellers to increase thesupply of goods. !n the other hand, low prices reducesthe margin of pro"t so the producer reduces thesupply.




#he price cannot fall below a certain point .In case theprice falls too much the supply of the product may bestopped .#he price below which the producer will not bewilling to sell is $reserved price”.

#he amount of reserved price depends upon %&'

(.)urability of commodity

*.+stimated price

.-torage charges

.#ransportation charges etc.

/+-+/0+) 1/I2+




(.#here is no change in price of relatedcommodities. *.#here is no change in technique of production.

.#here is no change in price of factors of production.

.#here is no change in goal of "rm.

3.#here is no e4pectation of change in the price ofthe

commodity.




7;(S(<TAT#=< => ?A T2;=U*2

SU77?@ SC2(DU?(

• *ives a full account of supply of a

particular commodity

• ?aw of supply can e etter e understood

with the help of supply schedule

• ;elation etween price )B of good and its

supply




7;(S(<TAT#=< => ?A T2;=U*2 SU77?@

CU;-( • *raphical representation of supply schedule is

supply curve

• #t is an upward sloping curve from left to right• Thus oth supply schedule and supply curve

show law of supply i.e" they show a positiverelationship etween price and supply




7resentation of law of supply through

supply curve

The graphical representation of the supply schedules supply curve. The

relationship etween the !uantity sellers want to sell during some time

period and price is what economists call the supply curve. #t is an

upward sloping curve from left to right. This shows !ositive relationship

etween price and supply.

Though usually the relationship is positive" so that when price increases

so does !uantity supplied" there are e)ceptions.



Copyright © Amity University Diagrammatic representation of supply schedule.




EXCE!"#$S !# !%E L&' #(S)L*

#he law of supply does not apply in following cases%

(.In case of agricultural products whose supply is

a5ected by natural factors.*.In case of perishable goods like food. In case of thesegoods seller is willing to sell more units at decayingprices.

.In case of goods having social distinction. #he supply ofgoods will remain limited even if their prices are high




-upply curves in very short period6market period7%&

#+ -8119: 28/0+ WI99 ;+ A 0+/#I2A9 9I<+ 1A/A99+9 #! :&A=I-, ;+2A8-+ FI/>- 2A< <!# A)?8-# #+I/ 1/!)82#I!< #!A<: 2A<@+ I< 1/I2+.

9ong 1eriod%&

-8119: !F I<18#- 2A< ;+ 2A<@+),#+ -8119: WI99 ;+81WA/) -9!1I<@ I< #+ 9!<@ 1+/I!).




$=-($(<T A?=<* A SU77?@ CU;-(

A<D S2#>T => T2( SU77?@ CU;-( +E

+#E+E$! &L#$- & S)L*C)E /

If the quantity supplied increases ordecreases in response to rise or fall inprice of commodity alone assuming other

things remaining the same, it is know asthe movement along the supply curve.




T$%&% M#' (% T)*

+*,,*)G /*SS(,T%S:-• AB %0T%S* *+ S1//,' :-2 hen

the !uantity supplied increases with the

rise in price.

• :B C*T&#CT* *+ S1//,' +EFwhen

!uantity supplied decreases with the fall in

price.







When there is change in supply due to factors other than priceof commodity then there is shift in supply curve. <ow two casesarises%

0."$CE&SE "$ S)L*/ We move from original supply curveto the new rightward supply curve.

1.DECE&SE "$ S)L*/ In this case there will be leftwardshift in supply curve







C#1S%S +*& T$% C&%#S% S1//,'

1. >all in the price of related sustitutesB goods9

,. Changes in the goals of producers9

/. >all in the price of factors of production9

0. #mprovement in technology9G. #ncrease in the numer of firms in the mar%et9

H. Susidies offered y the government9 and

I. hen the firm e)pects a fall in the price of the

commodity.




C#1S%S +*& D%C&%#S%

S1//,'

+ollo3ing causes are res!onsi4le for decreasein su!!ly :

1. ;ise in the price of the related sustituteB commodities9,. Changes in the goals of the producer9

/. ;ise in the price of factors of production9

0. >all in the level of technology9

G. Decrease in the numer of firms in the mar%et9H. hen susidies are withdrawn 9 and

I. hen the firm e)pects a rise in the price of thecommodity.




$A;J(T (5U#?#:;#U$

$ar%et e!uilirium)hen the quantity demanded equals thequantity su!!lied53hen 4uyers6 and sellers6!lans are consistent.

