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PPT – Economic Analysis for Business Session IV: Market Forces of Supply and Demand-I PowerPoint presentation | free to download - id: 71c7be-MWQ3Y

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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

Markets and Competition

0

- 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.

Demand

0

- 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.

The Demand Schedule

0

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.

Helens Demand Schedule Curve

0

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 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

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

Market Demand versus Individual Demand

0

- 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

The Market Demand Curve for Lattes

0

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

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.

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

Demand Curve Shifters Determinants of Demand

0

- 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

Demand Curve Shifters No. of buyers

0

- An increase in the number of buyers causesan

increase in quantity demanded at each price,

which shifts the demand curve to the right.

Demand Curve Shifters No. of buyers

0

Suppose the number of buyers increases. Then,

at each price, quantity demanded will increase

(by 5 in this example).

Demand Curve Shifters income

0

- 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.)

Demand Curve Shifters prices of related goods

0

- 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

Demand Curve Shifters prices of related goods

0

- 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

Demand Curve Shifters tastes

0

- 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.

Demand Curve Shifters expectations

0

- 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.

Summary Variables That Affect Demand

0

- 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

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

21

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.

22

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

23

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

24

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.)

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.

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?

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)

Supply

0

- 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

The Supply Schedule

0

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.

Starbucks Supply Schedule Curve

0

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

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

Market Supply versus Individual Supply

0

- 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

The Market Supply Curve

0

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

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

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.

Supply Curve Shifters

0

- 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

Supply Curve Shifters input prices

0

- 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.

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).

Supply Curve Shifters technology

0

- 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.

Supply Curve Shifters No. of sellers

0

- An increase in the number of sellers increases

the quantity supplied at each price, - shifts the S curve to the right.

Supply Curve Shifters expectations

0

- 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.

Summary Variables That Affect Supply

0

- 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

A C T I V E L E A R N I N G 2 Supply curve

0

- 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.

44

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.

45

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

46

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.

47

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.)

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

- Find the market (Industry) supply equation

(curve) for the new automobile. - Work out Practice What happens to supply curve

if any of the variable such as hourly wage rate

changes.

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

- Find the market (Industry) supply equation

(curve) for the new automobile. (Q - 42000000

2000P) - Work out Practice What happens to supply curve

if any of the variable such as hourly wage rate

changes.

Supply and Demand Together

0

Equilibrium P has reached the level where

quantity supplied equals quantity demanded

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

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

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

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

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

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.

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.

Thank you