DEMAND

ANALYSIS

Desire + Ability + Willingness to pay

 DEMAND DETERMINANTS

PRICE OF COMMODITY INCOME, PREFERENCES PRICE OF RELATED GOODS ADVERTISEMENT CONSUMER EXPECTATIONS

 INDIVIDUAL DEMAND
MARKET DEMAND DEMAND FUNCTION DEMAND SCHEDULE

Y
D1

P2

P
P1

ASSUMPTIONS: FACTORS SHOULD REMAIN CONSTANT 1. Tastes, preferences,customs, Habit of buyers. 2. Income of buyers. 3. Price of substitutes-compliments 4. Quality of Product 5. Government Policy 6. Future expected price 7. Arrival of New substitutes in the Market.

SHIFT IN DEMAND
INCREASE IN DEMAND
Y

PRICE

R1

PRICE

X1
P1

D2 D1

D2

D1
O X M1 QUANTITY X

M1

QUANTITY

DECREASE IN DEMAND
P

y D

R1

PRICE

PRICE
M

P1
M1

D1 D2

QUANTITY

 DEMAND DISTINCTIONS
PRODUCERS GOODS- CONSUMERS GOODS

DERIVED GOODS AUTONOMOS GOODS

DURABLE - NON- DURABLE GOODS INDUSTRY - COMPANY

SHORT TERM LONG TERM

TOTAL MARKET- MARKET SEGMENT

 ELASTICITY OF DEMAND
TYPES OR KINDS 1. PRICE ELASTICITY OF DEMAND

 2. INCOME

ELASTICITY OF DEMAND

PROPORTIONATE CHANGE IN THE QUANTITY

DEMANDED OF A PRODUCT

PROPORTIONATE CHANGE IN INCOME

CROSS ELASTICITY OF DEMAND

3.
PROPORTIONATE CHANGE IN PURCHASES OF COMMODITY X PROPORTIONATE CHANGE IN THE PRICE OF COMMODITY Y

 1.Mathamatical: ED=% change in Q.Demanded

% Change in Price
A. ED>1 50%/20% =5/2 B. ED<1 10%/20%=1/2

C. ED=1 20%/20%=1

PRICE

QUANTITY DEMANDED 100 150

TOTAL OUTLAY 1000 1200

ELASTICITY OF DEMAND Ed > 1

I.

10 8

II.

10 8 10 8

100 125 100 110

1000 1000 1000 880

Ed=1

III.

Ed<1

 Y
B
ED=1 PRICE

TOTAL OUTLAY

POINT METHOD

EP=Lower Part of the Demand Curve Upper Part of the Demand Curve

Y
S
ED>1

PRICE

ED=1

R
ED<1

X QUANTITY DEMANDED

ARC ELASTICITY

Y
35 33 30 25

PRICE (P) 20 15 10
5

J K

20

40 43

60

75 80

100

108

QUANTITY(Q)

 Importance of Price-elasticity
Production Planning, Producers of

Goods/services, Price determination, Public utility, Joint Supply, Super-Markets, FactorPricing, International Trade(export-Import), Taxation Policy, Shifting of Tax-burden.

SUPPLY

SUPPLY ANALYSIS

Assumptions:
Constant Items 1.Number of Firms, The scale of Production, The speed of Production. 2. Techniques of Production. 3. Supply of substitutes. 4. Cost of production.

