Pan African Enetwork Project: Diploma in Business Management Managerial

PAN African eNetwork Project
Diploma in Business Management

Managerial Economic & Analysis
Semester - I
Sonia Singh
Copyright Amity University
1
Meaning of Demand
Conceptually, demand can be defined as the desire
for a good backed by the ability and willingness to
pay for it. The desire without adequate purchasing
power and willingness to pay do not become
effective demand and only an effective demand
matters in economic analysis and business
decisions.
Types of Demand
The demand for various commodities is generally
classified on the basis of the consumers of the
product, suppliers of the product, nature of
goods, duration of the consumption of the
commodity, interdependence of demand, period of
demand and nature of use of the
commodity(intermediate or final).
Individual and Market Demand

Autonomous and derived demand
Demand for durable and nondurable goods
Demand for firms product and industry
product
Demand for consumers and producers goods
Individual and Market Demand

The quantity of a commodity which an individual is
willing to buy at a particular price during a specific
time period given his money income, his taste and
prices of other commodities is called individuals
demand for a commodity.
On the other hand market demand of a commodity is
the summation of individual demand by all the
consumers. Market demand is a multivariate
relationship and determined by many factors
simultaneously.
Demand for durable and nondurable goods

Durable goods are those whose total utility is not
exhausted in a single or short run use. Such goods
can be used repeatedly over a period of time.
Durable goods may be consumer goods as well as
producer goods.
The demand for nondurable goods depends largely on
their prices, consumer income and is subject to
frequent change.
Autonomous and derived demand

The demand for a commodity that arises on its
own out of a natural desire to consume or
possesses a commodity independent of the
demand of other commodities, the demand for
the product is termed as independent.
Commodities like tea and vegetables
absolute terms. On the other hand
demand for a product is tied to the
some parent product, the demand is
derived demand.
do come on
if the
demand for
termed as
Demand for firms product and industry

product
Firms demand denotes the demand for the products
by a particular company or firm whereas industry
demand is the aggregation of demand for the
product of all the firms of an industry as a whole.
Demand for consumers and producers

goods
Consumer goods are those, which are, meant for
the final consumption by the consumers or the
end users. Producer's goods on the other hand
are used for the production of consumer goods or
they are intermediate goods, which are further
processed upon to convert them into a form to be
used by the end user. Another distinction is that
the demand for producers goods is derived
demand and it indirectly depends on the demand
for the consumer goods which the producer goods
is used to produce.
Determinants of Demand
Own Price
Prices of related goods Substitutes
and Complements
Income
Tastes & Preferences
Expectations
Population
Other exogenous factors
Demand Analysis
Law of Demand There is Inverse relationship
between price and quantity demanded ceteris
paribus i.e.,other factors remaining constant.
Demand Schedule A list / table showing
quantity demanded of a good at different
prices, all other things being held constant
Demand Function The determinants of quantity

demanded when summarized in the form of
functional notations are called a demand
function. A typical demand function can be
specified as follows:
QXD = f ( px, p1,..pn, Y, T, Ey, Ep, u)
Demand Curve Represents the relation between
price and quantity demanded of a good, all other
things being held constant.
Demand schedule and demand curve

Price
Qty (D)
The graph shows that the demand curve is downward

sloping.
A decrease in the price is reflected by a corresponding
increase in the amount of quantity demanded.
This inverse relationship between price and the quantity
demanded is depicted in the shape of the demand
curve. The downward slope of the demand curve
reflects the law of demand, which states that other things
remaining
the same, if the price of any good decreases its quantity
demanded
increases and vice versa.
Individual Demand and Market Demand
Market demand
The sum of the demands of all the buyers in a
market.
The market demand curve is the horizontal
sum of the demand curves of all buyers in the
market
Market Demand
Exceptions of law of demand
1. Giffen goods :if the concerned good is a

Giffen good the rational consumer will go
on decreasing his consumption of the
good as the price falls. This is because a
Giffen good is such that the consumer
purchase less and less of the good as its
price falls and vice versa.
2.Veblen effect:a consumer may judge a

good by its price . Thus, when a price
hike takes place for a good the
consumer may be misguided to think that
a quality improvement has taken place
and he consumes more of the product.
3.Consumer expectations:
4.Market trend: in the share market it is
noted that when the price of a particular
share rises its demand also increases to
some people and vice versa.
What Happens to Demand if?

