Demand analysis

• Firms sell goods/services to buyers
– Consumers (individuals) : utility – Firms : make profits

• Willingness to pay: maximum price buyer will pay for a good
– Point of indifference between buying and not buying – Lower price always preferred by buyer

• Willingness to pay is determined by
– Buyer’s tastes or needs – Income and wealth
• Normal/inferior goods • Cyclical/acyclical demand

– Substitutes – Complementary goods

quantity demanded at each price – Usually downward sloping: lower willingness to pay for additional units • Lower utility of consumption for consumers • Lower productivity of resources for firms • Shifts in demand curve .• Demand curve for an individual buyer – Willingness to pay for different quantities of the good – Or.

• Market demand – – – – Sum of individual demand curves Aggregate quantity demanded at each price Arrays individual buyers in order of willingness to pay Identical goods? Product differentiation? .

• Market segments / Price discrimination – Different segments willing to pay different prices – Consumer surplus – Can firms exploit this? • Feasible? • Fair? .

• Price sensitivity of demand – Slope of market demand curve – Flat demand curve: very price sensitive: Elastic • Goods with good substitutes • Luxury items ? – Steep demand curve: less sensitive: Inelastic • Necessities .

• Time-frame: easier to find substitutes over long run • Demand curves – Accept as given? – Seek to modify? .

Supply analysis • Supply curve – How much the firm will sell at each price – Assumption: price-taking firm • Time-frame of supply decision – Long run: compete in the market at all? – Short run: how much to produce & sell? .

fixed costs are inevitable • Should not affect short run supply decisions (?) . • In the short run. labor…. electricity. – Variable or marginal costs: cost per additional unit produced • Raw materials. rent. depreciation. labor….• Short run supply • Based on costs – Fixed costs: incurred regardless of volume • ‘headquarter’ costs.

• Marginal costs – Cash costs: out-ofpocket – Opportunity costs: foregone profits • Marginal cost curve : Short run supply curve .

• Long run supply: entry & exit • Recover both fixed and variable costs • Fixed costs – Out-of-pocket costs – Opportunity costs: return on capital .

• Average costs – Includes both fixed and variable costs – Typical U shape – Minimum of the average cost curve: Optimal long run supply point – Market price must exceed price at this point – Determine entry and exit – Dynamics? .

• Shifts in supply curve – Input costs – Technology • Market supply curve – Sum of individual supply curves – Usually slopes upward • Less efficient firms enter market when price is high • Arrays firms from most efficient to least .

• Supply elasticity – Flat supply curve: very sensitive to price: Elastic – Steep supply curve: less sensitive: Inelastic • Varies over the range of output – Elastic when spare capacity is available – Inelastic when capacity constrained .

continuous adjustments .Market equilibrium • Interesection of market demand and supply curves • Disequilibrium will cause price to adjust and yield new equilibrium • Real world: series of small disequilibriums. series of price adjustments • Currency markets: rapid.

• Profit calculation based on equilibrium price • Average and marginal costs • Marginal cost determines supply volume • Average costs at that volume .

Market adjustment • Shifts in demand and supply curves – Increase: shift to the right – Decrease: shift to the left • Impact on quantity and price .

• Inelastic curves: adjustment largely through price • Elastic curves: adjustment largely through quantity • Short run versus long run .

Identical products 2.Perfect competition • Three assumptions: 1. Full information • Excess profits  more firms enter  increased supply  lower price  zero excess profits . Many small price-taking buyers and sellers 3.

• Three more conditions: 1. Identical sellers 2. Free entry 3. Free exit • • Zero excess profits Long run profitability? .

Departures from perfect competition • Most markets have far from perfect competition – Exceptions: commodities • Secret of long run profitability: deviations from perfect competition • Few sellers or buyers – Extreme case: monopoly or monopsony – Oligopoly • Collusion • Cartels: incentives to cheat the cartel – Societal impact: anti-trust regulation .

• Entry and exit barriers – First mover advantage • Headstart on learning curve • Economies of scale • Reputation and branding – High exit costs • May lead to firms accepting sustained losses • Product differentiation – Special attributes: Real or imaginary .

• Differences among sellers – Least cost producer – Innovation • Imperfect information – Search costs protect existing relations and discourage competition .

Master your semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master your semester with Scribd & The New York Times

Cancel anytime.