5. Market of Prices of other related goods.

PRICE

QUANTITY SUPPLIED

COST CONCEPTS
MONEY COST REAL COST FIXED COST VARIABLE COST OPPORTUNITY COST IMPLICIT EXPLICIT COSTS

 COST OUTPUT RELATIONSHIP

IN THE SHORT RUN

TC = TFC+ TVC TVC= TC- TFC AFC = TFC/Q
AVC = TVC/Q AC=TC/Q MC = TC/Q

TC

TVC

TFC

COST

OUTPUT

COST CONCEPTS Y
B

AFC

COST CONCEPTS
AVC

COST CONCEPTS
Y
MC AC

Q
R
O
X

COST CONCEPTS MC
Y
AC

AVC
AFC

COST-OUTPUT RELATIONSHIP IN THE LONG RUN

SAC1
SAC2 SAC3 SAC4

LAC

COST

OUTPUT

REASONS

ABSENCE OF FIXED COSTS, UTILISATION OF PLANT,

INTERNAL ECONOMIES( LABOUR,TECHNICAL,

MANAGERIAL,MARKETING,FINANCIAL, RISK SPREADING) EXTERNAL ECONOMIES( ECONOMIES OF CONCENTRATION, INFORMATION) DISECONOMIES- DISPUTES, STRIKES,LOCKOUTS,TRADE-UNION, CORRUPTION,INFFENCIENCY,INFLATION

PRODUCTION FUNCTION
INPUTS PRODUCTION FUNCTION OUTPUTS

 INPUTS Q =F( Ld,L,K,M,T,t )

Q =F( K,L ) ASSUMPTIONS

A PARTICULAR UNIT OF TIME

TECHNICAL KNOWLEDGE DURING THE TIME

CONSTANT FACTORS OF PRODUCTION-VARIABLE UNITS USING THE BEST TECHNIQUES TWO FACTORS --K,L LIMITED SUBSTITUTION OF ONE FACTOR FOR THE OTHER

 NATURE OF PRODUCTION TECHNICAL RELATIONSHIPBETWEEN THE PHYSICAL INPUTS AND OUTPUTS- NOTHIG TO DO WITH THE PRICE OF THE COMMODITY. COMBINED EFFORTS OF FACTORS TECHNICAL KNOWLEDGE DIVISIBILITY OR INDIVISIBILITY OF FACTORS

TYPES
LAW OF VARIABLEPROPORTION LAWS OF RETURNS

PRODUCTION FUNCTION WITH ONE VARIABLE INPUTS-

P FUNCTION WITH TWO VARIABLE INPUTS- THE

ISOQUANTS . PRO FUNCTION WITH ALL VARIABLE INPUTS THE LAWS OF RETURNS TO SCALE

LAWS OF RETURNS Diminishing, Constant and Increasing Returns

Diminishing Returns:

Assumptions: 1. One factor is fixed-others variable. 2. Quality of variable factors is identical 3. Production technique-constant. 4. Land is used efficiently.

Laws of returns
Labour and Capital cost Rs. 1000 2000 3000 4000 5000 6000 7000 Total Returns (rice) 20 QHs 36 48 56 60 60 56 Average Returns 20 QHs 18 16 14 12 10 08 Marginal returns 20QHs. 16 12 08 04 0 -4

SIGNIFICANCE: 1. AGRICULTURE, EXTRACTIVE, MANUFACTURING INDUSTRIES. 2. SCARCITY OF A SINGLE FACTOR AND ITS IMPERFECTLY SUBSTITUTABLE. 3. BUSINESS DECISIONS- HOW MUCH TO PRODUCE WHAT NUMBER OF WORKERS TO APPLY TO A GIVEN FIXED INPUT HOW MANY WORKERS TO EMPLOY.

INCREASING RETURNS
DOSES OF LABOUR+CAPITAL FIRST SECOND THIRD MARGINAL RETURNS (SCOOTERS) 100 150 200 TOTAL RETURNS 100 250 450

FOUTH
FIFTH SIXTH

250
300 350

700
1000 1350

LAW OF VARIABLE PROPORTION

ASSUMPTIONS: One factor alone changes all other factors-

technology-constant, variable factors are homogeneous-applicable in Fixed Average Marginal the short run.Variable Total
Factor Factor (Machine (Labour) ) Producti on Producti on Producti on

1 1 1 1 1 1 1 1 1 1

1 2 3 4 5 6 7 8 9 10

5 units 11 18 26 33 38 40 41 41 39

5 units 5.5 6 6.5 6.6 6.3 5.7 5.1 4.6 3.9

5 units 6 7 8 7 5 2 1 0 -2

ISOQUANT CURVE
ASSUMPTIONS:

There are two inputs-Labour (L) and Capital (K) to produce A commodity X. 2. L and K- (An substitute each other but at a diminishing rate. 3. The technology of production is given.
1.

