Demand, Supply and the Market

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Pepper remains hot as demand outstrips supplyService tax will be lower for travel by AC train and airPower demand in Delhi touches new high, blackouts continue*

Sequence of discussionWhat are demand and supplyWhat determines demand and supplyWhat is the relationship between demand, supply and priceHow does the price mechanism transmit information to economic agentsHow responsive are demand and supply to market incentives

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The marketA 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.*

Case-Cokes perception of market shareDiet, caffeine free, diet caffeine free coke varieties and also Sprite and Minute Maid Orange Juice competing with PepsiFor carbonated cola soft drinks, Coke and Pepsi share 80% Coke views as Stomach Share for its market for potable liquids64 ounces of fluids to be consumed to survive each dayCoke accounts for less than 2 ounces i.e. 3% market*

100 tons of steel are demanded by Maruti SuzukiDiesel demand is going to be robust due to economic growthGold demand increases in India during festivals

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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 payRational consumers*

Demand Function*

Demand function with ceteris paribus condition Qdx = f (Px) cet. par.

Demand and Derived DemandThe Law Of Demand

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Case- Law of demand solves environmental problem1960-American discarded an avg. of 2.6 pounds per person per day (ppppd)Residents of Percasie, Penn paying annual fee of $120 per person2.2 pound of trash pppdPercasie Municipality provided special bags for 40p-1.5$MC increased from 0-4% per poundTrash picked up in approved bags onlyRecycling for cans, bottles and newspapersTrash reduced by 1 ppppd, 40% lessPaid 30% less

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Demand functionQdX = f (Px, Ox, Ax, Stx, Pz, Oz, Az, Stz, Y, T, E, Cr, G,Pop,W,--)Where Qdx = the qty. demanded of good x in a given time periodPx = the own price of the product or service xOx = the number of outlets through which x isdistributedAx= the level of advertising or promotion for xStx = the style or design of xPz = the price of a related good, a substitute or complement

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Oz = the number of outlets for a competitor product/serviceAs = the level of advertising for the related productStz = the style or design of related product.Y = the income of consumers and distribution.T = the tastes or preferences of consumersE = the expectations of consumers with regard to price, etc.Cr = the cost and availability of creditG = government policyPop = the change in the population compositionW = weather conditions

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Px, Ox, Ax, Stx - strategic variablesPz, Oz,AzStz -_competitors variablesY, T, E - consumer variablesW, Pop, G, Cr - other variables*

Positively Sloped Demand Curve indicator of quality, economic cycles Change In the Quantity Demanded Change In DemandIndividual and market demand

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Internet affects demand and supplyEnemy of high prices and high profit margins by eliminating geographical boundaries > increasing price elasticity of demandOlx, futurebazar, flipkart, amazon Bargain prices, broad assortment of attractive products and speedy delivery, returns and after sales servicesTraditional retailers to compete and use internet*

ExerciseAn economic consultant for x corporation recently provided the firms marketing manager with this estimate of demand function for the firms product.Qdx = 12,000 3Px + 4Py 1Y + 2AxSuppose 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?

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SupplyA quantity of a commodity that a producer or a supplier is willing to sell at various given prices over a specific time period.*

Supply function with ceteris paribus condition *Qsx = f ( Px ) cet. par.

Law of SupplyWhen price of a good rises the quantity supplied will also rise.

Why? *

Higher Cost Higher Profit Levels New Producers

Complete supply function*

Supply functionQsx = f(Px,Fe,Fp,Po,G,W,E,Cn,N,C,T----------)Qsx = quantity supplied of xPx = product priceFe = factor productivities (efficiencies) or the state of technologyFp = factor pricePo = prices of other related productG = firms goals

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T = time lag E = firms expectations about future prospects for prices, costs, sales and the state of economy in general. Cn = Porter- Consumers sophisticated and knowledgeable demands at home (Japanese cameras, Nokia of Finland, Ericsson of Sweden)N = number of firms C = character of the firms in the industry Nr=natural shocks (weather, diseases, wars, machine breakdown, industrial disputes, fire, flood, earthquake) *

ExerciseFind out possible reasons for increasing supply of butter. *

Qsx = 200 + 80P 20a1 15a2 + 30jWhere Qsx - quantity supplied of X, P is price of X, a1, a2 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 a1 and a2 have a negative sign?

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Equilibrium price and quantity *

Monthly price (Rs. Per kg)Md (tons)Ms (tons)47001008500195114504501640054019190810

Equilibrium in the marketMarket equilibriumDemand and supply in wrong directionMarshallian and Walrasian equilibrium and disequilibriumMetastable equilibriumGeneral Equilibrium Do you see a relationship between the markets of nitrogen and butter?

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