(!uilirium priceThe !rice at 3hich the quantity demandedequals the quantity su!!lied.

(!uilirium !uantityThe quantity 4ought and sold at theequili4rium !rice.

$ % ( ili i




$ar%et (!uilirium

• =nly at

e!uilirium

demand intersects

supply.P P 66+ e!uilirium price+ e!uilirium price

QQ66+ e!uilirium !uantity+ e!uilirium !uantity

$ % t Di ili i




$ar%et Dise!uiliria

• Excess demand or

shortage e)ists when

!uantity demanded

e)ceeds !uantitysupplied at the

current price.• To eliminate the shortage"To eliminate the shortage"

some consumers aresome consumers are

willing to raise the currentwilling to raise the currentprice.price.

$ % t Di ili i




$ar%et Dise!uiliria

• Excess supply or

surplus e)ists when

!uantity supplied

e)ceeds !uantitydemanded at the

current price.• To eliminate the surplus"To eliminate the surplus"

some sellers are willing tosome sellers are willing to

lower the current price.lower the current price.

# i D d S l




#ncreases in Demand or Supply

• Higher demand leads to higher

e!uilirium price and higher

e!uilirium !uantity.

• Higher supply leads to lower

e!uilirium price and higher

e!uilirium !uantity.

Decreases in Demand or




Decreases in Demand or

Supply

• Lower demand leads to lower

price and lower !uantity

e)changed.

• Lower supply leads to higher

price and lower !uantity

e)changed.

; l ti $ it d f Ch




;elative $agnitudes of Change

• The relative magnitudes of change in supply andThe relative magnitudes of change in supply and

demand determine the outcome of mar%et e!uilirium.demand determine the outcome of mar%et e!uilirium.

; l ti $ it d f Ch




;elative $agnitudes of Change

• hen supply and demand oth increase" !uantityhen supply and demand oth increase" !uantity

will increase" ut price may go up or down.will increase" ut price may go up or down.




/rice: # Market6s #utomatic &egulator

,a3 of market forceshen there is a shortage" the price

rises.

hen there is a surplus" the price

falls.

Sur!lus or %cess Su!!ly

The !uantity supplied e)ceeds the

!uantity demanded.

Shortage or %cess Demand

The !uantity demanded e)ceeds the!uantity supplied.




5.1. A change in !uantity demanded refers to

aB Contraction along a demand curve

B Shift of the demand curvecB $ovement along a demand curve

dB ()pansion along a demand curve

Ans+ C




5.,. A change in demand refers to

aB Contraction along a demand curve

B Shift of the demand curve

cB $ovement along a demand curvedB ()pansion along a demand curve

Ans+ :




• 0. #n case of sustitute goods if the price

of commodity ) increases the demand of

commodity y

• aB ;emain constant

• B #ncreases

• cB Decreases

• dB >luctuates

Ans+




2ouseholds are on the KKKKKK side of input factorB

mar%ets and on the KKKKKKK side of output productB

mar%ets.• AB Demand9 supply•

:B demand9 demand•

CB Supply9 demand•

DBSupply9 supply

• Answer+

C




• /. hat happens to demand when price

of the commodity falls

• aB Demand e)pands

• B Demand contracts

• cB <o change

• dB Can e)pand or contract Ans + a




>irms are on the KKKKKK side of input factorB mar%ets and

on the KKKKKKK side of output productB mar%ets.

• ABDemand9 supply

•:Bdemand9 demand

• CBsupply9 demand

•DB

•

supply9 supply• Answer+

A




hich of the following is held constant along the demand curve4

• AB7rice of the good

•:B5uantity

•

CB#ncome•

DB•

:oth A and :•

Answer+•

C•




The Llaw of demandL implies that as prices KKKKKKKKKK

increases.

• ABfall" demand

•:Brise" demand

•

CBfall" !uantity demanded

•DB

rise" !uantity demanded

• Answer+

•C




According to the law of demand" as prices fall" ceteris

parius"

• ABdemand increases.

•:B

demand decreases.•

CB

!uantity demanded decreases.•

DB

!uantity demanded increases.•

Answer+

D




According to the law of demand there is KKKKKKKKKK

relationship etween price and !uantity demanded.

• ABa positive

•:Ba negative

•CBeither a positive or negative

•DBa constantly changing

•

Answer+:•



Than% @ou

7lease forward your !uery

To+ sonia7singh9gmail.com

CC+mano.amityMpanafnet.com

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