BASIC DEMAND AND SUPPLY ANALYSIS

A market is an institutional arrangement under which buyers and sellers can exchange some quantity of a ..good or service at a mutually agreeable price.

Market Demand
A market demand schedule is a table showing the quantity of a commodity that consumers are willing and able to purchase over a given period of time at each price of the commodity while holding constant all other relevant economic variables on which demand depends(the ceteris paribus assumption)

Market Demand Schedule

Data Point A B C E F G Price ($) 5 4 3 2 1 0 Quantity Demanded 0 1 2 3 4 5

The inverse price quantity relationship (indicating that a greater quantity of the commodity is demanded at lower prices and a smaller quantity at a higher prices) is called the Low of Demand.

BY plotting on a graph the various price- quantity combination given by market demand schedule , we obtain the market demand curve for the commodity .The price per unit of the commodity usually measured along the vertical axis,while the quantity demanded of the commodity per unit of time is measured along the horizontal axis.

The demand curve has a negative slope ,that is , it slopes downward to the right. The negative slop is a reflection of the low of demand or inverse pricequantity relationship.

The demand curve slopes downward because price and quantity demanded are inversely related.

Reasons for the Application of the Rule of Demand

Income Effect
Substitution Effect

The weekly demand schedule for milk in a city is given below :

Price ( Rs/ Litre )
9

Quantity Demanded
18

10
11 12 13 14

16
14 12 10 8

 Draw a weekly demand curve for milk ion the city. Derive the weekly demand function for milk in the city What is the maximum quantity of the milk demanded for a week in the city? At what price no milk will be demanded ?

Answers
Maximum Quantity Demanded= 36 Litre When price is Rs 18/Liter , no milk will be demanded

Shifting Demand versus Movements along a Demand Curve A change in the price of a good causes a change in the quantity demanded, but does not shift demand

Changes in Demand vs. Changes in Quantity Demanded

A price change would change the quantity demanded which involves movement along the demand curve.

Demand Shift Factors

Tastes and Preferences Substitutes and Complements Income - Normal vs. Inferior Goods Population Price Expectations

Changes in Demand - Decrease

Demand Shifts LEFT When: Prices of substitutes decrease Prices of complements increase Normal good-income decreases Inferior good-income increases Population decreases Tastes & preferences turn against the product

Changes in Demand - Increase

Demand Shifts RIGHT When: Prices of substitutes increase Prices of complements decrease Normal good-income increases Inferior good-income decreases Population increases Tastes & preferences turn in favor of the product

SUPPLY
Supply relates the quantity of a good that will be offered for sale at each of various possible prices, over some period of time, ceteris paribus.

Supply Schedule
Data Point H I J K L M Price ($) 5 4 3 2 1 0 Quantity Supplied 4 3 2 1 0 0

Supply Curve

The supply curve slopes upward because price and quantity supplied are directly related.

Supply Shift Factors

Prices of Inputs Technological Change Government or Union Restrictions Prices of Substitutes in Production Prices of Jointly Produced Goods Expected Future Prices Number of Sellers

Changes in Supply vs. Changes in Quantity Supplied

A price change causes movement from one point to another along the same supply curve.

Changes in Supply vs. Changes in Quantity Supplied Supply Shifts LEFT When: Sellers expect price to rise in future. Price of labor or any input rises. Government or union restrictions increase cost. Price of substitute in production rises. Price of product produced jointly falls. Number of sellers declines

Changes in Supply - Increase

Supply Shifts RIGHT When: Sellers expect price to decline in future. Price of labor or any input falls. Technological change lowers cost. Price of product produced jointly rises. Number of sellers increases

Determination of equilibrium price

This occurs when the quantity of the commodity demanded in a market per unit of time equals the quantity of the commodity supplied to the market over the same time period . Geometrically equilibrium occurs at the interaction of the commoditys market demand curve and market supply curve . The price and quantity at which equilibrium exists are known respectively ,as the equilibrium price and the equilibrium quantity or market clearing quantity .

