Demand and Supply

Anshuman Sinha
 How Hewlett-Packard Manages
the Demand for Printers

… Because of the importance of printers

to Hewlett-Packard, the company devotes
significant resources to monitoring and
forecasting consumer demand.

Carly Fiorina
Estimating the Demand for Printers at
Hewlett-Packard

Inaccurate forecasts in
2001 caused Hewlett-
Packard to produce more
printers than they could
sell.
Need-Want-Desire-Demand
 NEED: is something essential/necessary
 WANT: is a feeling for something you lack
 DESIRE: is an urge for something that is
currently out of reach
 DEMAND: is need/want for something
accompanied by ability & willingness to pay the
price
Law of demand

 Why does the demand curve slop

downward?
 Because, there is inverse relation between
price and quantity demanded, other things
remaining constant (i.e., Law of Demand)

Reasons:
1. Income effect
2. Substitution effect
The Demand Side of the Market

 Holding Everything Else Constant:

The Ceteris Paribus Condition

Ceteris paribus (“all else equal”) The

requirement that when analyzing the
relationship between two variables—such
as price and quantity demanded—other
variables must be held constant.
Demand & Quantity Demanded
Demand: refers to the entire relationship between prices and
the quantity of a product that people are willing & able to
purchase per period of time at each of these prices, ceteris
paribus

Quantity Demanded: refers to how much of the product the

people are willing & able to purchase per period of time at
one particular price, ceteris paribus
General Demand Function
=> St. line equation illustration
 Six variables that influence Qd
 Price of good or service (P)
 Incomes of consumers (M)
 Prices of related goods & services (PR)
 Taste patterns of consumers (T)
 Expected future price of product (Pe)
 Number of consumers in market (N)
 Thus, general demand function is:
Qd = f(P, M, PR, T, Pe , N)
More specifically,
Qd = a + bP + cM + dPR + eT + fPe + gN
 ‘a’ is intercept parameter; it shows the value of Qd when all
variables are simultaneously equal to zero
 b, c, d, e, f, & g are slope parameters
Slope parameters measure the effect on Qd of changing one of
the variables while holding the others constant

 Sign of parameter shows how variable is related to Qd

 Positive sign indicates direct relationship
 Negative sign indicates inverse relationship
 General Demand Function

Variable Relation to Qd Sign of Slope Parameter

P Inverse b = Qd/P is negative

Direct for normal goods c = Qd/M is positive
M
Inverse for inferior goods c = Qd/M is negative

PR Direct for substitutes d = Qd/PR is positive

Inverse for complements d = Qd/PR is negative

T Direct e = Qd/T is positive

Pe Direct f = Qd/Pe is positive

N Direct g = Qd/N is positive

 Why Supermarkets Need to Understand
Substitutes and Complements

FROZEN CHEES ICE POTATO

COFFEE PIZZA E CREAM CHIPS CEREAL SAUCE YOGURT

Varieties in
Five retail 391 337 128 421 285 242 194 288
store

Varieties
Introduced 113 109 47 129 93 114 70 107
in a 2-Year
Period

Varieties
Removed 135 86 32 118 77 75 36 51
in a 2-Year
Period

A supermarket shouldn’t remove a slow-selling soup from its shelves

without researching whether shoppers use that soup as a substitute or
a complement for another soup.
Companies Respond to a Growing
South Indian Population

Firms are responding to the

tastes of a growing South Indian
population. Some Restaurant for
example, include signs in both
English & Local language.
Simplified General Demand Function

Most important factors affecting quantity demanded:

 Price of the product
 Consumer income
 Price of related good
Hence, simplified general demand function:
Qd = a + bP + cM + dPR
Direct Demand Function or Demand
 Direct demand function or demand can be expressed as
follows:
Qd = f(P)
 Demand function can be derived by holding all the
variables constant except price:
 Qd = a + bP + cM + dPR
Suppose:
 Qd = 3200 – 10P + 0.05M - 24PR
Qd = 3200 – 10P + 0.05M - 24PR
To derive a demand function, Qd = f(P), the variables M
and PR must be assigned specific (fixed) values.

Suppose consumer income is $60,000 and the price of a

related good is $200. To find the demand function, the
fixed values of M and PR are substituted into the
function:
Qd = 3200 – 10P + 0.05(60,000) – 24(200)
= 3200 – 10P + 3000 – 4800
= 1400 – 10P

Thus, demand function is:

Qd = 1400 – 10P

 The intercept parameter, 1400, is the amount of the

good consumers would demand if price is zero
 Slope of this demand function is -10
Inverse Demand function:
P = f(Qd)
Since Qd = 1400 – 10P
P = 140 – 0.10Qd

Demand function can be expressed in form of:

 Demand equation
 Demand schedule (or table)
 Demand curve
Demand Schedule/Table
Price Qd
140 0
120 200
100 400
80 600
60 800
40 1000
20 1200
0 1400
Demand Curve
Interpretation of a point on demand curve

Every point on a demand curve can be interpreted in either

of two ways:
1. The maximum amount of a good that will be purchased if
a given price is charged
2. The maximum price that consumers will pay for a
specific amount of a good. This price is also called the
Demand Price.
Demand Price is the maximum amount consumers are
willing to pay for the good
Choke Price
Choke Price is the price at which quantity demanded will be
zero
How to calculate choke price?
Suppose demand function is Qd = 1400 – 10P; then, Inverse
Demand Function will be
P = 140 – 0.10Qd
To calculate Choke Price, set Qd = 0 in Inverse Demand function
P = 140 – 0.10 (0)
P = 140
Therefore, Choke Price = 140
Change in Quantity Demanded (Qd):
 Caused by change in price of the product
 Shown by movement along demand curve
 Increase in Qd (downward movement)
 Decrease in Qd (upward movement)

Change in Demand:
 Caused by change in non-price factors such as consumer
income, price of related goods, etc
 Shown by shift of demand curve
 Increase in demand (outward shift)
 Decrease in demand (inward shift)
Questions: Substitutes/Complements; Normal/Inferiors
 Direct demand vs. Derived Demand
Direct Demand:
Commodities or services which satisfy our wants
directly are said to have direct demand (all consumer
goods)
Derived Demand:
Commodities or services demanded for producing
goods which satisfy our wants directly are said to have
derived demand (demand for labour, petrol for car)
Individual demand vs. Market Demand

Individual Demand:
Demand of an individual consumer

Market Demand:
Sum of demands of all consumers
 Aggregating Individual Demands
Price ($) Quantity demanded Market
Consumer 1 Consumer 2 Consumer 3 demand

6 3 0 0 3
5 5 1 0 6
4 8 3 1 12
3 10 5 4 19
2 12 7 6 25
1 13 10 8 31
 Exceptions to Law of Demand
 Veblen effect (prestige value) such as diamond
 Snob effect (unusual or unique products) such as rare
paintings, vintage items
 Bandwagon effect: preference for a product
increases as the number of buyers purchasing the
product increases; such as mobile, laptops
 Conspicuous necessities such as television,
automobile, refrigerators
Exceptions to Law of Demand…

 Emergencies such as war, famine

 Speculation (future changes in prices):
 Rising prices
 Falling prices
 Change in fashion
 Giffen goods