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Presentation No.

3 DEMAND & SUPPLY
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Review of demand and supply definitions and concepts. Influencing factors of the demand and the supply. Market Equilibrium and Market Intervention Price Elasticity

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Yield Management (5249)

1. Basic Concepts: Definitions

Market is the social institution in which goods, services and production factors (labor, land, capital) are exchanged free and voluntarily among sellers and buyers. Place where consumers and producers can freely act (selling or buying) searching their own interests (invisible hand – A Smith). Production is the process of transforming available resources into goods and services which are used to satisfy wants and needs commonly known as consumption. Supply and Demand are the forces that make the market to work. Price system is the mechanism by which buyers and sellers express their desires and arrive at an agreement reaching market equilibrium and the exchange of goods and services.

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Market intervention: Price Control

Rationing: the prices direct (allocate) the stock of a good (service) toward the users that more value it. (- rate control) Assigning: the prices attract resources toward those sectors in which benefits are produced, and they deviate them of the sectors in which losses are produced. (capacity management)

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1.  The demand of a good can be expressed by a demand chart where the different quantities demanded according to the price are collected. 4 .a Demand and Demand Chart  It reflects the quantity of a good that the buyers want and they can buy. It reflects the different calculations pricebenefit that the buyers of a good do: – –  Cost: the market price of any good. Benefit: satisfaction that the good provides.

the demand of a good does not depend alone of its price.Demand Curve  The demand curve is the graphic representation of the relation among the price of a good and the quantity demanded. What other factors influence in the demand?  5 . Nevertheless.

G. PB.The demand equation  The demand equation is the mathematical function that collects the relation among the quantity demands of a good and other variables QA = D (PA. N) PA = Price of analyzed good Y = Disposable income PB = Price of substitute or complementary goods G = Inclinations and preferences of the consumers N = Scale (size) of the market (population) E = Expectations (on future levels of income or prices) 6 . Y.

000 – 200 PA 7 . being maintained all others variables constant (ceteris paribus).  Example of a demand curve equation: QA = 10.PA = Price of the analyzed good  We have seen that the demand curve has a negative slope.  Demand Law: The quantity demanded of a good decreases when its price increases and increases when price decreases.

– Benefit: the market price of any good.b Supply and the chart of supply  It shows the different quantities of a good that the producers are willing and can offer (supply) in exchange for a price. Similar to the demand. It reflects the different calculations costbenefit that the producers of a good do: –   Cost: the production cost of goods.1. 8 . the supply can be specified inside a chart of offerings that reflect the different quantities supplied (offered) to different prices.

The offering of the market can also be expressed through a function of offering (supply) where all the factors that influence the quantity offered are reflected.  9 .The supply curve  The supply curve is the graphic representation of the relation among the price of a good and the quantity offered.

The supply equation  It collects the existing mathematical relation among the quantity offered of a good. agricultural products) 10 . E. PB. H. z.e. the price and the others variable that influence in the decisions of production. r. M) PA = Price of the analyzed good PB = Price of substitute or complementary goods r = The price of the productive factors z = Technology cost H = The number of competitor suppliers E = Expectations on variations in the prices M= Weather and environmental changes (i. QA = S (PA.

the quantity supplied also increases.PA = Price of the analyzed good   We have seen that the supply curve has a positive slope. (ceteris paribus)  Example of a supply curve equation: QA = 500 + 1000 P 11 . The Law of supply express the direct relation that exists between the price and the quantity supplied (offered): upon increasing the price.

a Changes in the demanded quantity versus shifts in the demand curve  The changes in the components of the function of demand causes different movements in the curve of demand PA = Price of analyzed good (independent variable) Movements along the curve of demand Y = Disposable income PB = Price of substitute goods G = Inclinations and preferences N = Scale (size) of the market E = Expectations (ceteris paribus) Displacements of the curve of demand 12 .2.

Changes in the demanded quantity: Movements along the curve of the demand Price ($) D PA A Caused by the changes in the price ($) PB B D QA QB Quantity 13 .

Shifts in the demand (cont): Displacements of the demand curve 14 .

b Changes in the supplied quantity versus shifts in the supply curve  The changes in the components of the function of supply causes different movements in the curve of supply PA = Price of analyzed good (independent variable) PB = Price of substitute goods r = Price of the productive factors z = Technology cost H = The number of competitors E = Expectations M= Weather (ceteris paribus) Movements along the curve of supply Displacements of the curve of supply 15 .2.

Changes on the supplied quantity: Movements along the curve of the supply Price ($) Caused by changes in the price ($) S PB PA QA QB Q Quantity 16 .

Changes on the supply: Displacements of the curve of supply 17 .

