DEMAND AND SUPPLY ANALYSIS

If you cant pay for a thing, dont buy it. If you cant get paid for it, dont sell it.

By: Prof. Vani Khosla

MEANING OF DEMAND

Demand signifies the ability or the willingness to buy a particular commodity at a given point of time or at a specified price. Demand for commodity implies on three things:

DEMAND = DESIRE + ABILITY TO PAY + WILL TO SPEND

Demand is the desire or want backed up by money. Demand is always related to price & time. Demand may be viewed ex-ante or ex-post.

CLASSIFICATION OF DEMAND

Demand
Consumers & Durable & Non-Durable Goods Demand Derived Company or Firm Short -Run & Long-Run Demand

Producers Goods Demand

& Autonomous Demand

&
Industry Demand

Two Levels of Consumer Demand

Individual Demand
ID....refers to the demand for a product from the individual persons point of view. It is single consuming entitys demand.

Market Demand
MD.refers to the total demand of all the buyers, taken together. It is aggregating all individual buyers demand function in the market.

Factors Influencing Individual Demand

Price of the Product.

Income of the Consumers: Normal Goods, and Inferior Goods.

Tastes & Preferences of the Consumers.

Prices of Other Products: Substitute Goods, and Complementary Goods.

Consumers Expectations.
Advertisement Effect.

Factors Influencing Market Demand

Price of the Product.

Distribution of Income & Wealth in the Community. Communitys Common Tastes & Preferences. General Standards of Living & their Spending Habits.

Future Expectations.
Inventions & Innovations. Fashions. Climate or Weather Conditions. Customs. Advertisement & Sales Propaganda.

LAW OF DEMAND

It is the functional relationship between the quantity demanded of a particular product and its price in the market. The equation can be written as:

Qdx = f (Px)

Statement of the Law: According to Alfred Marshall The law of demand states that, .. The amount demanded increases with a fall in prices & diminishes with a rise in prices.

Assumptions of the Law

Law of Demand based on fundamental assumption ceteris paribus are as follows:

No change in Consumers Income. No change in Consumers Tastes & Preferences. No change in the Prices of related Goods. No change in Fashions. No change in Government Policy. No change in the Distribution of Income & Wealth. No change in Weather Conditions.

Cont.

DEMAND SCHEDULE :: A Tabular Statement of price or quantity relationship is called the demand schedule. It shows the quantity of goods that a consumer would be willing and able to buy at specific prices under the existing circumstances. DEMAND CURVE :: A Graphical presentation of a demand schedule is known as demand curve. It expresses the relation between the price charged for a product & the quantity demanded , holding constant the effects of all other variables.

Individual Demand Schedule and Curve. Market Demand Schedule and Curve.

Individual Demand Schedule & Demand Curve

Price of Oranges

Quantity Demanded

D P r i c e

(Rs. Per kg.)

30 25

(Qty. in kg.)
2 4

20
15 10

6
10 16
Quantity Demanded D

Market Demand Schedule & Demand Curve

Price (Rs.) 4 3 2 1

Quantity Market Demanded demand A 1 2 3 5 B 1 3 5 9 C 3 5 7 10 5 10 15 24

DD is the Market Demand Curve , which is the summation of all individual demand curves.

Why does the Demand Curve Slope Downwards from Left to Right ??

1. Operation of the law of Diminishing Marginal Utility

2. Income Effect

3. Substitution Effect

4. Change of Number of Consumers

5. Change of Number of Uses

Exceptions to the Law Of Demand (Upward Sloping Demand Curve)

Giffen Goods. Speculation. Articles of snob appeal (Expensive Commodities). Consumers psychological bias or illusion. Demonstration Effect. Goods with no substitutes.

D P r i c e

Demand

ELASTICITY OF DEMAND

Alfred Marshall defines:: The Elasticity of Demand in a market is . Great or small according to the amount demanded... Increases much or little for a given fall in price, and diminishes much or little for a given rise in price.

Elasticity of Demand = % age Change in Quantity Demanded % age Change in Determinant of Demand

KINDS OF ELASTICITY OF DEMAND

Price Elasticity of Demand

ELASTICITY OF DEMAND
Income Elasticity of Demand Cross Elasticity of Demand

PRICE ELASTICITY OF DEMAND

Price elasticity of demand is a measure used in economics to show the responsiveness of the quantity demanded of a good or service to a change in its price. Price Elasticity of Demand = Proportionate Change in Quantity Demanded Proportionate Change in Price

Types of Price Elasticity of Demand::

Perfectly Elastic Demand. Perfectly Inelastic Demand. Unitary Elastic Demand. Relatively Elastic Demand.

Relatively Inelastic Demand

1. Perfectly Elastic demand

When the demand for a product changes increases or decreases even when there is no change in price, it is known as perfect elastic demand.

