Economic Analysis for Business Session IV: Market Forces of Supply and Demand-I

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Economic Analysis for BusinessSession IV
Market Forces of Supply and Demand-I
InstructorSandeep Basnyat 9841892281 Sandeep_basn
yat_at_yahoo.com
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Markets and Competition
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• A market is a group of buyers and sellers of a
  particular product.
• A competitive market is one with many buyers and
  sellers, each has a negligible effect on price.
• A perfectly competitive market
• all goods exactly the same
• buyers sellers so numerous that no one can
  affect market price each is a price taker
• In this chapter, we assume markets are perfectly
  competitive.

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Demand
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• Demand comes from the behavior of buyers.
• The quantity demanded of any good is the amount
  of the good that buyers are willing and able to
  purchase.
• Law of demand the claim that the quantity
  demanded of a good falls when the price of the
  good rises, other things equal.

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The Demand Schedule
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Price of lattes Quantity of lattes demanded
0.00 16
1.00 14
2.00 12
3.00 10
4.00 8
5.00 6
6.00 4

• Demand schedule A table that shows the
  relationship between the price of a good and the
  quantity demanded.
• Example Helens demand for lattes.

• Notice that Helens preferences obey the Law of
  Demand.

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Helens Demand Schedule Curve
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Price of lattes Quantity of lattes demanded
0.00 16
1.00 14
2.00 12
3.00 10
4.00 8
5.00 6
6.00 4
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Demand Equation and Function

• According to the Law of Demand
• When P increases, Q decreases, and
• When P decreases, Q increases
• (other things remain constant)
• Demand equation Qd f (P)
• For a linear demand curve (having equal slopes),
• The Demand Function Qd a bP
• Where, b slope of the curve
• a Slope coefficient or demand
  parameter

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Example Demand Equation and Function

• If the slope of a linear demand curve is -20
  and demand parameter is 100, find the demand
  equation for the curve.
• Solution Equation for the demand curve is
• Qd a bP
• Qd 100 20P

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Market Demand versus Individual Demand
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• The quantity demanded in the market is the sum of
  the quantities demanded by all buyers at each
  price.
• Suppose Helen and Ken are the only two buyers in
  the Latte market. (Qd quantity demanded)

Market Qd
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The Market Demand Curve for Lattes
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Movement along the demand curve
P Qd (Market)
0.00 24
1.00 21
2.00 18
3.00 15
4.00 12
5.00 9
6.00 6
P
Q
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Market Demand Function and Equation

• Market Demand Case
• 1. There are 500 consumers in an economy, each
  with an individual demand curve of
• Qi 15 - P
• Find the total demand from the market (Qm)
• 2. There are 500 consumers with individual
  demand curves of Qi 15P and
• 300 consumers with individual demand curves of
  Qi 30-2P,
• Find the total demand (Qm) from the market.

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Market Demand Function and Equation

• Market Demand Case
• 1. There are 500 consumers in an economy, each
  with an individual demand curve of
• Qi 15 - P
• Find the total demand from the market (Qm)
• Qm 500(15 - P) ? Qm 7500 - 500P.
• 2. There are 500 consumers with individual
  demand curves of Qi 15P and
• 300 consumers with individual demand curves of
  Qi 30-2P,
• Find the total demand (Qm) from the market.
• Qm 500(15 P) 300(30 - 2P) 9000 6900P

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Demand Curve Shifters Determinants of Demand
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• The demand curve shows how price affects quantity
  demanded, other things being equal.
• These other things are non-price determinants
  of demand (i.e., things that determine buyers
  demand for a good, other than the goods price).
  
• Changes in them shift the D curve

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Demand Curve Shifters No. of buyers
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• An increase in the number of buyers causesan
  increase in quantity demanded at each price,
  which shifts the demand curve to the right.

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Demand Curve Shifters No. of buyers
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Suppose the number of buyers increases. Then,
at each price, quantity demanded will increase
(by 5 in this example).
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Demand Curve Shifters income
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• Demand for a normal good is positively related to
  income.
• An increase in income causes increase in
  quantity demanded at each price, shifting the D
  curve to the right.
• (Demand for an inferior good is negatively
  related to income. An increase in income shifts
  D curves for inferior goods to the left.)