SITUATION: Youre the owner of a hot dog making
company:
(a) people change their preference from

hamburgers to hot dogs?

company:
(b) Your country negotiates a deal w/ China

to trade hot dogs for egg rolls?

company:
(c) the price of ground beef increases?

company:
(d) the minimum wage rises?

company:
(e) the trade union threatens a strike if

owners fail to meet their demands?

company:
(f) unemployment hits an all-time high?

company:
(g) the price of buns increases due to a

wheat shortage?
Changes in Demand
Change in the quantity demanded

A change in the quantity of a good that people
plan to buy that results from a change in the
price of the good.
Change in demand
A change in the quantity that people plan to
buy when any influence other than the price of
the good changes
A Change in Quantity Demanded

A change in
quantity
demanded is
caused by a
change in the price
of the good, which
causes a
movement along
the demand curve.
Shifts in the Demand Curve

D1
D0
Price
D2
0
Quantity
Shifts in the demand curve
When the demand curve shifts from D0 to D1,

more is demanded at each price.
When the demand curve shifts from D0 to D2, less
is demanded at each price.
Such and increase/decrease in demand can

be caused by:
A rise /fall in the price of a substitute
A fall/rise in the price of a complement
A rise/fall in income
A redistribution of income towards those
who favour the commodity
A change in tastes that favours the
commodity
What Is Supply?
Supply of a commodity refers to the various
quantities of the the commodity which a seller is
willing and able to sell at different prices in a
given market, at a point of time.
Supply is related to scarcity. Its only the scarce
goods which have a supply price; Goods which
are freely available have no supply price.
Factor affecting the supply of commodity
1. The price of commodity:- The supply of

commodity very much depend upon its price. There is
direct and positive relationship between price of
commodity and supply.
2. The
price of the substitutes:-The supply

of a particular commodity is inversely
related with the price of other
commodities,such as the supply of wheat
will fall with the rise in price of rice.This is
due to the fact that rise in price of rice will
encourage the producers to produce more
rice.consequently area under wheat will be
lesser and the supply will of decline.
3.Change in technology:-If the change in

technology or new discoveries bring
reduction in price and increase in
production,this will increase the level of
supply also.
4.Goals of firm:-Generally the aim of firm

is maximize the profit. Beside this
maximum sales,maximum output or
maximum employment is also taken as the
goal s of firm..This goals change in them
affect the supply of commodity.sometimes
the producer may continue to maximize
the supply of commodity without profit
simply to build the their image and prestige
in society
5.Expected change in price:-In case producer expect an increase

in the price ,they will try to withdraw goods from the
market.Consequently,supply will reduce .If price is expected to fall
in the market ,supply will naturally increase.
6.Natural factors :- Supply of good is a part of good produce.It mean

that more production of good will result its more supply and vice
versa..Agricultural production depends upon the natural factors such as
rain,fertility,climatic condition etc. production may be adversely affected
by drought and heavy rains and flood etc.
7.Means of transportation and

communication:-Adequate supply of
commodities is maintained If the means of
transportation and communication are
developed.Scarcity of good will be less in the
domestic market,if the mean of the
transportation and communication are
properly developed.
8.Taxation policy:-The production of commodity is

discouraged ,if heavy duty in on its products is
imposed .In the same way tax concession
encourage producer to increase supply.
9.Agreement among producer:-Sometime all the
firms producing the same commodity forms an
association, pool or a syndicate and regular
supply of the goal in such way ,so that they may
get maximum profit.
Law of Supply says, supply of the commodity will increase

with increase in price and decrease with decrease in price,
other things remaining the same. In other words, price of
any commodity is directly related with the quantity supplied .
According to Dooley, the law of supply states that

other things remaining the same , higher the price, the
greater the quantity supplied or lower the price, the
smallest the quantity supplied.
When we are talking of supply, we are bound to view

with the eyes of producers , not the consumers
,because its producers who are the suppliers.
It is quite natural that in case of increase in prices

producers will like to multiply their profit. For this
they will be required to sell more quantity of goods
and thus the supply of goods will increase. Higher
price in this way induces the sellers to increase the
supply of goods. On the other hand, low prices reduces
the margin of profit so the producer reduces the
supply.
RESERVED PRICE
The price cannot fall below a certain point .In case the
price falls too much the supply of the product may be
stopped .The price below which the producer will not be
willing to sell is reserved price.
The amount of reserved price depends upon :->