P r i D c e

e =
D

Quantity Demanded

2. Perfectly Inelastic demand

e = 0
When a change in price how so ever large or small, there is no change in quantity demanded, it is known as perfect inelastic demand.
D P r P i c P e

D Quantity Demanded

3. Unitary Elastic demand

When the proportionate change in demand is equal to proportionate changes in price, it is known as unitary elastic demand.

D P r P i c e P

e = 1

Quantity Demanded

4. Relatively Elastic demand

When the proportionate change in demand is more than the proportionate changes in price, it is known as relatively elastic demand.

D P r P i c P e

e > 1

Quantity Demanded

5. Relatively Inelastic demand

When the proportionate change in demand is less than the proportionate changes in price, it is known as relatively inelastic demand.

D P r P i c e P

e < 1

D
Q Q

Quantity Demanded

INCOME ELASTICITY OF DEMAND

Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers income.

Income Elasticity of Demand = Percentage Change in Quantity Demanded Percentage Change in Income

Types of Income Elasticity of Demand::

Unitary Income Elasticity. Income Elas. Greater than Unity. Income Elas. Less than Unity. Zero Income Elasticity.

Negative Income Elasticity.

1. Unitary Income Elasticity

e = 1
When an increase in income brings about a proportionate increase in quantity demanded, then it is known as unitary income elasticity.
D I n Y c o Y m e

D Q Q

Quantity Demanded

2. Income Elasticity Greater than Unity

e > 1
When an increase in income brings about a more than proportionate increase in quantity demanded, it is known as income elasticity greater than unity.
D I n Y c Y o m e

Quantity Demanded

3. Income Elasticity Less than Unity

e < 1
D I n Y c o Y m e

When income increases .. quantity demanded also increases but less than proportionately, it is known as income elasticity less than unity.

D Q Q Quantity Demanded

4. Zero Income Elasticity

e = 0
D I n Y c o Y m e

When quantity demanded remains the sameeven though income increases, it is known as zero income elasticity.

D Quantity Demanded

5. Negative Elastic demand

When there is increase in incomethen quantity demanded falls, it is known as negative elastic demand.

D I n Y c o m Y e

e < 0

D Q Q

Quantity Demanded

CROSS ELASTICITY OF DEMAND

The cross elasticity of demand or cross-price elasticity of demand measures the responsiveness of the demand for a commodity to a given change in the price of some another commodity.

Cross Elasticity of Demand =

Percentage Change in Quantity Demanded of X Percentage Change in Price of Y

1. Substitute Goods
A substitute good is a good with a positive cross elasticity of demand. This means a good's demand is increased when the price of another good is increased. For example: Tea and Coffee

e > 0
D P r P i c P e D Q Q

Quantity Demanded

2. Complementary Goods

A complementary good is a good with a negative cross elasticity of demand. This means a good's demand is increased when the price of another good is decreased.
For example: Bread and Butter.

e < 0
P P r i c P e D Q Q

Quantity Demanded

3. Unrelated Goods
e = 0
D P r P i c P e

The unrelated goods have zero cross elasticity of demand. This means a change in the price of one good has no effect on the demand of another good. For example: Razor Blade & Petrol

D Quantity Demanded

CASE STUDY DISCUSSION (Pricing Game by a Game Marketer)

SUPPLY ANALYSIS

MEANING OF SUPPLY

The supply of a commodity means the amount of that commodity which producers are able and willingness to offer for sale at a given prices in specific period of time. The supply of a product mathematically expressed as: Sx = f (Px,Py,Pi,T,Mi,G,N etc.) can be

which includes Total supply of product x, Price of product x, Price of related products, Prices of inputs, Change in technology, Time periods etc.

DETERMINANTS OF SUPPLY

Price of the Product (Own Price).

Price of Related Products. Cost of Factors of Production. Change in Technology.

Time Periods.
Government Policy. The Natural Factors. Self Consumption. Sellers Expectations. Motives of Producer.

LAW OF SUPPLY

The Law of Supply simply expresses the relation between the quantity of product supplied & its price and other things remaining constant.

Sx = f (Px)
According to S.E.Thomas,

a rise in price tends to increase supply and a fall in price tends to reduce it.

Assumptions of Law of Supply

Cost of production is unchanged. Fixed scale of production. Government policies are unchanged. No change in the technique of production. No speculation. No change in transportation cost. The prices of all other goods remains constant.

INDIVIDUAL SUPPLY SCHEDULE & SUPPLY CURVE

Price of Product (Rs.)

Quantity Supplied (units)

S
P R I C E

10 15 20 25 30 40

100 200 270 350 450 600

S
QTY. SUPPLIED

MARKET SUPPLY SCHEDULE & SUPPLY CURVE

Price (Rs.) 5 15 25 35

Quantity Supplied A B C

Market Supply
P R I C E

SS is the Market Supply Curve. S

10 20 30 20 40 50 30 50 80 50 90 100

60 110 160 240

S QTY. SUPPLIED

EXCEPTIONS TO THE LAW OF SUPPLY

Labor Supply

Immediate Need For Cash

Rare Goods

Self Consumption

Future Expectation

Hoardings

ELASTICITY OF SUPPLY

Elasticity of supply is the responsiveness of producers to changes in the price of their goods or services .
Elasticity is measured as the percent change in quantity divided by the percent change in price.

