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    ECONOMICS DEMAND PPT @ MBA 2009.ppt ECONOMICS DEMAND PPT @ MBA 2009.ppt Presentation Transcript

    • Managerial Economics & DEMAND
    • Analysis of Demand & Supply & Market Equilibrium
    • Concept of Market A market is a mechanism by which buyers and sellers interact to determine the price and quantity of a good or service Demand side of the market for a product refers to all its consumers and the price they are willing to pay for buying a certain quantity of a product during a period of time.
    • What is Demand??? Demand is the desire or want backed up by money Always related to price and time
    • Statement of Law of Demand“All other things remaining constant, higher the price of a commodity, smaller is the quantity demanded and lower the price, larger the quantity demanded” Dx = f (Px)
    • Reasons for Inverse Relationship Income effect- the decline in the price of a commodity leads to an equivalent increase in the income of a consumer because he has to spend less to buy the same quantity of goods. The part of the money left can be used for buying some more units of commodity.  For e.g.- suppose the price of mangoes falls from Rs.100/- per dozen to 50/- per dozen. Then with the same amount of 100/- you can buy one more dozen, i.e.,2 dozens at Rs. 50/- Substitution effect- When the price of a commodity falls, the consumer tends to substitute that commodity for other commodity which is relatively expensive.  For e.g. – Suppose the price of the Urad falls, it will be used by some people in place of other pulses. Thus the demand will increase.
    • Assumptions Underlying the Law No change in Consumer’s Income No change in Consumer’s Preferences No change in Fashion No change in Price of related goods No Expectation of future price changes or shortages
    • Individual Demand ScheduleTabular representation of Quantity of acommodity that an individual is willingand able to purchase over a given period oftime at each price of the commodity, whileholding constant all other relevanteconomic variables on which demanddepends.
    • Individual Demand SchedulePrice of Com X Quantity demanded(Rs per kg) of Com X (Qty in kg) 80 2 70 4 60 6 50 10
    • Market demand ScheduleTabular representation of Quantity of acommodity that all individuals are willingand able to purchase over a given period oftime at each price of the commodity, whileholding constant all other relevanteconomic variables on which demanddepends.
    • Market Demand SchedulePrice in (Rs) Units of Commodity X Market demanded per day Demand by Individuals or Total A B C 4 1 1 3 5 3 2 3 5 10 2 3 5 7 15 1 5 9 10 24
    • Determinants of Individual Demand Income Price of Substitute & Complementary products Taste & Preferences Advertisement Expectation regarding future price changes Climatic Conditions
    • Determinants of Market Demand Price of Product Distribution of Income & wealth Community’s Common Habits and Scale of Preferences Spending Habits of People Growth of Population Age Structure and Sex ratio of Population Future Expectations Level of Taxation Fashions Climate Conditions Customs Advertisement
    • Multivariate Demand Function Dx = D (Px, Py, Pz, B, W, A, E, T, U)  Here Dx, stands for demand for item x (say, a car)  Px, its own price (of the car)  Py, the price of its substitutes (other brands/models)  Pz, the price of its complements (like petrol)  B, the income (budget) of the purchaser (user/consumer)  W, the wealth of the purchaser  A, the advertisement for the product (car)  E, the price expectation of the user  T, taste or preferences of user  U, all other factors.
    • Demand equation D= a – bP Where ‘a’ is constant parameter signifying initial demand irrespective of price ‘b’ represents slope of demand curve functional relationship between price and demand, having minus sign denotes negative function
    • Exceptions to Law of Demand Conspicuous consumption – The goods which are purchased for ‘Snob appeal’ are called as the conspicuous consumption. For e.g.- diamonds. They are the prestige goods. They would like to hold it only when they are costly and rare. Speculative market: in this case the higher the price the higher will be the demand. It happens because of the expectation to increase the price in the future. For e.g. shares, lotteries
    • Contd… Giffens goods: It is a special type of inferior goods where the fall in the price results into the decrease In the quantity demanded. This happens because of people’s preference for superior commodity Consumer’s Psychological bias: Many a times consumer judges the quality of a good from its price. Such consumers may purchase high price goods because of the feeling of possessing a better quality. The exceptional demand curve shows a positive relation between the price and the quantity demanded.
