Demand, Supply and the Market

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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

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The marketA 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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• 100 tons o f steel are demanded by Maruti Suzuki

• Diesel demand is going to be robust due to economic growth

• Gold demand increases in India during festivals

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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 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

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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

complement10

Oz = the number of outlets for a competitor product/serviceAs = 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 creditG = government policyPop = the change in the population compositionW = 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

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Positively Sloped Demand Curve – indicator of quality, economic cycles

Change In the Quantity Demanded Change In DemandIndividual and market demand

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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

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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

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Qsx = f ( Px ) cet. par.

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

Complete supply function

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Supply function

Qsx = 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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Exercise

Find out possible reasons for increasing supply of butter

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

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Find out demand and supply functions for real estate market

Qsx = 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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Exercise

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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 81026

Equilibrium in the market

Market equilibriumDemand and supply in wrong directionMetastable equilibriumGeneral Equilibrium

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