CAPITAL-LABOUR COMBINATIONS AND OUTPUT

Points Output A B C D Input Combinations K OK4 OK3 OK2 OK1 + + + + + L OL1 OL2 OL3 OL4 = = = = 100 100 100 100

ISOQUANT CURVE
K

CAPITAL (K)

K 4 K3
K 2 K 1

A B C D IQ1=10 0 IQ2

L1

L2

L3

L4 LABOUR (L)

Properties of Isoquants
1. 2. 3.

A negative slope. Convex to the origin. No two Iso quants intersect or touch each other.

CAPITAL (K)

OL2+JL2=OL2+KL2 JL2=KL2 JL2<KL2

K J L
LABOUR(L)

200 100

L2

UPPER ISOQUANT REPRESENT HIGHER LEVEL OF OUTPUT

B QUANTITY OFK C

D
A IQ2=20 0

IQ1=100

X QUANTITY OFL

Sl.No

Scale (Land+Labour)

Total Producti on (Quintal s)

1 3 6 10 14 18 21 23

Marginal Productio n (Quintals)

1 2 3 4 2 stage C.returns 4 4 3 2 III stage D.retu rns I Stage I returns

1 2 3 4 5 6 7 8

1 Acre+2 workers 2 Acres+4 workers 3 Acres+6 workers 4 acres+8 workers 5 acres+10 workers 6 acres+12 workers 7 acres+14 workers 8 acres+16 workers

9 acres+18 workers

24

LAWS OF RETURNS TO SCALE Increasing, constant and decreasing

B
4 II stage

Marginal production

3 2 1 A

D
1 2 3 4 5 6 7 8 9 10

scale

TIME ELEMENT IN PRICE-DETERMINATION MARKET PERIOD, D

D
P3 P 3 D3

PRICE

P 2
P 1
T O

P2
D2 P 1

D 1
X

QUANTITY

SHORTD PERIOD MSC SPSC

D Q1

P1 P2 P

Q2
D1 Q

D
O M M1 x

Perfect Competition:
Features or Characteristics:
A large number of buyers and sellers Identical products Perfect knowledge Perfect mobility of products Perfect mobility of factors. Free entry or free exit No transport cost Single Price

PRICE-OUTPUT DETERMINATION IN THE SHORT PERIOD INDUSTRY

D1 S

S
D

E
D D
E

E 1

M1

monopoly
profit

q
R

sm c

sac
ar mr

Monopolistic competition
Features- Large number of firms, Product

differentiation, selling costs, free entry-exit, Consumers divided

MONOPOLISTIC COMPETITION

SHORT PERIOD

MC
P 1

B T AR

AC

MR MC=MR

LONG PERIOD

LMC

P1 B LAC

LAR Q LMR

PRICE DESCRIMINTATION Types, personal, trade When it is possible? 1. 2. 3. 4. 5. 6. 7. 8. Differences in price elasticities Market Segmentations. Monopolist No Resale Agreement between rival sellers Geographical conditions Artificial difference between goods. Government regulations

p1
E 1

P2
A2

MC

AMR
AR MR2 2 M2 M

mr1 AR 1 M1

Features of oligopololy
1.Monopoly power 2.Inter-dependence of the firms 3.Uncertain demand curve 4.Aggressive marketing methods 5.Conflicting attitudes 6.Price rigidity

monopoly
y

HETEROGENEOUS

ac
ar p
A C

AR

mc
T K P B

THE KINKED DEMAND CURVE

COLLUSION: PERFECT, IMPERFECT, ORAL WRITTEN AGREEMENTS, CARTELS 3. LEADERSHIP DOMINANT TYPE PARAMETRIC TYPE

Theories of profit
1. Risk Theory- Prof. Hawley A. Insurable- Fire, floods, earth-quake B. Non-Insurable-Marketing of the products, price fluctuations, changes in demand-supply 2. Uncertainity Theory-Prof Knight A. Insurable or Foreseeable B. Non-Insurable or Unforseeble Risk of competition, technical risks, Risk of Governments, Intervention, Business Cycle Risks.