CHAPTER 3
SUPPLY AND DEMAND
The Situation: Demand for Tea
• -The CEO of Global Food has asked to his VP of
Marketing, Nicole Goodman to provide him with
a report on the elements that are driving the
demand for tea. “How responsive will people be
to price changes in the price of competing
products such as bottled water and carbonated
soft drinks? Is tea a ‘luxury’ good, or is it a
necessity? The answers to these questions will
help us better understand how to price and
position our brand in the marketplace”.
Market Demand
• The demand for a good is the quantity of a
good people are ready to buy at various
prices with a time period, while other
factors held constant.
• There is an inverse relationship between
Price and Quantity demand, which is
called the “law of demand”.
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•
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•
•
P$
10
9
8
7
6
5
Qd
0
80
120
160
200
250
Non-Price Determinants of
Demand
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•
•
•
•
Tastes and Preferences
Income
Price of Related Goods
Future Expectations
Number of buyers
• Changes in price result in changes in the
quantity demanded (movement along demand
curve)
• Changes in the non-price determinants result in
changes in demand (shifts in the demand curve)
Market Supply
• Supply is the quantity of a good that
people are ready to sell at various prices
within a period, while other factors held
constant. Changes in price result in the
quantity supplied. Changes in non-price
determinants result in change in the
supply.-i.e. shifts of the supply curve
Non-price Determinants:
•
•
•
•
•
Costs and technology
Price of other goods
Future expectations
Number of sellers
Weather conditions
Market Equilibrium
• It takes place where Qd=Qs
• Draw a Figure over here.
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•
•
•
•
Show:
Equilibrium price
Equilibrium quantity
Shortage
Surplus
Comparative Statics Analysis
• Market analysis is made through changes
in other determinants of demand and
supply.
• Comparative statics analysis is a form of
sensitivity analysis often referred as “what
if”. It refers to the comparison of the
various points of equilibrium, resulting
from shifts in Supply or Demand curves.
Supply, Demand and Managerial
Decision Making:
• While Supply and Demand establish the
overall framework in which prices
established, individual firm exist market
power (some control over price) over their
price because of their dominant size in the
market or because of their ability to
differentiate their product through
advertising, brand names and special
features.
• It is important for managers to understand
market demand on two levels: One is the
overall demand for the product which is
offered by all sellers. Second, there is the
demand by buyers for the product offered
by the particular firm. This is called
company demand.
International application: world
sugar market
• While our situation indicates the
importance of corn syrup as a sweetener,
sugar is still the primary sweetener of soft
drinks around the world.
• World sugar price, like corn prices are
governed by forces of supply and demand.
In 1998, world sugar price were lowest in a
decade. This is caused by non-price
determinant of supply and demand.
Non-price determinants of supply
and demand
•
Non-price determinants of supply:
– Costs and technology
– Price of other products offered
– Future expectations of sellers
– Number of sellers
– Weather conditions particularly for agricultural products
Ie. Favorable weather condition in Brazil, Thailand and Australia
– Brazil supplied more cane syrup to the sugar market from alcohol production
•
Non-price determinants of demand:
– Tastes and preferences
– Income
– Price of related products
– Future expectations among buyers
– Number of buyers
Ie. Economic crisis in Asia reduced the demand for sugar in this region.
– China and India increased domestic production, thus less imported sugar.
– Russia imposed substantial tariff on imported sugar from 1% to 15%
All above factors caused a world surplus of 1-2 million tons of sugar in 1998. leading to 215
dollars per ton from high of 500 dollars in 1980ties.
• Draw Figures:
• 3.5, 3.6, 3.7, 3.8 Short-run vs Long-run changes
• Class Exercise
• Case 3.1 (Coffee) and Case 3.2 (Air travel)
• The Solution (Tea)