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Demand Curve Shifters prices of related goods
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• Two goods are substitutes if an increase in the
  price of one causes an increase in demand for the
  other.
• Example pizza and hamburgers. An increase in
  the price of pizza increases demand for
  hamburgers, shifting hamburger demand curve to
  the right.
• Other examples Coke and Pepsi, laptops and
  desktop computers, compact discs and music
  downloads

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Demand Curve Shifters prices of related goods
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• Two goods are complements if an increase in the
  price of one causes a fall in demand for the
  other.
• Example computers and software. If price of
  computers rises, people buy fewer computers, and
  therefore less software. Software demand curve
  shifts left.
• Other examples college tuition and textbooks,
  bagels and cream cheese, eggs and bacon

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Demand Curve Shifters tastes
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• Anything that causes a shift in tastes toward a
  good will increase demand for that good and shift
  its D curve to the right.
• Example The Atkins diet became popular in the
  90s, caused an increase in demand for eggs,
  shifted the egg demand curve to the right.

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Demand Curve Shifters expectations
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• Expectations affect consumers buying decisions.
• Examples
• If people expect their incomes to rise, their
  demand for meals at expensive restaurants may
  increase now.
• If the economy turns bad and people worry about
  their future job security, demand for new autos
  may fall now.

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Summary Variables That Affect Demand
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• Variable A change in this variable

Price causes a movement along the D
curve No. of buyers shifts the D
curve Income shifts the D curve Price ofrelated
goods shifts the D curve Tastes shifts the D
curve Expectations shifts the D curve
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A C T I V E L E A R N I N G 1 Demand curve
Draw a demand curve for music downloads. What
happens to it in each of the following scenarios?
Why?

• A. The price of iPods falls
• B. The price of music downloads falls
• C. The price of compact discs falls

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A C T I V E L E A R N I N G 1 A. price of
iPods falls
Music downloads and iPods are complements. A
fall in price of iPods shifts the demand curve
for music downloads to the right.
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A C T I V E L E A R N I N G 1 B. price of
music downloads falls
Price of music down-loads
The D curve does not shift. Move down along
curve to a point with lower P, higher Q.
P1
D1
Q1
Quantity of music downloads
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A C T I V E L E A R N I N G 1 C. price of
CDs falls
CDs and music downloads are substitutes. A
fall in price of CDs shifts demand for music
downloads to the left.
Price of music down-loads
Quantity of music downloads
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Market Demand Equation and Function

• Combining Price and Non-price determinants
• Total Market demand for a product
• f (Price of the Product, Prices of other
  goods, Income, Tastes and Preferences of
  Consumers, Expectations and Number of Buyers)
• Or, Qd f (P, Po, I, T, E, B)
• In a functional form
• Qd a1P a2Po a3I a4T a5E a6B
• (Q Parameter x Notation of variable.)

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Exercise Market Demand Estimation
Estimating Industry Demand for New
Automobiles Estimated Value for
Independent Parameter Variable
during Independent Variable Estimate Coming
Year (1) (2) (3) Average Price for New
Cars (P) 500 25,000 Average Price for New
Luxury Cars(PX) 210 50,000 Disposable Income,
per Household (I) 200 45,000 Population
(Pop) (millions) 20,000 300 Average Interest
Rate (i) (percent) 1,000,000 8 Industry
Advertising Expenditures (A) 600 5,000 million
Find the market (Industry) demand equation
(curve) for the new automobile.
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Solution Market Demand Equation
The demand function for the automobile industry
is Q Parameter x Notation for Independent
Variable. Or, Q 500P 210PX 200I
20,000Pop 1,000,000i 600A Substituting
the value of all variables except P, Q
500P 210(50,000) 200(45,000) 20,000(300)
1,000,000(8) 600(5,000) Q 20,500,000
500P or, P 41,000 0.002Q When P 25000,
Q 8,000,000 (8 millions). If the average
interest rate increases by 2, how would it
affect the demand curve? How many cars would be
sold if the average interest rate increases by
2?
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Solution Market Demand Equation
The demand function for the automobile industry
is Q Parameter x Notation for Independent
Variable. Or, Q 500P 210PX 200I
20,000Pop 1,000,000i 600A Substituting
the value of all variables except P, Q
500P 210(50,000) 200(45,000) 20,000(300)
1,000,000(8) 600(5,000) Q 20,500,000
500P or, P 41,000 0.002Q When P 25000,
Q 8,000,000 (8 millions). If the average
interest rate increases by 2, how would it
affect the demand curve? How many cars would be
sold if the average interest rate increases by
2? (Ans Demand Curver shifts to Left Q
6,000,000)
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Supply
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• Supply comes from the behavior of sellers.
• The quantity supplied of any good is the amount
  that sellers are willing and able to sell.
• Law of supply the claim that the quantity
  supplied of a good rises when the price of the
  good rises, other things equal

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The Supply Schedule
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Price of lattes Quantity of lattes supplied
0.00 0
1.00 3
2.00 6
3.00 9
4.00 12
5.00 15
6.00 18

• Supply schedule A table that shows the
  relationship between the price of a good and the
  quantity supplied.
• Example Starbucks supply of lattes.