1.Durability of commodity
2.Estimated price
3.Storage charges
4.Transportation charges etc.
1.There is no change in price of related

commodities.
2.There is no change in technique of production.
3.There is no change in price of factors of production.
4.There is no change in goal of firm.
5.There is no expectation of change in the price of
the
commodity.
PRESENTATION OF LAW THROUGH

SUPPLY SCHEDULE
Gives a full account of supply of a
particular commodity
Law of supply can be better be understood
with the help of supply schedule
Relation between price (x) of good and its
supply
PRESENTATION OF LAW THROUGH SUPPLY

CURVE
Graphical representation of supply schedule is
supply curve
It is an upward sloping curve from left to right
Thus both supply schedule and supply curve
show law of supply i.e, they show a positive
relationship between price and supply
Presentation of law of supply through

supply curve
The graphical representation of the supply schedules supply curve. The

relationship between the quantity sellers want to sell during some time
period and price is what economists call the supply curve. It is an
upward sloping curve from left to right. This shows positive relationship
between price and supply.
Though usually the relationship is positive, so that when price increases
so does quantity supplied, there are exceptions.
Diagrammatic representation of supply schedule.

EXCEPTIONS TO THE LAW OF

SUPPLY
The law of supply does not apply in following cases:
1.In case of agricultural products whose supply is
affected by natural factors.
2.In case of perishable goods like food. In case of these
goods seller is willing to sell more units at decaying
prices.
3.In case of goods having social distinction. The supply of
goods will remain limited even if their prices are high
Supply curves in very short period

(market period):THE SUPPLY CURVE WILL BE A VERTICAL LINE PARALLEL TO Y
-AXIS, BECAUSE FIRMS CAN NOT ADJUST THEIR PRODUCTION TO
ANY CHANGE IN PRICE.
Long Period:SUPPLY OF INPUTS CAN BE CHANGED,THE SUPPLY WILL BE

UPWARD SLOPING IN THE LONG PERIOD.
MOVEMENT ALONG A SUPPLY CURVE

AND SHIFT OF THE SUPPLY CURVE :-
MOVEMENT ALONG A SUPPLY

CURVE :
If the quantity supplied increases or
decreases in response to rise or fall in
price of commodity alone assuming other
things remaining the same, it is know as
the movement along the supply curve.
THERE MAY BE TWO

FOLLOWING POSSIBILITIES: A) EXTENSION OF SUPPLY :-> When
the quantity supplied increases with the
rise in price.
B) CONTRACTION OF SUPPLY :->when
quantity supplied decreases with the fall in
price.
When there is change in supply due to factors other than price

of commodity then there is shift in supply curve. Now two cases
arises:
1.INCREASE IN SUPPLY: We move from original supply curve
to the new rightward supply curve.
2.DECREASE IN SUPPLY: In this case there will be leftward
shift in supply curve
CAUSES FOR THE INCREASE IN SUPPLY

1. Fall in the price of related (substitutes) goods;
2. Changes in the goals of producers;
3. Fall in the price of factors of production;
4. Improvement in technology;
5. Increase in the number of firms in the market;
6. Subsidies offered by the government; and
7. When the firm expects a fall in the price of the
commodity.
CAUSES FOR DECREASE IN

SUPPLY
Following causes are responsible for decrease
in supply :
1. Rise in the price of the related (substitute) commodities;
2. Changes in the goals of the producer;
3. Rise in the price of factors of production;
4. Fall in the level of technology;
5. Decrease in the number of firms in the market;
6. When subsidies are withdrawn ; and
7. When the firm expects a rise in the price of the
commodity.
MARKET EQUILIBRIUM
Market equilibrium
When the quantity demanded equals the

quantity suppliedwhen buyers and sellers
plans are consistent.
Equilibrium price
The price at which the quantity demanded

equals the quantity supplied.
Equilibrium quantity
The quantity bought and sold at the

equilibrium price.
Market Equilibrium
Only at
equilibrium
demand intersects
supply.
P0: equilibrium price
Q0: equilibrium quantity
Market Disequilibria
Excess demand or
shortage exists when
quantity demanded
exceeds quantity
supplied at the
current
price.
To
eliminate
the shortage,
some consumers are
willing to raise the current
price.
Market Disequilibria
Excess supply or
surplus exists when
quantity supplied
exceeds quantity
demanded at the
current price.
To eliminate the surplus,

some sellers are willing to
lower the current price.
Increases in Demand or Supply
Higher demand leads to higher

