Demand Analysis

Unit 2
Chapter 1
Demand analysis
NEED
WANT
DEMAND
Demand
n Demand for a commodity refers to the quantity
of the commodity which an individual household
is willing to purchase per unit of time at a
particular price.
Demand for a commodity implies:
(a) Desire to acquire it,
(b) Willingness to pay for it, and
(c) Ability to pay for it.
Law of Demand
Marshall law states that, all other factors
being equal, as the price of a good or
service increases, consumer demand for
the good or service will decrease and vice
versa.
Exceptions to law of demand
1. Giffen goods: Inferior goods on which the consumer spends a large
part of his income and the demand for which falls with a fall in their
price.. a rise in their price drains their resources and the poor have to
shift their consumption from the more expensive goods to the giffen
goods,
2. Articles of snob appeal: Goods which serve ' status symbol ' do not
follow the law of demand. these are goods of ' conspicuous
consumption
3. Expectations regarding future prices: If the price of a commodity

is rising and is expected to rise in future the demand for the
commodity will increase.
4. Emergency: At times of war, famine etc. consumers have an

abnormal behaviour..
5. Quality-price relationship: people assume that expensive goods are

of a higher quality then the low priced goods.
Demand Schedule
Demand Curve
Market Demand
u Market demand refers to the sum of
all individual demands for a
particular good or service.
u Graphically, individual demand

curves are summed horizontally to
obtain the market demand curve.
Demand functions
ä simple demand functions

Qd = a – bP
ä more complex demand functions

Qd = a – bP + cY + dPs – ePc
Demand curve for equation: Qd = 10 000 – 200P
50
40
P 30
20
10
D
0
0 2 4 6 8 10
Q (000s)
50
P Qd (000s)
5 9
40
P 30
20
10
D
0
0 2 4 6 8 10
Q (000s)
50
P Qd (000s)
5 9
40
10 8
P 30
20
10
D
0
0 2 4 6 8 10
Q (000s)
50
P Qd (000s)
5 9
40
10 8
15 7
P 30
20
10
D
0
0 2 4 6 8 10
Q (000s)
50
P Qd (000s)
5 9
40
10 8
15 7
20 6
P 30
20
10
D
0
0 2 4 6 8 10
Q (000s)
Prices of Related Goods
Substitutes & Complements
u When a fall in the price of one good
reduces the demand for another good,
the two goods are called
substitutes.(Tea & Coffee)
u When a fall in the price of one good
increases the demand for another
good, the two goods are called
complements.(Car & petrol)
Determinants of demand
ä Tastes & Preferences
ä number and price of substitute goods
ä number and price of complementary goods
ä Income (Taxes & Subsidies)
ä Advertisings
ä Expectations
ä Seasonal Variations
ä Population
Determinants of demand
Change in Quantity Demanded
versus Change in Demand

u Movement along the demand curve.
u Caused by a change in the price of
the product.
Changes in Quantity
Price of
Cigarettes
Demanded
per Pack
A tax that raises the
price of cigarettes
C results in a movement
$4.00
along the demand
curve.
2.00 A
D1
0 12 20 Number of Cigarettes
Smoked per Day
Change in Demand
u A shift in the demand curve, either
to the left or right.
u Caused by a change in a
determinant other than the price.
Consumer Income
Price of
Normal Good
Ice-Cream
Cone
$3.00 An increase
2.50 in income...
Increase
2.00 in demand
1.50
1.00
0.50
D2
D1
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
Consumer Income
Price of
Inferior Good
Ice-Cream
Cone
$3.00
2.50 An increase
2.00
in income...
Decrease
1.50 in demand
1.00
0.50
D2 D1
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
Variables that A Change in
Affect Quantity
Demanded This Variable . . .
Price Represents a movement
along the demand curve
Income Shifts the demand curve
Prices of related Shifts the demand curve
goods
Tastes Shifts the demand curve
Expectations Shifts the demand curve
Number of Shifts the demand curve
buyers
Components of Demand:
The Substitution Effect
n Assuming that real income is constant:
ä If the relative price of a good rises, then
consumers will try to substitute away from
the good. Less will be purchased.
ä If the relative price of a good falls, then
consumers will try to substitute away from
other goods. More will be purchased.
n The substitution effect is consistent with
the law of demand.
© Oxford University Press, 2016. All rights reserved.
Components of Demand:
The Income Effect
n The real value of income is inversely