Elasticity of Supply = %age Change in Quantity Supplied %age Change in Price

Types of Elasticity of Supply

Perfectly Elastic Supply

Relatively Inelastic Supply

Perfectly Inelastic Supply

Relatively Elastic Supply

Unitary Elastic Supply

1. Perfectly Elastic Supply

When the supply for a product changes increases or decreases even when there is no change in price, it is known as perfectly elastic supply.

P r i S c e

Quantity Supplied

2. Perfectly Inelastic Supply

When there is a heavy change in price level, but there is no change in quantity supplied, it is known as perfectly inelastic supply.

S P r P i c P e

S Quantity Supplied

3. Unitary Elastic Supply

When the proportionate change in supply is exactly equal to proportionate changes in price, it is known as unitary elastic supply.

P r P i c e P S Q Q

Quantity Supplied

4. Relatively Elastic Supply

When the proportionate change in supply is greater than the proportionate changes in price, it is known as relatively elastic supply.

S P r P i P c e

Quantity Supplied

5. Relatively Inelastic Supply

When the proportionate change in supply is less than the proportionate changes in price, it is known as relatively inelastic supply.

S P r P i c e P

S
Q Q

Quantity Supplied

MARKET EQUILIBRIUM

MEANING OF MARKET EQUILIBRIUM

Market equilibrium is that state in which the quantity that firms want to supply equals the quantity that consumers want to buy.

According to Marshall,
Just As the two blades of a pair of scissors are required t cut the cloth, so also the two blades of demand & supply are required to determined the price in the market.

Example of Market Equilibrium

Market for Denim Pants
Price of Denim Pants Quantity Demanded 0 50 100 8 7 6 0 1 2 Quantity Supplied

150

200
250 300 350 400

4
3 2 1 0

4
5 6 7 8

Market Equilibrium in Diagrammatical Form

Market Disequilibrium
At prices above the equilibrium price, quantity supplied is greater than quantity demanded, resulting in a temporary surplus.
At prices below the equilibrium price, consumers desire to buy more products than are available, creating a temporary shortage.

Market Disequilibrium in Diagrammatical Form

P
400

Price

300 200 100

Quantity

GOLD: The Supply-Demand Equilibrium

Recent News..Gold

Why gold had been going through a phenomenal bull run for the past 11 years. Gold went up when the market went up. It went further up when the market went down - and it's still moving closer to the top. What are the logical reasons behind this increasing valuation? Gold demand is rising faster than its supply. Central banks around the world are hoarding gold and are buying more. Inflationary Pressures and Fear

The Demand and Supply Equation

In the commodities market, traders buy and sell commodities based on their expectation about future supply and demand equations, thus pushing the price higher or lower. There are two primary ways in which Gold is supplied : Mines and Recycled Gold. Recycled gold supply will depend on gold price expectation, cost and availability. The three primary drivers of gold demand are Jewellery, manufacturing technology products such as semiconductors, and Investments.

Why central banks hold gold

All Central banks need some reserve assets that are readily available to them and are buying more gold in order to reduce their dependency on the dollar or euro. Gold is liquid and not correlated closely to any other asset class, not even to its own supply demand equation. In India, The gold holding is 557.5 tonnes which is least among the major economies. RBI is known to buy International Monetary Fund gold and considers investment in gold as a safe investment. But India is the largest country with a gold demand of 933.4 tonnes, which is a quite significant figure considering fact that fluctuating and increasing gold prices and rupee weakening against U.S. dollar.

Inflationary Pressures and Fear

Though no one says gold prices are going up only because of inflation, it does play an indirect role in the price rise.
With most central banks around the world engaged in monetary easing, inflationary fears and the expectation of weakening local currency pushes investors and banks to hedge their position using gold. Inflation or deflation, as long as economic concerns and fear remain, investment demand for gold will remain steady.

Current Situation of India in Gold Market

In 2011, India and China accounted for 61% of total demand of gold. When a country's economy grows..the more the growth, the more the demand for gold will be. If these economies slow down, then the demand for gold will automatically dive. But there is one more problem, the price rise.people are not able to afford that much money. The strength of local currency can also pay a major role here. For example, the Indian currency weakened steadily against the dollar this year. While the price of gold dropped around 10% in the global market this year, the price of gold kept moving higher in India due to the country's weak local currency.

Cont..
Todays Gold Rate in India:

10 gram gold Rate in India = Rs.32320.00 24 carat gold per gram Rate in India = Rs.3232.00 22 carat gold per gram Rate in India = Rs.3022.00

(Updated On 10-09-2012)