With the following table determine Demand function , Supply Function and equilibrium price and quantities mathematically
Price (Px) 6 5 4 3 2 QDx 2000 3000 4000 5000 6000 QSx 8000 6000 4000 2000 0

Answer

QDx= 8000- 1000P QSx= - 4000+2000P Equilibrium price = Rs 4 Equilibrium quantity =4000

A farm product has the following demand and supply functions : Demand : Q= 13500- 500P Supply: Q = 3000+ 200P Required Determine the equilibrium price and quantity under each of the following situation Govt imposes a specific sales tax at the rate of Rs 10.00 per unit Govt imposes a lump sum tax of Rs 1000 .

Effects of changes in Demand and Supply

Change in Demand ,if Supply is unchanged
Change in supply ,if demand is unchanged Simultaneous change in demand and supply

 Rationing by Prices Maximum Ceiling Minimum Floors

CLASS OF 2007 The Reynolds company is trying to capitalize on the booming market for ballpoint pens .It has been selling 500 numbers of ballpoint pen per week at Rs 15.00 each. However it is considering lowering the price to Rs 12.00. The outside consultants they hired estimated that its price elasticity of demand to be - 5 over this price range .

A. What would be the new quantity sold if the price were lowered to Rs 12.00?

B.What would be the level of the new revenue ?

C. What additional information does Reynolds Company needs to know before it can determine whether or not a price decrease to Rs 12.00 will increase its profits ?

 D. Suppose Reynolds's nearest competitor lowers its price from Rs 12.00 to Rs 9.00 per Ball point pen . If the cross elasticity is 0.24,what will be the effect of the competitor's price reduction non Reynolds Companys quantity sold?

ANSWERS

A.1750 B.21000 C.Cost information D.1633.978 or approximately 1634

CLASS OF 2006

The following table gives the estimated price ,cross, and income elasticities for selected commodities in USA or UK Required Indicate from the price elasticity if the demand is elastic or inelastic, From the cross elasticity if the commodities are substitutes or complements and from income elasticity whether the commodity is a luxury , necessity or an inferior good Indicate in the change in the amount purchased of each good if the commodity price or the consumers income rose by 10 %

Price elasticity of demand Commodity Beef Potatoes Sugar Electricity Restaurant Meal ep 0.92 0.31 0.31 1.20 2.27

CLASS OF 2006

Income elasticity of demand Commodity Butter Margarine ey 0.42 -0.20

Meat
Electricity Restaurant Meal

0.35
0.20 1. 48

Cross elasticity of demand

Commodity Beef, pork Butter , Margarine Cheese , Butter exy 0.28 0.67 - 0.61

Sugar , Fruits
Electricity, Natural Gas

- 0.28
0. 20

Demand schedule for product X for the last five years is given below:

Year
1 2 3 4 5

Px
10 10 10 10 15

Qx
1000 950 1050 1100 900

Py
9 10 9 9 9

Y
15000 15000 16000 15000 15000

A
50000 50000 50000 60000 50000

Required

Using arc elasticity estimate price, income and promotional elasticities of demand Based on the above answer ,comment on i. The nature of the product X ii. The relation between product X and Y iii. The effect of an increase in the price of product X on total revenue

Answers
i. Price elasticity: 0. 263 Cross Elasticity : - 0.487 Income elasticity : 0.756 Promotional elasticity : 0.524 ey is positive good is normal , but ep is les than one so good is necessity ii. AS exy is negative goods X and Y are complementary goods iii. If price is increased total revenue will increase as ep is inelastic

Moonlight ,a domestic appliance manufacturer, has estimated its demand function for its fully automatic washing machine to be
Q= 166000- 100Pm+ 75Pc +2.5Y+0.02A- 200C Q=Demand for Moonlight fully automatic washing machine PM =Price of Moonlight Washing machine Pc= Price of a competing brand Y= Per capita income of the country A= Annual promotional expenditure on this model by Moonlight C= Operating cost per load of wash for this model

The current values for the variables are as follows :

Pm=Rs 10000 Pc = Rs 11000 Y= Rs 20000 A= Rs 500000 C=Rs 5 What are the values of price and cross elasticities of demand for Moonlights Washing Machine

Answers - 20 and 16.5 respectively