• Notice that Starbucks supply schedule obeys the
  Law of Supply.

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Starbucks Supply Schedule Curve
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Price of lattes Quantity of lattes supplied
0.00 0
1.00 3
2.00 6
3.00 9
4.00 12
5.00 15
6.00 18
P
Q
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Supply Equation and Function

• According to the Law of Supply
• When P increases, Q Increases, and
• When P decreases, Q decreases
• (other things remain constant)
• Supply equation Qs f (P)
• For a linear supply curve (having equal slopes),
• The Supply Function Qs a bP
• Where, b slope of the curve
• a Slope coefficient or demand
  parameter

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Market Supply versus Individual Supply
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• The quantity supplied in the market is the sum of
  the quantities supplied by all sellers at each
  price.
• Suppose Starbucks and Jitters are the only two
  sellers in this market. (Qs quantity
  supplied)

Market Qs
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The Market Supply Curve
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P QS (Market)
0.00 0
1.00 5
2.00 10
3.00 15
4.00 20
5.00 25
6.00 30
Movement along the supply curve
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Market Supply Function

• Market Supply Case
• 1. If there are 400 suppliers with individual
  supply curves of
• Qi 15 2p, then the market supply curve is
• 2. If there are 500 suppliers with individual
  supply curves of Qi 15 p and 300 suppliers
  with individual supply curves of Qi 302p, then
  the total supply from the market is

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Market Supply Function

• Market Supply Case
• 1. If there are 400 suppliers with individual
  supply curves of
• Qi 15 2p, then the market supply curve is
• Qs 400(15 2p) 6000 800p.
• 2. If there are 500 suppliers with individual
  supply curves of Qi 15 p and 300 suppliers
  with individual supply curves of Qi 302p, then
  the total supply from the market is
• Qs 500(15 p) 300(30 2p) 16500 1100p.

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Supply Curve Shifters
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• The supply curve shows how price affects quantity
  supplied, other things being equal.
• These other things are non-price determinants
  of supply.
• Changes in them shift the S curve

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Supply Curve Shifters input prices
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• Examples of input prices wages, prices of
  raw materials.
• A fall in input prices makes production more
  profitable at each output price, so firms supply
  a larger quantity at each price, and the S curve
  shifts to the right.

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Supply Curve Shifters input prices
0
Suppose the price of milk falls. At each price,
the quantity of Lattes supplied will increase
(by 5 in this example).
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Supply Curve Shifters technology
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• Technology determines how much inputs are
  required to produce a unit of output.
• A cost-saving technological improvement has same
  effect as a fall in input prices, shifts the S
  curve to the right.

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Supply Curve Shifters No. of sellers
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• An increase in the number of sellers increases
  the quantity supplied at each price,
• shifts the S curve to the right.

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Supply Curve Shifters expectations
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• Suppose a firm expects the price of the good it
  sells to rise in the future.
• The firm may reduce supply now, to save some of
  its inventory to sell later at the higher price.
• This would shift the S curve leftward.

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Summary Variables That Affect Supply
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• Variable A change in this variable

Price causes a movement along the S
curve Input prices shifts the S
curve Technology shifts the S curve No. of
sellers shifts the S curve Expectations shifts
the S curve
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A C T I V E L E A R N I N G 2 Supply curve
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• Draw a supply curve for tax return preparation
  software. What happens to it in each of the
  following scenarios?

A. Retailers cut the price of the software.
B. A technological advance allows the software
to be produced at lower cost. C. Professional
tax return preparers raise the price of the
services they provide.
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A C T I V E L E A R N I N G 2 A. fall in
price of tax return software
The S curve does not shift. Move down along
the curve to a lower P and lower Q.
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A C T I V E L E A R N I N G 2 B. fall in
cost of producing the software
Price of tax return software
The S curve shifts to the right at each price,
Q increases.
S1
P1
Q1
Quantity of tax return software
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A C T I V E L E A R N I N G 2 C.
professional preparers raise their price
This shifts the demand curve for tax preparation
software, not the supply curve.
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Market Supply Equation and Function

• Combining Price and Non-price determinants
• Total Market Supply for a product
• f (Price of the Product, Input Prices,
  Technology, Expectations and Number of Sellers)
• Or, Qs f (P, Pi, T, E, S)
• In a functional form
• Qd a1P a2Pi a3T a4E a5S
• (Q Parameter x Notation of variable.)

