Managerial Economics

Demand concepts,LOD, determinants,

exceptions, LOS, Equilibrium, application of
demand and supply
Session 5&6
Chandan Adhikari
The still waters run deep and the great
universal forces are inaudible. Where
calmness is, there is the greatest power.
Calmness is the sure indication of a strong
well-trained patiently disciplined mind.
 Lessons of Life
• Did you know that at Harvard, one of the most prestigious
universities in the world, the most popular and successful
course teaches you how to learn to be happier?
• The Positive Psychology class taught by Ben Shahar
attracts 1400 students per semester and 20% of Harvard
graduates take this elective course.
• According to Ben Shahar, the class - which focuses on
happiness, self-esteem and motivation - gives students the
tools to succeed and face life with more joy._
• This 35-year-old teacher, considered by some to be "the
happiness guru", highlights in his class 14 key tips for
improving the quality of our personal status and
contributing to a positive life:
 14 tips
• 🚩Thank God for everything you have: Write down 10 things you have in your life
that give you happiness. Focus on the good things!
• * Practice physical activity * Experts say exercising helps improve mood. 30 minutes
of exercise is the best antidote against sadness and stress.
• * Breakfast: * Some people miss breakfast for lack of time or not to get fat. Studies
show that breakfast gives you energy, helps you think and perform your activities
successfully.
• * Assertive *: Ask what you want and say what you think. Being assertive helps
improve your self-esteem. Being left and remaining silent creates sadness and
hopelessness.
• * Spend your money on experiences. A study found that 75% of people felt happier
when they invested their money in travel, courses and classes; While only the rest
said they felt happier when buying things.
• * Face your challenges *: Studies show that the more you postpone something, the
more anxiety and tension you generate. Write short weekly lists of tasks and complete
them.
• * Put everywhere nice memories, phrases and photos of your loved ones *: Fill your
fridge, your computer, your desk, your room, YOUR LIFE of beautiful memories.
 Contd…
• 🚩Tip 8. * Always greet and be nice to other people *: More than
100 inquiries state that just smiling changes the mood.
• 🚩Tip 9. * Wear comfortable shoes *: If your feet hurt you, you become moody,
says Dr. Keinth Wapner, President of the American Orthopedics Association.
• 🚩Tip 11. * Listen to music * (Praise God): It is proven that listening to music
awakens you to sing, this will make your life happy.
• 🚩Tip 12. * What you eat has an impact on your mood *:- Do not skip meals,
eat lightly every 3 to 4 hours and keep glucose levels stable.- Avoid excess
white flour and sugar.- Eat everything! Healthy- Vary your food.
• 🚩Tip 13. * Take care of yourself and feel attractive *:70% of people say they
feel happier when they think they look good.
• 🚩Tip 14. * Fervently believe in God *: With him nothing is impossible!
Happiness is like a remote control, we lose it every time, we go crazy looking
for it and many times without knowing it, we are sitting on top of it .
 Learning outcomes
• Understand the theoretical construct of Demand
and Supply with a view to identify their
determinants and their respective importance
with respect to different types of goods over
time.
• Discuss exceptions to law of demand and types
of Demand
- Market demand for smart phones in India
 Market demand for smart phones in India
( Adapted from Frost & Sullivan On Market
Dynamics of Mobile Phone Industry in India,
June 25, 2018
• The penetration of smart phones in India has surpassed US and
is only second to China.(317.1 million in 2019) Mobile phones:
1.1514 billion at the end of December 2019.
 Smart phone uses
• With the growth in Internet services, smartphones
found high uptake among the urban/Internet savvy
population for various uses.
Megatrends impacting the
smartphones market
 Drivers of demand
• Gen Y
• The working-age population
• Working women (need, willingness, ability to pay and
income)
• The great Indian middle class (population and income)
• Emergence of new social, technological, and
economic trends. (tastes and preferences)
• Urbanization will also affect the market such that 64%
of the total Indian population will be urbanized by
2025, and cities will account for 70% of India’s GDP
in 2030.
 Contd..
• Declining prices due to intense competition among the
mobile phone manufacturers (LoD)
• In 1995 prepaid SIM at a call rate of Rs. 17/- minute
• Price is still the top-most factor driving purchase in our
country, and consumers prefer to buy from the platform
that offers the lowest price.(price determinant)
• Smartphones are expected to outrun feature phones in the
country by 2019.
• Several initiatives such as bundled offers, discounts and
aggressive pricing is substantially driving growth.
(incentives, advertisement are determinats of demand.
• Easy financing option by handset makers (credit a
determinant of demand)
 Contd….

