MANAGERIAL ECONOMICS: PGP 2018

SESSION 3:
SUPPLY- EQUILIBRIUM

1
 From Last Time
• What is Demand? Factors that determine
Demand?

• Movement along demand curve. Shift in

Demand curve

• Substitutes/ Compliments; Normal/ Inferior

Goods

2
SUPPLY

3
 Supply

• Individual Supply Curve:

Quantity of a product that an individual is
willing to sell at a particular price, ceteris
paribus
 Inside Business:
Supply of Coffee in NY

• What were the reasons for

decrease in supply of coffee in
NY?
• Brazil is one of the leading
exporters of coffee to the US.
 Inside Business:
Supply of Coffee in NY
• What were the reasons for decrease in
supply of coffee in NY?
• Brazil is one of the leading exporters of
coffee to the US.
• Adverse natural conditions in Brazil has a direct
effect on supply of coffee (and price) in NY
– Frost in 1975
– Seven month drought in 1985
• Expectation of future price rise can lead to
hoarding
• Change in input prices of fertilizers, machinery
etc.
 Individual Firm’s Supply
• Supply for good is given by
•  

• Where
: quantity supplied of commodity x by an individual firm per time
period
: price per unit of commodity
: price of inputs
: Technology
E : Expected future price of the product
SUPPLY AND OWN PRICE

8
 Supply and Own Price

• What do you think is the relation between

quantity supplied and price?
LAW OF SUPPLY
 Law of Supply

Definition:

Ceteris Paribus, when the price of a product

falls, the quantity supplied of the product will
not increase, and visa versa.
 Supply Curve

Price of coffee Quantity

100 10
150 15
200 20
250 25

Keeping constant all other factors that

influence supply
REPRESENTING LAW OF SUPPLY

13
 Supply Schedule and Curve
• Supply Schedule : Represent amount of a
quantity of a good that is supplied at various
prices

14
Supply Curve
P

Price 300
($) S1
250

200

150

100

5 10 15 20 25 30
Quantity
(PC)
15
 Pointers on Supply Schedule
• Supply curve does not slope downwards

• Supply curve assumes, prices of inputs,

technology to be constant

• Market supply pertains to a particular time

period. Longer the time period greater supply

16
MOVEMENT ALONG THE SUPPLY
CURVE

17
 Movement Along Supply Curve
P

Price 350
As price of a good ($) S1
reduces, quantity 300

supplied reduces,
250
keeping all other
factors constant 200

Change in supply : 150

movement along the
supply curve 5 10 15 20 25 30
Quantity
(PC)
18
 Movement of Supply Curve
•   𝑺𝟏
𝑺𝟐

Pric
• The supply curve shifts e
25
when resource prices 0

change, technology 15
0
improves, or shocks 10
0
occur. (i.e. whenever 25
5 10 15 20
ceteris paribus is Quantit
y
violated)
 Movement of Supply Curve:
price of input
𝑺𝟏
•   𝑺𝟐

Pric
• Increase in price of input: shifts to e
25
the left 0
15
0
• Examples: 10
– increase in excise duty of the input 0

5 10 15 20 25
– Increase in price of fertilizers, Quantit
y
tractors and HYV seeds
 Shift of the Supply Curve
𝑺𝟏
•   𝑺𝟐

Pric
• Better technology: shifts to the right e
25
0

• Example: 15
0

• Advent of computers 10
0
• Advent of tractors and other 5 10 15 20 25
Quantit
machinery for farming y
 Shift of the Supply Curve
𝑺𝟏
𝑺𝟐

•   Pric
e

• Increase in expected future price 25

0
of the product: shifts to the left 15
0

10
• Example: high prices of onions 0
(hoarding behavior) 5 10 15 20 25
Quantit
y
 Demonstration Problem
•Supply
  function for TV sets:

Where : price of TV sets

Price of computer monitor

Price of inputs

• Suppose TVs are sold for $400 per unit, computer monitors are sold for $100 per

unit, and the price of an input is $2,000. How many television sets are produced?
 Solution
•  
• Substituting the values:

• Adding up:

Total quantity of television sets produced = 800

• Why is the coefficient of the price of computer monitor

negative?
WHAT IS A MARKET?

25
 Staples and Office Depot Merger
• 1997, Staples and Office Depot wanted to
merge

• Case filed to disallow the merger

• Federal Trade Commission (FTC) v/s Staples

and Office Depot
 Types of Mergers
• Horizontal Merger: Merger of companies that
produce similar products.
• Eg. Vodaphone and Hutch, Tata Motors and
Jaguar

• Vertical Merger: Merger of companies that

operate in different stages of production process
• Eg. Time Warner and Turner Corporation.
Hindalco and Novelis
27
TRENDS IN M&A IN INDIA

28
 Staples and Office Depot Merger
• What is critical in allowing/disallowing the
merger?

• What determines the effect of merger on

market share?
 Staples and Office Depot Merger
• How would Staples and Office Depot argue this
case?

• Staples argued that you could buy office supplies

from any stationary store, Wal-Mart, Kmart
• Computers from a number of small computer
stores and online
• Thus, merger would lead to a 6% market share
 Staples and Office Depot Merger
• Would FTC have the same opinion?

• FTC argued that Staples and Office Depot

belonged to “one stop shopping for all office
supplies”
• Three major players- Staples, Office Depot,
Office Max
• Merger would significantly increase prices
 Market
• What constitutes a market is in the eye of the
beholder

• How to define a market?

 What is a Market?
• Product
• Buyers
• Sellers
• They together (sometimes the Govt.) interact
(invisible hand)
• Market is not industry
Coca Cola Inc.
 Coca Cola Inc.
• Coca Cola is reviewing price of Coke. How
should it view its market?

• Coke and Pepsi constitute about 80% of the

soft drinks market

• What is Coca Cola’s market?

 Coca Cola Inc.
• “Stomach Share”- Coke’s share of portable
liquid that a human consumes
• Coca Cola accounts 3% of the total liquid
consumed by humans

• Competing with coffee, tea, hard liquid etc

 SSNIP Test
• Small but Significant Non transitory Increase in
Price Test

• Identify smallest relevant competitors within

which the firm can exercise price increase

• Smallest set of firms (including the concerned

firm) that can sustain an increase in price of 5%
for around a year
MARKET PRICE

38
Market Price

39
 Market Price
• What is market price of the product?

• Who determines market price?

• What is the role of market prices?

40
 Price Movement
• During Akshaya Tritiya, is the quantity
demanded of gold same as that supplied?

• Do you expect any change in prices?

• Shortages put upward pressure on the price

43
 Excess Demand
• Excess Demand: At the prevailing price,
quantity demanded is greater than quantity
supplied

• Prices rise when there is Excess Demand

44
 Price Movement
• During harvest, is the quantity demanded of
wheat same as that supplied?

• What will be the movement of price during

this time

• Surpluses put downward pressure on the

price
45
 Excess Supply

• Excess Supply: At the prevailing price,

quantity supplied is greater than quantity
demanded

• Prices fall when there is Excess Supply

46
MARKET EQUILIBRIUM

47
 Market Equilibrium

• At equilibrium price there is no tendency to

change the price

• Market equilibrium is determined at the

intersection of the market demand curve and the
market supply curve

• Market equilibrium : No excess demand or

supply
48
Market Price= Equilibrium Price ?

49
 Equilibrium Price
• At any point in time, observed price may not
be the equilibrium price

• Market forces always push the market price

towards equilibrium

• Markets are never in equilibrium but tend

towards equilibrium

50