equilibrium price and higher
equilibrium quantity.
Higher supply leads to lower

equilibrium price and higher
equilibrium quantity.
Decreases in Demand or
Supply
Lower demand leads to lower

price and lower quantity
exchanged.
Lower supply leads to higher

price and lower quantity
exchanged.
Relative Magnitudes of Change
The relative magnitudes of change in supply and

demand determine the outcome of market equilibrium.
Relative Magnitudes of Change
When supply and demand both increase, quantity

will increase, but price may go up or down.
Price: A Markets Automatic Regulator

Law of market forces
When there is a shortage, the price
rises.
When there is a surplus, the price
falls.
Surplus or Excess Supply
The quantity supplied exceeds the
quantity demanded.
Shortage or Excess Demand
The quantity demanded exceeds the
quantity supplied.
Q.1. A change in quantity demanded refers to

(a) Contraction along a demand curve
(b) Shift of the demand curve
(c) Movement along a demand curve
(d) Expansion along a demand curve
Ans: C
Q.2. A change in demand refers to

(a) Contraction along a demand curve
(b) Shift of the demand curve
(c) Movement along a demand curve
(d) Expansion along a demand curve
Ans: B
4. In case of substitute goods if the price

of commodity x increases the demand of
commodity y
(a) Remain constant
(b) Increases
(c) Decreases
(d) Fluctuates
Ans: b
Households are on the ______ side of input (factor)

markets and on the _______ side of output (product)
markets.
A) Demand; supply
B) demand; demand
C) Supply; demand
D)
Supply; supply
Answer:
C
3. What happens to demand when price

of the commodity falls
(a) Demand expands
(b) Demand contracts
(c) No change
(d) Can expand or contract
Ans : a
Firms are on the ______ side of input (factor) markets and

on the _______ side of output (product) markets.
A)
Demand; supply
B)
demand; demand
C)
supply; demand
D)
supply; supply
Answer:
A
Which of the following is held constant along the demand curve?
A)
Price of the good
B)
Quantity
C)
Income
D)
Both A and B
Answer:
C
The "law of demand" implies that as prices __________

increases.
A)
fall, demand
B)
rise, demand
C)
fall, quantity demanded
D)
rise, quantity demanded
Answer:
C
According to the law of demand, as prices fall, ceteris

paribus,
A)
demand increases.
B)
demand decreases.
C)
quantity demanded decreases.
D)
quantity demanded increases.
Answer:
D
According to the law of demand there is __________

relationship between price and quantity demanded.
A)
a positive
B)
a negative
C)
either a positive or negative
D)
a constantly changing
Answer:
B
Thank You
Please forward your query
To: sonia23singh@gmail.com
CC:
manoj.amity@panafnet.com
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Enviado por

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PAN African eNetwork Project

Diploma in Business Management

Copyright Amity University

Copyright Amity University

Individual and Market Demand

Copyright Amity University

Individual and Market Demand

Copyright Amity University

Demand for durable and nondurable goods

Copyright Amity University

Autonomous and derived demand

Copyright Amity University

Demand for firms product and industry

Copyright Amity University

Demand for consumers and producers

Copyright Amity University

Copyright Amity University

Demand Function The determinants of quantity

Copyright Amity University

Demand schedule and demand curve

Copyright Amity University

The graph shows that the demand curve is downward

Individual Demand and Market Demand

Copyright Amity University

Copyright Amity University

Exceptions of law of demand

1. Giffen goods :if the concerned good is a

Copyright Amity University

2.Veblen effect:a consumer may judge a

Copyright Amity University

Copyright Amity University

What Happens to Demand if?

(a) people change their preference from

Copyright Amity University

What Happens to Demand if?

(b) Your country negotiates a deal w/ China

Copyright Amity University

What Happens to Demand if?

(c) the price of ground beef increases?

Copyright Amity University

What Happens to Demand if?

(d) the minimum wage rises?

Copyright Amity University

What Happens to Demand if?

(e) the trade union threatens a strike if

Copyright Amity University

What Happens to Demand if?

(f) unemployment hits an all-time high?

Copyright Amity University

What Happens to Demand if?

(g) the price of buns increases due to a

Copyright Amity University

Change in the quantity demanded

Copyright Amity University

A Change in Quantity Demanded

Copyright Amity University

Shifts in the Demand Curve

Shifts in the demand curve

When the demand curve shifts from D0 to D1,

Copyright Amity University

Such and increase/decrease in demand can

Copyright Amity University