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Exercise Market Supply Estimation
Estimating Industry Supply for New
Automobiles Estimated Value for
Independent Parameter Variable
during Independent Variable Estimate Coming
Year (1) (2) (3) Average Price for New
Cars (P) 2,000 25,000 Average Price for
SUV(Psuv) -400 35,000 Average Hourly Wage
Rate (W) -100,000 85 Average Cost of
Steel/Ton (S) -13,750 800 Average Cost of
Energy/mcf (E) 125,000 4 Average Interest
Rate (i) in percent -1,000,000 8

1. Find the market (Industry) supply equation
   (curve) for the new automobile.
2. Work out Practice What happens to supply curve
   if any of the variable such as hourly wage rate
   changes.

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Exercise Market Supply Estimation
Estimating Industry Supply for New
Automobiles Estimated Value for
Independent Parameter Variable
during Independent Variable Estimate Coming
Year (1) (2) (3) Average Price for New
Cars (P) 2,000 25,000 Average Price for
SUV(Psuv) -400 35,000 Average Hourly Wage
Rate (W) -100,000 85 Average Cost of
Steel/Ton (S) -13,750 800 Average Cost of
Energy/mcf (E) 125,000 4 Average Interest
Rate (i) in percent -1,000,000 8

1. Find the market (Industry) supply equation
   (curve) for the new automobile. (Q - 42000000
   2000P)
2. Work out Practice What happens to supply curve
   if any of the variable such as hourly wage rate
   changes.

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Supply and Demand Together
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Equilibrium P has reached the level where
quantity supplied equals quantity demanded
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Equilibrium price
0
The price that equates quantity supplied with
quantity demanded
P QD QS
0 24 0
1 21 5
2 18 10
3 15 15
4 12 20
5 9 25
6 6 30
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Equilibrium quantity
0
The quantity supplied and quantity demanded at
the equilibrium price
P QD QS
0 24 0
1 21 5
2 18 10
3 15 15
4 12 20
5 9 25
6 6 30
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Equilibrium in Automobile market

• Market demand curve
• Qd 20,500,000 500P
• Market supply curve
• Qs - 42000000 2000P
• Equilibrium is at Qd Qs
• 20,500,000 500P - 42000000 2000P
• 2500P 62500000
• Therefore, P 25000
• Q 20,500,000 500(25000) 8,000,000

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Numerical Problem on Demand and Supply

• 1) Suppose
• Demand eqn. for a product Qd 286 - 20p
• Supply eqn. For a product Qs 88 40p
• Find Equilibrium Quantity and Price

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Numerical Problem on Demand and Supply

• 1) Suppose
• Demand eqn. for a product Qd 286 - 20p
• Supply eqn. For a product Qs 88 40p
• Find Equilibrium Quantity and Price
• Solution
• Qd Qs
• 286 - 20p 88 40p
• 60p 198
• P 3.30
• Q 286 20(3.3) 220

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Some variations-Solved Problem

• Market Demand and Supply Case
• Given
• 500 consumers with individual demand curves of Qi
  15-p
• 300 consumers with individual demand curves of Qi
  30-2p
• Total demand from the market is QM 16500 -
  1100p.
• Find
• The total quantity buyers want to buy at price of
  10
• The quantity that the 500 and 300 buyers want to
  buy at 10.

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Some variations-Solved Problem

• Market Demand and Supply Case
• Given
• 500 consumers with individual demand curves of Qi
  15-p
• 300 consumers with individual demand curves of Qi
  30-2p
• Total demand from the market is QM 16500 -
  1100p.
• Find
• a) The total quantity buyers want to buy at price
  of 10
• At a price of 10, the buyers want to buy 16500-
  110010 5500 units.
• b) The total quantity that 500 and 300 buyers
  want to buy.
• Each of the 500 buyers with an individual demand
  curves of
• Qi 15 - p wants to buy 15 - 10 5 units, for a
  total of 2500.
• And each of the 300 buyers with individual demand
  curves of Qi 30 - 2p wants to buy
  30 - 2 10 10 units, for a total of 3000.

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Thank you