Dr.

Vishwanath Karad World Peace University

School of Management (PG)

Faculty of Management
Managerial Economics

UNIT II
Demand and Supply Analysis
 Learning Points

Demand and Supply analysis:

2.1 Demand: concept, determinants, law of demand
2.2 Supply: concept, determinants, law of supply
2.3 Market equilibrium. concept of equilibrium and
changes in it
2.4 Elasticity of demand and supply- calculation and
application
 Introduction
The terms supply and demand refer to the behaviour of people as
they interact with one another in competitive markets.

A market is a group of buyers and sellers of a particular good or

service. The buyers as a group determine the demand for
the product, and the sellers as a group determine the supply
of the product.

Economists use the term competitive market to describe a

market in which there are so many buyers and so many sellers
that each has a negligible impact on the market price
 Demand

Quantity demanded is the amount of a good that buyers

are willing and able to purchase at given rate at a point
of time

Dx=F(Px) I,TP, Pr, T)

 Determinants of Demand

1. Market Price
2. Consumer Income
3. Prices of Related Goods
4. Taste and Preferences
5. Future Expectations of Buyers
Shift in demand curve
 Law of Demand

The law of demand states that there is an inverse

relationship between price and quantity demanded.

Demand Curve:
Demand curve is downward slopping line relating price
to quantity demanded.
 Demand Curve, Demand
Schedule
Price
3.00 Price Quantity
0.00 12
2.50 0.50 10
1.00 8
2.00 1.50 6
2.00 4
1.50
2.50 2
1.00 3.00 0

0.50
Quantity
Demanded
0 1 2 3 4 5 6 7 8 9 10 11 12
 Exceptions to the Law of Demand

• Giffen’s goods
• Veblen Effect
• Bandwagon Effect
• Emergencies
 Supply

The supply of a commodity may be defined as the

amount of that commodity which the sellers (or
producers) are able and willing to offer for sale at a
particular price during a certain period of time
 Determinants of Supply
 Market price of the commodity
 Input prices(prices of factors of production)
 Technology
 Expectations
 Goals of the firm
 Number of producers
 Law of Supply

The law of supply states that there is positive and direct

relationship between price and supply.
Other factors being constant, If price of the product
increases, quantity supplied increases and vice versa.

Supply Curve:
The supply curve is the upward-sloping line relating
price to quantity supplied
Supply Curve
Price

3.00 Price Quantity

0.00 0
2.50 0.50 0
1.00 1
2.00 1.50 2
2.00 3
1.50 2.50 4
3.00 5
1.00

0.50

Quantity
0 1 2 3 4 5 6 7 8 9 10 11 12
 Exceptions to the law of supply
• Perishable Goods
• Clearance Sale
• Fear to be Out of Fashion
• Price Expectations of Sellers
 Market Equilibrium

 A market is in equilibrium when when no buyer or seller has any

incentive to change the quantity of goods , services or resources
that he or she buys or sells at given price

Equilibrium Price
 The price that balances supply and demand. On a graph, it is the
price at which the supply and demand curves intersect.
Equilibrium Quantity
 The quantity that balances supply and demand. On a graph it is
the quantity at which the supply and demand curves intersect.
Supply and Demand Together
Demand Schedule Supply Schedule

Price Quantity
Price Quantity
0.00 19
0.00 0
0.50 16 0.50 0
1.00 13 1.00 1
1.50 10 1.50 4
2.00 7 2.00 7
2.50 4 2.50 10
3.00 1 3.00 13

At Rs.2.00, the quantity demanded is equal to

the quantity supplied!
 Equilibrium of Supply and Demand
Price
Supply
$3.00

2.50 Equilibrium

2.00

1.50

1.00

0.50 Demand
Quantity
0 1 2 3 4 5 6 7 8 9 10 11 12
 How an Increase in Demand Affects the
Equilibrium
Price of 1. Hot weather increases
Ice-Cream the demand for ice cream...
Cone

Supply

$2.50 New equilibrium

2.00
2. ...resulting Initial
in a higher equilibrium
price...
D2

D1
0 7 10 Quantity of
3. ...and a higher Ice-Cream Cones
quantity sold.
 How a Decrease in Supply Affects the
Equilibrium
Price of
Ice-Cream 1.Shortage of milk reduces
Cone the supply of ice cream...

