demand and supply analysis.pdf

7/27/2019 Demand and Supply analysis.pdf

1/26

PGP I

Term I


2/26

Demand function


3/26

Income and Substitution effect

When price rises:

Consumer feels worse of in terms of realincome-income effect

Goods become relatively expensive-

substitutioneffect


4/26

Inverse demand function


5/26

Demand relation

qx

p

8

4

4

12

A

B


6/26

Demand curve

10

20 qx

p

8

4

4

12

A

B


7/26

How to read the demand curve

At point A, consumers are willing to pay at the mostRs.8 per piece to buy 4 units of the product.

For 4 units the consumers willingness-to-pay is Rs.8per unit.

If the price is Rs.8, the consumers will buy at most 4units.

A movement from A to B is possible only if the pricefalls, and vice versa.


8/26

A linear Demand curve


9/26

Change in income: normal vs. inferior


10/26

1. Stock prices and demand, gold prices anddemand go up simultaneously- shift in the demand

curve due to expectation.

2. People are willing to pay more for luxury products

when their price increases: Veblen goods (designerwatch, luxury cars, designer perfumes)-Consumersperception of quality change

3. Giffen good :Generally staple food, inferiorgoods, a large amount of income is spent on it

Violation of law of demand?


11/26

Complements

An increase in the price of a complement causes a

downward shift of the demand curve

Quantity

Price

AB

Demand curve for Coffee

Price of sugar has increased


12/26

Substitute products

An increase in the price of a substitute product willcause an upward shift of the demand curve.

Quantity of coffee

Coffee price

A B

Price of tea has increased


13/26

Change in income

An increase in consumer income will cause anupward shift of the demand curve.

Quantity

Price

A B

Normal good:

Income has increased


14/26

Taste, preference and expectations

Taste and preferenceFashion and lifestyle, apart from needs, shape our

demand.

Price expectations

When price is expected to fall in future, some

consumers prefer to wait.


15/26

Market demand curve

10

6

10

10

6

3

6

3 3

15 8 23

Consumer 1 Consumer 2 Market demand

10

p

q q Q

pp


16/26

Supply relationship

Supply curve summarises information from theproduction side.

Quantity supplied is positively related to price.

A point on the supply curve tells us at a given price

how much the firms are willing to supply,

or, alternatively to supply a given level of outputhow much price the firms are willing to accept asminimum.


17/26

A linear supply curve


18/26

Supply curve

q

p

S

2


19/26

Market supply

Market supply is a horizontal sum of individual supplycurves

2

4

5 10 15 30

Single firms supply

Market supply of 2 firms

Market supply curve is flatter than the single firms

supply curve.


20/26

Shift of the supply curve

Suppose wage rate increases

Q

pS1

S2

Wage increase causes the supply curve to move leftward.

This indicates a fall in supply. That is, at a given p firms

are willing to supply less.


21/26

Market equilibrium

When demand and supply are matched.

D

S

E

Q

p

Pe

P1

P2

Surplus

Shortage

Qe Q2Q1


22/26

Change in the exogenous factors

Demand and supplycurve

EquilibriumPrice

EquilibriumQuantity

Demand curve shifts

rightward

increases increases

Demand curve shifts

leftward

decreases decreases

Supply curve shifts

rightward

decreases increase

Supply curve shifts

leftward

increases decreases


23/26

1. The price of good A goes up. As a result the demand

for good B shifts to the left. From this we can infer that:A) good A is a normal good.B) good B is an inferior good.C) goods A and B are substitutes.

D) goods A and B are complements.

2. Which of the following events will cause a leftwardshift in the supply curve of petrol?

A) A decrease in the price of petrolB) An increase in the wage rate of refinery workersC) Decrease in the price of crude oilD) An improvement in oil refining technology

Exercise 1


24/26

The inverse demand curve for product X is givenby: PX = 25 - 0.005Q + 0.15PY, where PX represents

price in dollars per unit, Q represents rate of sales inpounds per week, and PY represents selling price of

another product Y in dollars per unit. The inversesupply curve of product X is given by:PX= 5 + 0.004Q.

a. Determine the equilibrium price and sales ofX. Let PY = $10.

b. Determine whether X and Y are substitutes or

complements.

Exercise 2


25/26

Answer


26/26

Consumer and producer Surplus

Producer

surplus

A

B

C

E

50

40

30

Consumersurplus

D1

S1

Q

P

20

10

demand and supply analysis.pdf

Documents