18 .3. Therefore. The price of equilibrium is that in which it empties the market so that the quantity demanded and offered is the same one.a The Market Equilibrium    It will be reached there where concur the demand of the consumers with the offering of the producers. the equilibrium is found in the intersection of the curve of demand with the curve of supply. Meet of quantities and prices.

The Market Equilibrium 19 .

Surplus • The market will seek the equilibrium reducing the quantity supplied and increasing the quantity demanded.The Market Equilibrium: Situations out of equilibrium (Surplus) • When the price is over the price of equilibrium. 20 . it generates a surplus (excess of supply).

it generates a shortage (excess of demand) • The market will seek the equilibrium increasing the quantity offered and Shortage reducing the quantity 21 demanded.The Market Equilibrium: Situations out of equilibrium (Shortage) • When the price is lower to the price of equilibrium. .

what is the surplus of rooms? 22 .00 140. If the manager use a price of $140 /room. Based on these results.00 110.00 80.00 Supply (rooms) 0 0 10 15 20 25 30 40 50 Demand (rooms) 70 60 50 40 30 25 20 15 10 1 . If the manager use a price of $80 /room.00 50.00 95.00 155.EXAMPLE A hotel manager has studied the supply and demand behavior of the market and as a result he (she) has generated the following results (shown in the next table of Price ($ per room per night) vs Number of Rooms Supplied and Demanded).00 65. draw the supply and demand curves and show the equilibrium point of the market 2. what is the shortage of rooms? 3. Price ($ / room) 0.00 125.

A. the demand is generated by the customers and the supply is controlled by the hoteliers. The demand decreases Qo < Qd Shortage Quantity (Rooms) . Prices are adjusted “UP” ($/night/room) The supply increases High P. Low P. Scenario: when Prices are increasing In the hospitality industry.

Scenario: when Prices are decreasing In the hospitality industry. The supply decreases Low P. Prices are adjusted “DOWN” ($/night/room) Qo > Qd High P. The demand increases Surplus Quantity (Rooms) . the demand is generated by the customers and the supply is controlled by the hoteliers.B.

Both (supply and demand) curves can displace at the same time to reach market equilibrium 25 .

it could occur that the markets get in equilibrium but many people have not access to determined goods of first need.3. (i.b Market intervention • The fact that the results of equilibrium are efficient does not mean that they are desirable in absolute terms. food) • The worry by the population welfare can motivate the government to alter the results of the market: by implementing : Policy of price control (price floor and price ceiling)  Taxes 26 .e. For instance.

a surplus is produced (excess of offering) that is bought by the State. PE Surplus O D QD QE QO Q 27 . •The floor price is over the price of equilibrium.Policy of price control: Floor (minimum) Price • It is the price of a good established by law and supported by the offering P of the State to buy that PMIN good to that floor price established.

Shortage QO QE QD D Q 28 .PMAX shortage is produced (excess of demand).Policy of price control Ceiling (maximum) Price • Level above which the law does not permit to rise the price of a good. • The maximum or ceiling price is lower to P O PE E the price of equilibrium.

4. Price Elasticity • Definition: the measure of responsiveness in the quantity demanded for a good as a result of change in price of the same good. (∆Q/∆P) = is the derivative of the demand function. • Formula: the formula used to calculate price elasticity for a given product is: Point-price elasticity = (P/Q) * ( ∆Q/∆P) Where Q = Quantity P = Price. 29 . It is a measure of how consumers react to a change in price.

6(80/952) = −0. we take the derivative of the demand function (Q vs P): Next. to the ordered pairs ($40.000 − 0.02. 30 . We have at P=40.6P. 952). and at P=80. 976) and ($80. point-price elasticity e = −0. We wish to determine the point-price elasticity of demand at P = $80 and P =$40.6(40/976) = −0. we apply the equation for point-price elasticity. First.Elasticity . laserjet printers) has a demand curve Q = 1. point-price elasticity e = −0.05.Example Suppose a certain good (say.

or a narrow range of prices. On the other hand.Elasticity     In simpler words. 31 . Drinking water is a good example of a good that has inelastic characteristics in that people will pay anything for it (high or low prices with relatively equivalent quantity demanded). there are many substitutions which consumers may switch to. demand for a product can be said to be very inelastic if consumers will pay almost any price for the product. so it is not elastic. Inelastic demand means a producer can raise prices without much hurting demand for its product. demand for sugar is very elastic because as the price of sugar increases. and very elastic if consumers will only pay a certain price. for the product. and elastic demand means that consumers are sensitive to the price at which a product is sold and will not buy it if the price rises by what they consider too much.

Unit (or unitary) elastic.Summary Value n=0 (−1 < n < 0) n = −1 (−∞ < n < −1) n = −∞ Meaning Perfectly inelastic. 32 Perfectly inelastic demand Perfectly elastic demand .Elasticity . Relatively elastic. Relatively inelastic. Perfectly elastic.

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