related to the prices of goods.
n A change in the real value of income:
ä will have a direct effect on quantity
demanded if a good is normal.
ä will have an inverse effect on quantity
demanded if a good is inferior.
n The income effect is consistent with the
law of demand only if a good is normal.
Why does the Demand
Curve Slope Downward?
n Law of Demand
ä Inverse relationship between price and
quantity.
n Law of Diminishing Marginal Utility.
ä Utility is the extra satisfaction that one
receives from consuming a product.
ä Marginal means extra.
ä Diminishing means decreasing.
Darren’s utility from
16
14
consuming
12
chips (daily)
Packets TU
10 of chips in utils
Utility (utils)
0 0
8 1 7
2 11
6 3 13
4 14
4 5 14
6 13
2
0
0 1 2 3 4 5 6
-2
Packets of crisps consumed (per day)

16
14 TU
consuming
12
chips (daily)
Packets TU
10 of chips in utils
Utility (utils)
0 0
8 1 7
2 11
6 3 13
4 14
4 5 14
6 13
2
0
0 1 2 3 4 5 6
-2

16
14 TU
consuming
12
chips (daily)
Packets TU MU
of chips in utils in utils
10
Utility (utils)
0 0 -
8 1 7 7
2 11 4
3 13 2
6
4 14 1
5 14 0
4 -1
6 13
0
0 1 2 3 4 5 6
-2

16
14 TU
consuming
12
chips (daily)
Packets TU MU
of chips in utils in utils
10
Utility (utils)
0 0 -
8 1 7 7
2 11 4
3 13 2
6
4 14 1
5 14 0
4 -1
6 13
0
0 1 2 3 4 5 6
-2 MU
Market Supply
n Market Supply Schedule: a table showing
the quantity supplied of a commodity at
each price for a given period of time.
n Market Supply Curve: A positively-sloped
curve showing the various price-quantity
combinations given by the market supply
schedule.

Changes in Supply
Examples of things that could shift the
supply curve:
1) An improvement in technology,
2) A reduction in the price of resources used
in the production of the commodity,
3) For agricultural commodities, more
favorable weather conditions.

Market Equilibrium
Market Equilibrium
n Equilibrium Price of a Commodity: the
price at which the quantity demanded of
the commodity equals the quantity
supplied and the market clears.
n Surplus: occurs when the quantity
supplied exceeds the quantity demanded.
n Shortage: occurs when the quantity
demanded exceeds the quantity supplied.
The Market Mechanism
 Market Mechanism Summary
1) Supply and demand interact to
determine the equilibrium price.
2) When not in equilibrium, the market will adjust
to a shortage or surplus and return to the
equilibrium.
3) Markets must be competitive for the
mechanism to be efficient.
37
MARKET DEMAND & SUPPLY
Price Price
MARKET MARKET
P QD 200 DEMAND P QS 200 SUPPLY
Rs.5 10 B 2,000
Rs.5 60 S 12,000
4
3
20
35 x U
Y
E
4,000
7,000
4
3
50
35
x E
L
L
10,000
7,000
2 55 11,000 2 20 4,000
R E
1 80 16,000 1 5 1,000
S R
S
EQUILIBRIUM 38
MARKET DEMAND & SUPPLY
Price
Price Rs.5
Demand S Price Supply
P QD P Q
4
Rs.5 2,000 Market
Rs.5 12,000
S
Equilibrium
Rs.4 4,000 Rs3 Rs.4 10,000
Rs.3 7,000 7,000
Rs.2 11,000 2 Rs.3
4,000
Rs.1 16,000 Rs.2 1,000
1
D Rs.1
o 2 4 6 78 10 12 14 16 Q
39
Quantity
Y
S
Price
(Rs. per unit)
P E
Quantity
O Q X 40
Price
S
(Rs. per unit)
Surplus
P1
If price is above equilibrium
Point-Supply exceeds
P Demand.
Q Quantity
41
Price
S
(Rs per unit)
Surplus
P1
Assume the price is P1 , then:
1) Quantity Supplied is >
Quantity Demanded
P2 2) Producers lower price.
3) Quantity supplied decreases
4) Equilibrium is restored
Q1 Q3 Q2 Quantity
42
Price
(Rs. per unit) S
E Assume the price is P2, then:

