Managerial

Economics
[MGT609]
Trupti Mishra
Shailesh J Mehta School Of
Management
IIT Bombay

Demand Analysis

Demand/ Law of Demand

Demand Schedule/Demand Curve/Demand
Function
Factors affecting Demand
Change/Shift in the Demand
Supply/ Law of Supply
Supply Schedule/Supply Curve/Supply Function
Factors affecting Supply
Change/Shift in the Supply
Market Equilibrium

What is demand?

A relation showing the quantities of a good

that consumers are willing and able to buy
at various prices per period, other things
constant.

Demand Wants - Needs

Law of Demand

Relationship between Price and quantity

demanded is an economic law.

The quantity of a good demanded per

period relates inversely to its price, other
things constant.

Exception to Law of Demand

-

Giffen Goods
Veblen Effect
Prediction
Demonstration effect
Share Market
Insignificant proportion of Income spent
Goods with No substitute

Demand Schedule and Demand

Curve

Individual point on demand curve / schedule shows quantity

demanded and entire demand curve/schedule shows demand.

Factors Influencing Demand

Price of good or service (P)

Incomes of consumers (M)
Prices of related goods & services (PR)
Taste patterns of the consumer (T)
Expected future price of product (Pe)
Number of consumers in market (N)

Generalized Demand Function

Qd f ( P, M , PR , , Pe , N )

Qd a bP cM dPR e fPe gN

b, c, d, e, f, & g are slope parameters

Measure effect on Qd of changing one of the variables
while holding the others constant

Sign of parameter shows how variable is related to

Qd
Positive sign indicates direct relationship
Negative sign indicates inverse relationship

Factors Influencing Demand

Variable

Relation to Qd

Sign of Slope Parameter

b = Qd/ P is negative

Inverse

Direct for normal goods

Inverse for inferior goods

PR

Direct for substitutes

Inverse for complements

d = Qd/ PR is positive

Direct

e = Qd/ T

Pe

Direct

f = Qd/ Pe is positive

Direct

g = Qd/ N is positive

d = Qd/ PR is negative
is positive

Factors Influencing Demand

Variable

Relation to Qd

Sign of Slope Parameter

b = Qd/ P is negative

Inverse

Direct for normal goods

Inverse for inferior goods

PR

Direct for substitutes

Inverse for complements

d = Qd/ PR is positive

Direct

e = Qd/ T

Pe

Direct

f = Qd/ Pe is positive

Direct

g = Qd/ N is positive

d = Qd/ PR is negative
is positive

Demand Function

Demand function shows relation between P & Qd when all other variables are
held constant

Qd = f(P)
Qd/P must be negative

Qd = 500 5P
At zero price, demand is equal to 500 units.
(- ) shows inverse relationship between price and demand .
(5) Implies that for each one rupees change is price demand changes by 5 units

Market Demand
Market demand is the sum of all individual
demands at each possible price
Graphically, individual demand curves are
summed horizontally to obtain the market
demand curve.

Change in the Demand Curve

Change in quantity demanded
Occurs when price changes
Movement along demand curve

Change in demand
Occurs when one of the other variables, or determinants of
demand, changes
Demand curve shifts rightward or leftward

Change in the Demand Curve

Shifts in Demand
P

Price (Rupees)

80
70
60

D1
Demand
increase

D0

40

D2

50

30

Demand
decrease

20
10

100

300

500

700

900

Quantit
y

1,10
0

1,30
0

1,50
0

Qd

A Shifts in the Demand Curve

Price of
Cigarettes,
per Pack.

A policy to
discourage smoking
shifts the demand
curve to the left.

RS 2.00

D1
D2
0

10

20

Number of Cigarettes
Smoked per Day

16

A Movement Along the Demand

Curve
Price of
Cigarettes,
per Pack.

A tax that raises

the price of
cigarettes results
in a movements along
the demand curve.

Rs
4.00

A
Rs
2.00

D1

12

20

Number of Cigarettes
Smoked per Day

17

Do Soaring Price and Mounting Demand in

Indian Gold Market Speak of a Paradox

18

Supply
Supply of a goods refers to the various
quantities of the good which a seller is
willing and able to sell at a different
prices in a given market, at a particular
point of time.
Law of Supply
The law of supply states that, other
things equal, the quantity supplied
of a good rises when the price of the
good rises.
19

Factors Influencing Supply

Price of good or service (P)

Input prices (PI )
Prices of goods related in production (Pr)
Technological advances (T)
Expected future price of product (Pe)
Number of firms producing product (F)

20

Generalize Supply Function

Qs h kP lPI mPr nT rPe sF

k, l, m, n, r, & s are slope parameters

Measure effect on Qs of changing one of the variables
while holding the others constant
Sign of parameter shows how variable is related to Qs
Positive sign indicates direct relationship
Negative sign indicates inverse relationship

