Business economics demand, supply and market equilibrium

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Business economics demand, supply and market equilibrium

  1. 1. Business Economics – Demand, Supply and Market Equilibrium Sameer Gunjal
  2. 2. Concept of Demand <ul><li>Demand is defined as the amount of goods the consumers are ready to buy for a sustained period and at a given price point. </li></ul><ul><li>It is the relationship between price and quantity demanded other things remaining constant. </li></ul><ul><li>Quantity demanded is a flow concept thus time dimension needs to be mentioned </li></ul>
  3. 3. Law of Demand <ul><li>It states that quantity demanded is dependent on the price, thus for every change in the price the quantity demanded will change. </li></ul><ul><li>Mathematically, </li></ul><ul><ul><li>X=f(P) </li></ul></ul><ul><ul><ul><li>Where, </li></ul></ul></ul><ul><ul><ul><ul><li>X = Quantity Demanded </li></ul></ul></ul></ul><ul><ul><ul><ul><li>P = Price to be paid for the quantity demanded </li></ul></ul></ul></ul><ul><li>This relationship is inverse in nature. This is the reason why the demand curve is negatively sloped. </li></ul>
  4. 4. Demand Curve
  5. 5. Aberrations to the Law of Demand <ul><li>Giffen goods – inferior goods </li></ul><ul><li>Veblen effect – related to status </li></ul><ul><li>Expected increase in price further </li></ul>
  6. 6. Factors influencing the demand curve <ul><li>Price of close substitutes and complements </li></ul><ul><li>Income of consumer </li></ul><ul><li>Existing wealth of consumer </li></ul><ul><li>Change of preferences of consumer </li></ul><ul><li>Expectation regarding future price changes </li></ul><ul><li>Population </li></ul>
  7. 7. Shift in demand
  8. 8. <ul><li>Price elasticity of demand is defined as the change in quantity demanded for a unit change in the price. </li></ul><ul><li>Price elasticity of Demand = </li></ul><ul><ul><ul><li>(Percentage change in quantity demanded / Percentage change in Price) </li></ul></ul></ul>Price Elasticity of Demand
  9. 9. Mathematically <ul><li>e = dQ/dP * P/Q </li></ul><ul><ul><li>Where, </li></ul></ul><ul><ul><ul><li>e = price elasticity of demand </li></ul></ul></ul><ul><ul><ul><li>= slope of demand curve </li></ul></ul></ul><ul><ul><ul><li>P = Price </li></ul></ul></ul><ul><ul><ul><li>Q = Quantity demanded </li></ul></ul></ul>
  10. 10. Elasticity Types <ul><li>Perfectly elastic demand, e = ∞ </li></ul><ul><li>Perfectly inelastic demand, e = 0 </li></ul><ul><li>Unit elastic demand, e = 1 </li></ul>
  11. 11. Real World Price Elasticities
  12. 12. Factors influencing Elasticity of Demand <ul><li>Closeness of substitute </li></ul><ul><ul><li>Eg Oil – No close substitute </li></ul></ul><ul><ul><li>Metals – Plastic is a substitute </li></ul></ul><ul><ul><li>Necessities have inelastic demand </li></ul></ul><ul><li>Proportion of income spent on goods </li></ul><ul><ul><li>Eg Rent of house, money spent on movies </li></ul></ul><ul><li>Time elapsed since price change </li></ul><ul><ul><li>Eg 1973 Oil crisis. With the passage of time efficient cars were developed and thus consumption reduced </li></ul></ul>
  13. 13. Cross Elasticity of Demand <ul><li>Cross Elasticity of Demand = </li></ul><ul><ul><li>(Percentage change in quantity demanded / Percentage change in price of a substitute or complement) </li></ul></ul><ul><li>Cross elasticity </li></ul><ul><ul><li>Positive for substitutes </li></ul></ul><ul><ul><li>Negative for complement </li></ul></ul><ul><li>If items are unrelated then the cross elasticity tends to zero. </li></ul>
  14. 14. Examples on Cross Elasticity of Demand <ul><li>Eg. Price of Coke is constant and it sells at 9 bottles every hour. Now if the price of Pepsi changes from Rs. 15 to Rs. 25, then the sale of coke rises from 9 bottles to 11 bottles. What’s the cross elasticity of coke? (Coke and Pepsi are substitutes) </li></ul><ul><li>Eg. Price of Pizza is constant and it sells at 11 units every hour. Now if the price of Pepsi changes from Rs. 15 to Rs. 25, then the sale of Pizza falls 11 to 9. What’s the cross elasticity of Pizza? </li></ul>
  15. 15. Income Elasticity of Demand <ul><li>Income Elasticity of Demand = </li></ul><ul><ul><li>(Percentage change in quantity demanded / Percentage change in Income) </li></ul></ul><ul><li>Measures the responsiveness of demand for a change in income </li></ul><ul><li>Income elasticity is </li></ul><ul><ul><li>Greater than 1 – Normal Goods (Income elastic) </li></ul></ul><ul><ul><li>Positive or less than 1 – Normal Goods (Income inelastic) </li></ul></ul><ul><ul><li>Less than 0 – Inferior goods </li></ul></ul>
  16. 16. Analysis of Supply <ul><li>Supply of goods depends on the quantity of goods the producer is willing to sell for a sustained period of time and at a particular price point. </li></ul>
  17. 17. Elasticity of Supply <ul><li>It measures the responsiveness of quantity supplied to the change in price off the good. </li></ul><ul><li>Elasticity of supply = </li></ul><ul><ul><li>(percentage change in quantity supplied / Percentage change in price) </li></ul></ul><ul><li>Factors influencing the elasticity of supply </li></ul><ul><ul><li>Technological innovation </li></ul></ul><ul><ul><li>Time frame for supply decision </li></ul></ul><ul><ul><ul><li>Time taken to produce goods </li></ul></ul></ul>
  18. 18. Market Mechanism of Demand and Supply <ul><li>The in the markets equilibrium is established where the demand and the supply curve intersect each other. </li></ul><ul><li>That is the price at which the consumers are ready to buy and suppliers willing to sell a defined quantity of goods as decided by the price. </li></ul>
  19. 19. Next Session <ul><li>Module IV: Production Analysis </li></ul><ul><ul><li>Production Function </li></ul></ul><ul><ul><li>Production Function with one variable input – short run analysis </li></ul></ul><ul><ul><li>Production Function with two variable input – long run analysis </li></ul></ul><ul><ul><li>ISO COST and ISO QUANTS </li></ul></ul><ul><ul><li>Economies of Scale </li></ul></ul>
  20. 20. <ul><li> Thank You </li></ul>

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