Business Economics 03 Demand, Supply and the Market

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  • Business Economics 03 Demand, Supply and the Market

    1. 1. Demand, Supply and the Market
    2. 2. Sequence of discussion <ul><ul><li>What are demand and supply </li></ul></ul><ul><ul><li>What determines demand and supply </li></ul></ul><ul><ul><li>What is the relationship between demand, supply and price </li></ul></ul><ul><ul><li>How does the price mechanism transmit information to economic agents </li></ul></ul><ul><ul><li>How responsive are demand and supply to market incentives </li></ul></ul>
    3. 3. The market <ul><li>A 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. </li></ul>
    4. 4. Case-Coke’s perception of market share <ul><li>Diet, caffeine free, diet caffeine free coke varieties and also Sprite and Minute Maid Orange Juice competing with Pepsi </li></ul><ul><li>For carbonated cola soft drinks, Coke and Pepsi share 80% </li></ul><ul><li>Coke views as “Stomach Share” for its market for potable liquids </li></ul><ul><li>64 ounces of fluids to be consumed to survive each day </li></ul><ul><li>Coke accounts for less than 2 ounces i.e. 3% market </li></ul>
    5. 5. <ul><li>100 tons o f steel are demanded by Maruti Suzuki </li></ul><ul><li>Diesel demand is going to be robust due to economic growth </li></ul><ul><li>Gold demand increases in India during festivals </li></ul>
    6. 6. <ul><li>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 </li></ul><ul><li>Rational consumers </li></ul>
    7. 7. Demand Function
    8. 8. Demand function with ceteris paribus condition <ul><li>Qdx = f (Px) cet. par. </li></ul><ul><li>Demand and Derived Demand </li></ul><ul><li>The Law Of Demand </li></ul>
    9. 9. Case- Law of demand solves environmental problem <ul><li>1960-American discarded an avg. of 2.6 pounds per person per day (ppppd) </li></ul><ul><li>Residents of Percasie, Penn paying annual fee of $120 per person </li></ul><ul><li>2.2 pound of trash pppd </li></ul><ul><li>Percasie Municipality provided special bags for 40p-1.5$ </li></ul><ul><li>MC increased from 0-4% per pound </li></ul><ul><li>Trash picked up in approved bags only </li></ul><ul><li>Recycling for cans, bottles and newspapers </li></ul><ul><li>Trash reduced by 1 ppppd, 40% less </li></ul><ul><li>Paid 30% less </li></ul>
    10. 10. Demand function <ul><li>Qd X = f (P x, O x, A x, St x, P z, O z, A z, St z, Y, T, E, C r, G, </li></ul><ul><li>Pop,W,--) </li></ul><ul><li>Where Qd x = the qty. demanded of good x in a given time period </li></ul><ul><li>P x = the own price of the product or service x </li></ul><ul><li>O x = the number of outlets through which x is </li></ul><ul><li>distributed </li></ul><ul><li>A x = the level of advertising or promotion for x </li></ul><ul><li>St x = the style or design of x </li></ul><ul><li>P z = the price of a related good, a substitute or complement </li></ul>
    11. 11. O z = the number of outlets for a competitor product/service As = the level of advertising for the related product St z = the style or design of related product. Y = the income of consumers and distribution. T = the tastes or preferences of consumers E = the expectations of consumers with regard to price, etc. C r = the cost and availability of credit G = government policy Pop = the change in the population composition W = weather conditions
    12. 12. <ul><li>P x, O x, A x, St x - strategic variables </li></ul><ul><li>P z, O z ,A z St z - _ competitor’s variables </li></ul><ul><li>Y, T, E - consumer variables </li></ul><ul><li>W, P op , G, C r - other variables </li></ul>
    13. 13. <ul><li>Positively Sloped Demand Curve – indicator of quality, economic cycles </li></ul><ul><li>Change In the Quantity Demanded </li></ul><ul><li>Change In Demand </li></ul><ul><li>Individual and market demand </li></ul>
    14. 14. Internet affects demand and supply <ul><li>Enemy of high prices and high profit margins by eliminating geographical boundaries > increasing price elasticity of demand </li></ul><ul><li>Olx, futurebazar, flipkart, amazon </li></ul><ul><li>Bargain prices, broad assortment of attractive products and speedy delivery, returns and after sales services </li></ul><ul><li>Traditional retailers to compete and use internet </li></ul>
    15. 15. Exercise <ul><li>An economic consultant for x corporation recently provided the firm’s marketing manager with this estimate of demand function for the firm’s product. </li></ul><ul><li>Qd x = 12,000 – 3P x + 4P y – 1Y + 2A x </li></ul><ul><li>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 ? </li></ul>
    16. 16. Supply <ul><li>A quantity of a commodity that a producer or a supplier is willing to sell at various given prices over a specific time period . </li></ul>
    17. 17. Supply function with ceteris paribus condition Qs x = f ( P x ) cet. par.
    18. 18. Law of Supply <ul><li>When price of a good rises the quantity supplied will also rise. </li></ul><ul><li>Why? </li></ul>
    19. 19. <ul><li>Higher Cost </li></ul><ul><li>Higher Profit Levels </li></ul><ul><li>New Producers </li></ul><ul><li>Complete supply function </li></ul>
    20. 20. Supply function <ul><li>Qs x = f(P x, F e ,F p ,P o, G,W,E,C n ,N,C,T----------) </li></ul><ul><li>Qs x = quantity supplied of x </li></ul><ul><li>P x = product price </li></ul><ul><li>F e = factor productivities (efficiencies) or the </li></ul><ul><li>state of technology </li></ul><ul><li>F p = factor price </li></ul><ul><li>P o = prices of other related product </li></ul><ul><li>G = firm’s goals </li></ul>
    21. 21. <ul><li>C = character of the firms in the industry T = time lag E = firm’s expectations about future prospects for prices, costs, sales and the state of economy in general. C n = Porter- Consumer’s sophisticated and knowledgeable demands at home (Japanese cameras, Nokia of Finland, Ericsson of Sweden) </li></ul><ul><li>N = number of firms N r =natural shocks (weather, diseases, wars, machine breakdown, industrial disputes, fire, flood, earthquake) </li></ul>
    22. 22. Exercise <ul><li>Find out possible reasons for increasing supply of butter </li></ul><ul><li>Do you see a relationship between the markets of nitrogen and butter? </li></ul>
    23. 23. Find out demand and supply functions for real estate market
    24. 24. Qs x = 200 + 80P – 20a 1 – 15a 2 + 30j Where Qs x - quantity supplied of X, P is price of X, a 1, a 2 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 a 1 and a 2 have a negative sign? Exercise
    25. 25.
    26. 26. 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 19 190 810
    27. 27. Equilibrium in the market <ul><li>Market equilibrium </li></ul><ul><li>Demand and supply in wrong direction </li></ul><ul><li>Metastable equilibrium </li></ul><ul><li>General Equilibrium </li></ul>

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