21

Generalize Supply Function

Variable

Relation to Qs

Sign of Slope Parameter

Direct

k = Qs/ P is positive

PI

Inverse

l = Qs/ PI is negative

Pr

Inverse for substitutes m = Qs/ Pr is negative

Direct for complements
m = Qs/ Pr is positive

Direct

n = Qs/ T is positive

Pe

Inverse

r = Qs/ Pe is negative

Direct

s = Qs/ F is positive
22

Supply Function
- Supply function, or supply, shows relation between P &
Qs when all other variables are held constant
Qs = g(P)
Supply Schedule
- The supply schedule is a table that shows the
relationship between the price of the good and the
quantity supplied.
Supply Curve
-The supply curve is a graph of the relationship
between the price of a good and the quantity
supplied.
23

Supply Schedule: Example

Price of Ice-cream Cone
(Rs)

Quantity of cones
Supplied

0.00
0.50
1.00
1.50
2.00
2.50
3.00

0
0
1
2
3
4
5
24

Supply Curve: Example

Price of
Ice-Cream
Cone

Rs 3.00
2.50
2.00
1.50
1.00
0.50

10

12
25

Quantity of
Ice-Cream
Cones

Market supply Schedule

Price of Ice-cream
Cone (Rs)

0.00

0.50

1.00

1.50

2.00

2.50

10

3.00

13

B
+

Market

26

The Determinants of Quantity Supplied

27

Shifts in Supply
P

S2

80

S0

Price (Rupees)

70

S1

60

Supply
decrease

50

40

30

Supply
increase

20
10

100

300

500

700

Qs

900

Quantit
y
28

Market Equilibrium

Equilibrium refers to a situation in which the

price has reached the level where quantity
supplied equals quantity demanded.

Equilibrium price & quantity are determined

by the intersection of demand & supply curves
At the point of intersection, Qd = Qs
Consumers can purchase all they want &
producers can sell all they want at the
market-clearing price
29

Equilibrium
Demand Schedule

Supply Schedule

At Rs 2.00, the quantity demanded is equal to

the quantity supplied!

30

The Equilibrium of Supply and

Demand
Price of
IceCream
Cone

Supply

Equilibrium
price

Rs
2.00

Equilibrium

Demand
Equilibrium
quantity

10
31

1
1

Quantity of
Ice-Cream
Cones

Equilibrium

Surplus
When price > equilibrium price, then quantity supplied >
quantity demanded.
There is excess supply or a surplus.
Suppliers will lower the price to increase sales, thereby
moving toward equilibrium.
Shortage
When price < equilibrium price, then quantity demanded >
the quantity supplied.
There is excess demand or a shortage.
Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward
equilibrium.

32

Excess Supply
Price of
Ice-Cream
Cone

Surplu
s

Supply

2.50

2.00

Demand

4
Quantity
Demanded

10
Quantity
Supplied

33

1
1

Quantity of
Ice-Cream
Cones

Excess Demand
Price of
Ice-Cream
Cone

Supply

2.00

1.50

Shortag
e

4
Quantity
Supplied

Demand

10
Quantity
Demanded
34

1
1

Quantity of
Ice-Cream Cone

How an Increase Demand Affects

the Equilibrium
Price of
Ice-Cream
Cone

1. Hot weather increases the

demand for ice cream

Supply
New
equilibrium

Rs2.50

Rs
2.00

D2

Initial
equilibriu
m

2.
resulting
in a higher
price

D1

10

1
1

3. and a higher
quantity sold.

35

Quantity of
Ice-Cream Cone

How a Decrease Demand

Affects the Equilibrium S
Price of

Ice-Cream
Cone

1. A technical failure reduces

the supply of ice cream

S1

New
equilibrium

Rs
2.50

Initial
equilibrium

Rs
2.00
2.
resulting
in a higher
price

Demand

10

1
1

3. and a lower
quantity sold.

36

Quantity of
Ice-Cream
Cones

A Shift in Both Supply and

Demand

Price of
Ice-Cream
Cone

Large
increase in
demand

New
equilibriu
m

P2

S2

S1
Small
decrease in
supply

P1

D2

Initial equilibrium

D1
0

Q1

Q2

Quantity of
Ice-Cream Cone
37

A Shift in Both Supply and

Demand

Price of
Ice-Cream
Cone

Small
increase in
demand

S2

New
equilibriu
m

S1

P2
Large
decrease in
supply

P1

Initial
equilibrium

D2
D1
0

Q2

Quantity of
Ice-Cream Cone

Q1
38

Simultaneous Shifts

When demand & supply shift simultaneously

Can predict either the direction in which price
changes or the direction in which quantity
changes, but not both
The change in equilibrium price or quantity is
said to be indeterminate when the direction of
change depends on the relative magnitudes by
which demand & supply shift

39

What Happens to Price and

Quantity when Supply or Demand
Shifts?

40