1) Quantity Demanded is greater
than quantity Supplied
P3 2) Producers raise price.
3) Quantity supplied increases
4) Equilibrium is restored
P2
Shortage
D
Q1 Q3 Q2 Quantity
43
Change in Supply
P D1 S1
S2
Price
P2
P1
o Q2 Q 1 Q
Quantity
Change in Demand
D2 S1
P D1
P2
Price
P1
o Q1 Q2 Q
D P Q D P Q
D1 A D1
D1 S B S
P2
P1
D2
P1
P2
“Increase in Demand” Q1 Q2 Q2 Q1 “Decrease in Demand”
Four Possibilities
S P Q S P Q
D D D S2
C
S1 P2
S1
P2 S1 P1
P1
“Increase in Supply” Q1 Q2 Q2 Q1 46
“Decrease in Suply”
Change in Supply = Change in Demand
D2 S3
D1
S1
D3 S2
Q
47
Effects of Government Intervention
Price Controls
 If the Government decides that the

equilibrium price is too high, they may
establish a maximum allowable ceiling
price.
48
TAX SHIFTING AND THE ELASTICITIES
OF DEMAND AND SUPPLY
 When a product is taxed, who ultimately

shoulders the tax burden depends upon the
elasticity of demand and supply of the
product taxed.
 Usually the tax burden is shared between
producers and consumers.
 Consumers pay more of the tax, if demand is
relatively less elastic than supply
 Producers pay more of the tax if demand is
relatively more elastic than supply.
49
Price Ceilings
and Price Floors
 Price Ceiling
is a legally established maximum price which
a seller can charge or a buyer must pay.
 Price Floor
is a legally established minimum price which
a seller can charge or a buyer must pay.
50
Price Ceilings
 When the Government imposes a price
ceiling (i.e., a legal maximum price at
which a good can be sold) two outcomes
are possible:
The price ceiling is not binding.
The price ceiling is a binding constraint on
the market, creating shortages.
51
A Binding Price Ceiling
Price
S
Price
PE Ceiling
PC
Shortage
D
Q QE Q Quantity/time
S D
52
Market Impacts
of a Price Ceiling
 A Binding Price Ceiling creates. . .
Shortages (QD > QS)
Shortages create :
• Queuing
• Discrimination criteria set by sellers
• Bundled pricing with other goods
• Bribery/corruption
53
Price Floors
 When the Government imposes a price floor

(i.e., a legal minimum price at which a good
can be sold) two outcomes are possible:
The price floor is not binding.
The price floor is a binding constraint on the
market, creating surpluses.
54
A Binding Price Floor
Price
Surplus S
PF
Price Floor
PE
D
Q QE Q Quantity/time
D S
55
Market Impacts
of a Price Floor
 A Binding Price Floor creates. . .

Surpluses (QS > QD)
Surpluses create :
• Discrimination criteria set by buyers
Examples:
• Agricultural Price Supports
56
Tutorial
Q1. The demand equation for a popular brand of fruit
drink is given by the equation
Qx = 10 – 5Px + 0.001I + 10Py
where Qx = monthly consumption per family in gallons
Px = price per gallon of the fruit drink = $2.00
I = median annual family income = $20,000
Py = price per gallon of a competing brand = $2.50
 Interpret the parameter estimates.
 At the stated values of explanatory variables,
compute the monthly consumption (in gallons) of
fruit drink.
 Suppose median annual family income increased to
$30,000. What will be answer to part (ii) now?
 Q2. Demand function for a variety of Bakeman
biscuits is:
Q = 2.02P + 0.03A - 0.04Ac + 0.06Pc + 0.001I
where Q and P are quantity and price of the Bakeman
biscuits respectively; A and Ac are company’s own and
competitor’s advertisement expenditures, Pc is price of
competitor’s and I is the average personal disposable
income. Given A = 50, Ac = 100, Pc = 5 and I = 20,000
 Write down the demand & inverse demand equation.