    • Shifts in Demand Curve Extension and Contraction of Demand occurs due to changes in price, other factors remaining constant  When more of a commodity is purchased with a fall in price then it is known as extension of Demand and vice versa  Refer to movement along same demand curve Increase and Decrease in Demand refers to changes in demand due to factors other than price  An increase in demand signifies that more will be purchased at a given price than before .  Refer to movement from one demand curve to another
    • Reasons for shifts (increase or decrease in Demand) Changes in Income Changes in Taste, habits and Preferences Change in Fashions and Customs Change in Distribution of Wealth Change in Substitutes Change in demand for Complementary goods Advertisement and Publicity Persuasion Change in level of taxation
    • Nature of Demand Demand for Consumer’s goods & Producers goods Autonomous & Derived Demand Demand for Durables and Non- Durables (Perishables) Joint Demand and Composite Demand
    • Supply Analysis Supply during a given period of time means the quantities of goods which are offered for sale at particular prices Supply is what seller is able and willing to offer for sale Supply and Stock are related but distinct terms-Supply comes out of Stock Stock determines potential supply Stock is outcome of production
    • Determinants of Supply Cost of factors of production State of Technology Factors outside Economic Sphere such as weather conditions, natural calamities, etc Tax and Subsidy
    • Law of Supply“Other things remaining same ,supply of a commodity rises with arise in price and falls with a fall inprice”
    • Supply schedule
    • Assumptions : Cost of production is unchanged Technology is constant Govt policies are unchanged No change in Transport costs No speculation Prices of other goods constant
    • Positions: Supply Curve Extension and Contraction : refer to change in supply due to price, other things remaining same.  Movement along the supply curve Increase and Decrease in Supply: refer to change in supply due to determinants other than price  Shifts in Supply Curve
    • Causes for change in Supply Change in Cost of Production Supply also depends on Natural Factors Change in Technique of Production Policies of Government Business Combines
    • When market is in Equilibrium? Equilibrium price of a commodity is price at which quantity demanded of commodity equals quantity supplied and market clears Equilibrium is condition which once achieved tends to persist in time.
    • Equilibrium of Supply and Demand Price S Excess Supply E Excess D Demand D&S
    • Effect of Shift in Supply or Demand Demand & Effect on price Supply shifts and quantityIf demand Demand curve Both P & Qrises shifts to right increasesIf demand falls Demand curve Both P & Q shifts to left fallsIf supply rises Supply curve P falls but Q shifts to right increasesIf supply falls Supply curve P increases & shifts to left Q decreases
    • Simultaneous shifts of Supply and Demand New equilibrium price and quantity may be greater than, equal or even less than initial equilibrium levels depending on the magnitude and direction of two curves If both D & S shift to right by same amount , the equilibrium point shifts to right by same amount and hence equilibrium price remains same.
    • Impact of Excise tax on Price and Quantity An excise is a tax on each unit of commodity If collected from sellers tax causes supply curve to shift upward by the amount of tax Result is that consumers purchase a smaller quantity at a higher price while sellers receive a smaller net price after payment of tax
    • Impact of Excise tax on Price and Quantity S1 S0 T E1 Tax P1 Po E0 D Q1 Q0
    • Impact of Rent Control on Housing Markets Rent control is a type of price ceiling or maximum rent set below equilibrium price that government use for making rented housing affordable, however the effect has been opposite ie shortage of apartments
    • Rent Control create shortages S$1400MonthlyRent E$1000$600 Shortage D 1.2 1.6 2 Millions of Apartments
    • Thank You