Managerial Economics
POST GRAD OCTOBER 2020
Market forces :
Demand & Supply
TOPIC 1
▪The terms supply and demand refer to the behavior 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.
Few points to
start
▪The buyers as a group determine the demand for the
product, and the sellers as a group determine the supply
of the product
▪It can be organised (commodities) or not so organised (ice
creams)
▪Competitive market is one with many buyers and sellers,
each has negligible effect on prices.
▪In perfectly competitive market :
(1) the goods offered for sale are all exactly the same, and
2) the buyers and sellers are so numerous that no one can
affect the market price – each is “price taker”
Price & Demand are every day in the
news
Demand schedule : a table that shows the
relationship between the price of a good
and the quantity demanded
Catherine’s preferences follows the law of
demand
Demand curve for Catherine
demand curve :
a graph of the
relationship
between the
price of a good
and the quantity
demanded
Market
demand curve
The law of demand :
The demand curve is downward
sloping.
As the price of a good rises (falls)
and all other things remain
constant/ceteris paribus, the
quantity demanded of the good
falls (rises).
This corresponds to a movement
along a given demand curve.
Shift of the
demand curve
Any change that raises the
quantity that buyers wish to
purchase at a given price shifts
the demand curve to the right.
Any change that lowers the
quantity that buyers wish to
purchase at a given price shifts
the demand curve to the left.
Demand shifters / Determinants of Demand
There are many
things other than
prices which can
shift the demand
curve.
They are non-price
determinants
Advertising
and tastes
Number of buyers
Income
Prices of related goods
Expectations
Demand curve shifter : income
Normal good is a good for which, other
things equal, an increase in income leads to
an increase in quantity demanded at each
price. (D curve shifts to the right)
Inferior good is a good for which, other
things equal, an increase in income leads to
a decrease in demand at each price (D
curve shifts to the left)
Car/taxi → bus ride
Demand curve
shifter : income
Giffen good is a product that
people consume more of as the
price rises and vice versa. It is a
low income, non-luxury product
that defies standard economic
and consumer demand theory
(law of demand).
It is heavily influenced by a lack
of close substitutes and income
pressures. Ex : bread, rice, wheat
Veblen good : idem but for
luxury goods
Demand curve shifter : prices of related
goods
substitutes : two goods for which an increase
in the price of one leads to an increase in the
demand for the other.
Substitutes are often pairs of goods that are
used in place of each other.
Demand curve shifts to the right
Ex : hot dogs and hamburgers, sweaters and
sweatshirts, and Laptop and Tablet, Coke and
Pepsi, ice cream and frozen yogurt
Complements : two goods for which an
increase in the price of one leads to a
decrease in the demand for the other.
Complements are often pairs of goods that
are used together.
Demand curve shifts to the left
Ex : eggs and bacon, computer and software,
and hot fudge and ice cream,
Demand shifters : ex. substitute goods
Demand curve shifter : advertising & tastes
The most obvious determinant of your
demand is your tastes. (consumer
behaviour)
Ex If you like ice cream, you buy more of it.
Anything that causes a shift in tastes
towards a good will increase demand for
that good.
Demand curve shifts to the right
Advertising and
demand curve
for clothing
Demand shifters
Tastes and demand shift – Film Hudsucker proxy 1994
Demand curve shifter : expectations
Your expectations about the future may affect
your demand for a good or service today.
Ex : if you expect to earn a higher income
next month, you may choose to save less now
and spend more of your current income
buying ice cream.
Or if you expect the price of ice cream to fall
tomorrow, you may be less willing to buy an
ice-cream at today’s price.
inflation
Summary of demand
shifters
Price & Supply are every day in the news
Market supply
curve
The inverse law of supply
As the price of a good rises
(falls) and other things remain
constant, the quantity
supplied of the good rises
(falls).
Producers are willing to
produce more output when
the price is high than when it
is low.
1. Input prices
2. Technology
3. Number of firms
Supply shifters
4. Substitutes in production (ex corn-soya
beans)
5. Government taxes
6. Producer expectations
Supply shifters : examples
The business time – 8 February 2021
Competitive Market
Equilibrium
Equilibrium in a competitive (free) market is determined by
the intersection of the market demand and supply curves.
This Photo by Unknown Author is licensed under CC BY-SA
The equilibrium price is the price that equates quantity
demanded with quantity supplied.
https://www.nationalheraldindia.com/india/centres-free-market-solution-isclearly-against-the-interests-of-indian-farmers
Market equilibrium is every day in the
news
Determining
equilibrium :
supply & demand
Business executives
face a dilemma:
Customers want low
prices, and executives
want high prices.
Markets resolve this
dilemma by reaching a
compromise price.
The price that makes quantity demanded equal to quantity
supplied is called the equilibrium price. It occurs where the
demand and supply curves intersect.
CNY dinner – The Strait Times 7 Feb 2021
market
competitive market
law of demand/supply
demand schedule
Key words
Demand/supply curve
normal good
Inferior good
Substitutes
Complements
Equilibrium price
SBR – Keeping
it clean during
Covid-19
The sanitizer
shortage
▪This case looks at the product shortages of N95
and N99 masks, hand sanitizers and wipes as a
result of a new coronavirus, COVID-19.
▪You will have to respond to the question: What are
some alternate strategies to control product
shortages and how do they impact consumers and
disease control?
▪Learning objectives : formulate multiple strategies
to control product shortages and evaluate the
impact of shortages on consumers and on disease
control