 Draw the demand curve and find Q for P = 10.
Consumer and Producer Surplus
Consumer Surplus
• How much are you willing to pay for a pair of
jeans?
• As an individual consumer, you have no say in
determining the market price; you take the market
price as given.
• If the market price is at or below what you are
willing to pay for a good, you buy it.
• If the market price is below what you are willing to
pay for a pair of (your favorite) jeans, your
purchase will result in consumer surplus: the
difference between the price that you were willing
to pay and the (market) price you actually paid.
Consumer Surplus
• Individual consumer surplus = net gain from the
purchase of a good= the difference between the
maximum price a consumer is willing to pay for
a good and the actual price paid
• Total consumer surplus is the sum of all

consumer surpluses gained by all buyers of a
good in the market
Consumer surplus = the area above the
price and below the demand curve
100 Consumer surplus = {400(100-35)}/2
= 13000
Consumer Surplus
35 P = 35
D
0 400
Consumer Surplus and A Price Increase
100 Consumer surplus = {270(100-60)}/2

= 5400
Consumer
Surplus
60 P = 60
35
D
0 270 400
Producer Surplus
• The seller’s cost: the lowest price a seller is
willing to accept for a good: (marginal cost of
production)
• Producer surplus: the difference between the
(market) price a seller actually receives and
his/her (seller’s) cost
• A seller would not sell below his/her cost
• If the market price is below a seller’s cost the
seller will leave the market
Producer Surplus and The Market Supply
P Producer surplus = 6750
S
60 P = 60
Producer
Surplus
10
0 270
Total Surplus
S
100
Consumer
Surplus
60
Producer
Surplus
10 D
0 270
The Effects of a Tax
Without a tax, P
CS = A + B + C
PS = D + E + F A
Tax revenue = 0 S
B C
Total surplus PE
= CS + PS D E
=A+B + C D
F
+D+E+F
Q
QT QE
APPLICATION: THE 71
COSTS OF
With the tax, P
CS = A
PS = F
A
Tax revenue PB S
=B+D B C
Total surplus D E
=A+B PS D
+D+F F
The tax reduces
total surplus by Q
C+E QT QE
APPLICATION: THE 72
COSTS OF
P
C + E is called the
deadweight loss
(DWL) of the tax, A
PB S
the fall in total
B C
surplus that
results from a market D E
distortion, such as a PS D
tax. F
Q
QT QE
APPLICATION: THE 73
COSTS OF
About the Deadweight Loss
Because of the tax, the P
units between
QT and QE are not
sold.
PB S
The value of these
units to buyers is
greater than the cost of
PS D
producing them,
so the tax prevents
some mutually
beneficial trades. Q
QT QE
APPLICATION: THE 74
COSTS OF
ACTIVE LEARNING 1
The market for
Analysis of tax P airplane tickets
A. Compute $ 400
CS, PS, and
350
total surplus
without a tax. 300
S
250
B. If $100 tax
per ticket, 200
compute 150
D
CS, PS, 100
tax revenue,
50
total surplus,
and DWL. 0 Q
0 25 50 75 100 125 75
ACTIVE LEARNING 1
The market for
Answers to A P airplane tickets
CS $ 400
= ½ x $200 x 100 350
= $10,000 300
S
PS 250
= ½ x $200 x 100 P = 200
= $10,000 150
D
Total surplus 100
= $10,000 + $10,000 50
= $20,000 0 Q
0 25 50 75 100 125 76
ACTIVE LEARNING 1
A $100 tax on
Answers to B P airplane tickets
CS $ 400
= ½ x $150 x 75 350
= $5,625
300
PS = $5,625 S
PB = 250
Tax revenue 200
= $100 x 75 PS = 150
= $7,500 D
100
50
0 Q
DWL = $1,250
0 25 50 75 100 125 77
Taxes and Consumer and Producer Surplus
Loss of consumer surplus: A+B Tax revenue: A + C
Loss of producer surplus: C+F Deadweight loss: B +F
S’
100
K S
85
A B
60
C F
30
L
10 D
Q
0 100 270
Indifference
Curve Analysis
Combination Oranges Apples
A 1 10
B 2 6
C 3 3
D 4 1
Indifference curve
A curve showing all the combinations of
two goods (or classes of goods) that the
consumer is indifferent among.
Indifference Map
 An indifference map is a complete set of
indifference curves.
 It indicates the consumer’s preferences among
all combinations of goods and services.
 The farther from the origin the indifference
curve is, the more the combinations of goods
along that curve are preferred.
83
 Marginal rate of substitution (MRS):
the rate at which the consumer is
willing to exchange the good
measured along the vertical axis for
the good measured along the
horizontal axis.
Equal to the absolute value of the slope
of the indifference curve.
3-85
The Marginal Rates of Substitution
Rate at which one good can be substituted for another