S1

New
$2.50 equilibrium

2.00 Initial equilibrium

2. ...resulting
in a higher
price...
Demand

0 1 2 3 4 7 8 9 10 11 12 13 Quantity of
3. ...and a lower Ice-Cream Cones
quantity sold.
 ELASTICITY
Elasticity means responsiveness of one variable to a
change in other variable.

It is a measure of how much buyers and sellers respond

to changes in market conditions
 Demand Elasticity
Responsiveness of quantity demanded of commodity to
the changes in each of the determinant of demand.

Elasticity of demand measures how much the quantity

demanded changes with the given change in price,
consumer income, prices of related goods, taste and
expectations of consumers.
 Types of Demand Elasticity
• Price elasticity of demand

• Income elasticity of demand

• Cross elasticity of demand

 Price Elasticity of Demand

• Price elasticity of demand is the percentage change in

quantity demanded at given a percent change in the
price holding all other determinants constant
• It is a measure of how much the quantity demanded of
a good responds to a change in the price of that good.
 Determinants of Price Elasticity of Demand

Demand tends to be
Determinant more elastic
- Necessities versus Luxuries - If the good is a luxury.

• Availability of Close Substitutes - The larger the number of close

substitutes.

• Time Horizon
- The longer the time period.

- Market Size -Narrow Market

 Ranges of Elasticity
 Perfectly Elastic
Quantity demanded changes infinitely with any change
in price.

 Elastic Demand
Quantity demanded responds strongly to changes in
price.
Price elasticity of demand is greater than one.
Unit Elastic
Quantity demanded changes by the same percentage as the
price.

Inelastic Demand
Quantity demanded does not respond strongly to price changes.
Price elasticity of demand is less than one.

Perfectly Inelastic
Quantity demanded does not respond to price changes.
• Price elasticity of demand=
Percentage change in quantity demanded /Percentage change in price
Price elasticity= 20% ∕ 10% =2
Perfectly Elastic Demand

Price

4 D

Quantity
Elastic Demand
- Elasticity is greater than 1
Price

1. A 20% 5
increase
in price... 4
Demand

50 100 Quantity
2. ...leads to a 50% decrease in quantity.
Unit Elastic Demand
- Elasticity equals 1
Price

1. A 20% 5
increase
in price... 4

Demand

80 100 Quantity
2. ...leads to a 20% decrease in quantity.
Inelastic Demand
- Elasticity is less than 1
Price

1. A 22% 5
increase
in price... 4

Demand

90 100 Quantity
2. ...leads to a 10% decrease in quantity.
Perfectly Inelastic Demand
- Elasticity equals 0
Price Demand

1. An 5
increase
in price... 4

100 Quantity
2. ...leaves the quantity demanded unchanged.
 Inelastic •Price and total revenue move in same
demand direction

•Price and revenue move in opposite

Elastic Demand direction

Unit Elastic •Revenue remains constant

Demand
 Income Elasticity of Demand
It is the ratio of the percentage change in quantity
demanded to the percentage change in income.

For Normal goods, relation between income and

demand is positive, means they move in same
direction.

For Inferior goods , relation between income and

Demand is negative, means they move in opposite
direction
 Cross Elasticity
Cross elasticity of demand is defined as the percentage
change in the quantity demanded of one good divided
by the percentage change in the price of another good.

Substitute= Positive
Complimentary = Negative

https://www.youtube.com/watch?v=-ktiMh1oRQg
 Using elasticity in Managerial
decisions
• Controllable and uncontrollable factors
• Support your decisions in following situations
1. Demand for the product is price inelastic
2. If responsiveness to advertising is positive compared to product
quality and improvement
3. Cross price elasticity of demand compared to price change of
competitor is high
4. If income elasticity is low
Thank You