while holding utility constant
Slope of an indifference curve
3-86
dQY/dQX = -MUX/MUY
Diminishing Marginal Rate of
Substitution
3-87
Properties of IC’s
 The indifference curves are not likely to be
vertical, horizontal, or upward sloping.
A vertical or horizontal indifference curve holds
the quantity of one of the goods constant,
implying that the consumer is indifferent to
getting more of one good without giving up any
of the other good.
An upward-sloping curve would mean that the
consumer is indifferent between a combination
of goods that provides less of everything and
another that provides more of everything.
Rational consumers usually prefer more to less.
Indifference Curves:
No Crossing Allowed!
 Indifference curves cannot cross.
 If the curves crossed, it would mean that the
same bundle of goods would offer two different
levels of satisfaction at the same time.
 If we allow that the consumer is indifferent to all
points on both curves, then the consumer must
not prefer more to less.
 There is no way to sort this out. The consumer
could not do this and remain a rational consumer
Indifference curve bows towards origin
The slope or steepness of indifference
curves is determined by consumer
preferences.
It reflects the amount of one good that a
consumer must give up to get an additional
unit of the other good while remaining equally
satisfied.
This relationship changes according to
diminishing marginal utility—the more a
consumer has of a good, the less the consumer
values an additional value of that good. This is
shown by an indifference curve that bows in
toward the origin.
Budget Constraint
 The indifference map only reveals the
ordering of consumer preferences among
bundles of goods. It tells us what the
consumer is willing to buy.
 It does not tell us what the consumer is able
to buy. It does not tell us anything about the
consumer’s buying power.
 The budget line shows all the combinations
of goods that can be purchased with a given
level of income
 The mathematical expression for budget
constraint is:
M= Px X + Py Y
Y= M/Py – Px/Py
Example: Y = Rs 200
Px= Rs 2
Py= Re1
Consumer Equilibrium
Deriving the Demand Curve

Demand Analysis

Caricato da

Informazioni sul documento

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Demand Analysis

Caricato da

Copyright:

Formati disponibili

Unit 2

3. Expectations regarding future prices: If the price of a commodity

4. Emergency: At times of war, famine etc. consumers have an

5. Quality-price relationship: people assume that expensive goods are

u Graphically, individual demand

ä simple demand functions

ä more complex demand functions

Change in Quantity Demanded

n The real value of income is inversely

Packets of crisps consumed (per day)

Packets of crisps consumed (per day)

Packets of crisps consumed (per day)

© Oxford University Press, 2016. All rights reserved.

© Oxford University Press, 2016. All rights reserved.

E Assume the price is P2, then:

“Increase in Demand” Q1 Q2 Q2 Q1 “Decrease in Demand”

 If the Government decides that the

 When a product is taxed, who ultimately

 When the Government imposes a price floor

 A Binding Price Floor creates. . .

 Write down the demand & inverse demand equation.

• Total consumer surplus is the sum of all

100 Consumer surplus = {270(100-60)}/2

Rate at which one good can be substituted for another

Potrebbero piacerti anche