• Duet to the advent of Budget smart phones,feature

phone users are migrationg to smart phones as they
are able to enjoy the benefits of a smart phone at
affordable prices. (price determinant)
 Feature Phones vs. Smartphones, by
Volume, in Million Units, 2015-2025
Penetration rate: 24% in 2016, 42 percent FY 20
estimated : 51 percent in financial year 2025.
Mobile Phone Market in India, by
Units, in Million, 2015-2025
 Discussion(break-out room)
Due to corona and online teaching, the usage and demand for
smart phone is likely to increase. In the backdrop of the
following, discuss the following.
• Govt. should increase tax on the sale of S-phones to mobilse
more revenue.
• What could be the various uses of smart phones by the UG and
PG students. Could facebook, Whatsapp and twitter sites be
used for academic purposes.
• What could be the positive and negative impact of use of smart
phones and will it enhance the academic performance of the
students.
• Do you envisage some more drivers of growth of smart phones
in India? What are they?(What is mobile addiction?)
• Bottlenecks?
 The winning strategy- A case of
Jio
• Vision of Mukesh A to visualise that after 30 to 40
years, petroleum is not a good source to sustain the
business.
• Registered in 2010, it spent nearly 4 years to spread
network in the country with an investment of
Rs.150,000 crores before the starting of the company.
• Airtel, Voda, idea knew but did not pay much Attn.
• Reliance Industries has used a unique business strategy
that is already done by many big companies such as
Google.
• This strategy is called as ‘Give, Give, Give and ASK’.
 Free Internet: April 2017
• Reliance Jio was launched by providing free internet
4 Gb/day. After 3 to 4 months the company reduced
the data to 3 Gb. Soon after, it was 2 Gb/day. And
after 1.5 years of testing purpose, the company
provided 1 Gb/day.
• Besides, they were providing free internet and India
is a price-sensitive market. That’s why they able to
create a very large consumer base before officially
launching the company Reliance Jio Pvt. Ltd.
• The company gave free internet to the country. Now,
it was time for the company to start making revenue.
The company started with 300 Rs for 84 days. And 1
Gb data per day. ( price of complementary product)
 Unlimited Calling:
• It was providing free voice calling to any local
number. This was also the biggest move to
capture the large market. (winning strategy in a
Price sensitive Indian mkt.)
• It was still better deal rather than any other
telecommunication company in India.(Winning
competitive strategy)
• It also started providing Jio mags, Jio music, Jio
cinema, Jio TV and many more.(Add ons
source of revenue)
 Contd..
• That’s why people preferred to use Reliance Jio
sim-card as secondary card to begin with and
first card later ( psychological ploy)
• That’s how ‘Give, Give, Give and ASK’
strategy worked for Reliance Jio with 376.57
million followed by Airtel and Voda-idea with
143.34 and 117.93 million subscribers, as on
January 31, 2020 (TRAI)
 Strategic partnerships: April
2020
• Facebook invested over Rs 43,000 crore into the
company. Retailers will book orders on jioMart and
receive orders thru WhatApps.
• American private equity firm Silver Lake with an
investment of Rs 5,655 crore
• Vista Equity Partners with Rs 11,367 crore
investment.  
• Reliance has a net debt of Rs.1.5 lakh crore.
• Right issue of Rs.50000 crs already launched
• Reduce debt and raise equity and thereby reduce
interest outgo and increase profitability on sustained
basis.
Class Activity- What drives Gold
prices in India
 Factors that affect gold price
• Annual demand equivalent to about 25 percent of the total physical
demand worldwide
• End uses of Gold: jewellery, and bar and coin combined)
• Factors
• - Festive and wedding season
• - Price – price elasticity 0.5
• - Income- income elasticity 1
• - Desire for adornment
• - Safe investment (protection against volatility and inflation)
• - Interest rate (inverse relationship, higher FD rates, less d- for gold)
• - Good monsoon (Rural income goes up resulting into higher
demand for gold)
• - Geopolitical factors
• - Weakening dollar
• -Future gold demand
 Inferences for theory of demand
• Utility is the basis of Demand for any good or service.
• Smart phones have become the need now and consumers due to
smartphones’ multiple uses are willing to buy and have the ability to
pay due to affordable price. This is what demand is.

• Utility has a time perspective. One time utility, short term utility,
Long term utility etc.
• Consumables and consumer durables fit into this classification.
• Drivers/determinants of demand vary from good to good or service
to service.
• Determinants of demand differ with respect to short term and long
term.
 Contd….
• Price, income and population are common
determinants of demand.
• Concepts of autonomous demand and derived
demand can also be explained. Demand for internet
is derived demand as it is complementary product
used for communication, news, entertainment, Work
from home, market research etc.
• Demand for smart phone is autonomous demand
• Type of Good/service- Essential, normal, superior,
comfort, luxury, prestige etc.
• Govt. policies also impact demand.
Determinants of demand
 Inferences for theory of supply
• Demand drives supply of smart phones in India
2019
• During last 5 years lot of churning has taken
place in terms of market share of major brands,
chineese brands growing mainly at the cost of
India brands
• The average selling price of smart phones has
constantly declined, going from 332.5 U.S.
dollars in 2012 to 276.2 U.S. dollars in 2015.
By 2019, this figure is forecast to drop to 214.7
U.S. dollars. This is contrary to LoS
 Contd..
• The major mobile accessories used by customers
include external batteries, USB cables, mobile
cases and covers, chargers, and earphones. These
are complementary products and their prices are
going down due to which smat phones prices are
going down.
• Non price factors of supply such as technology,
cost of FoP, availability of FoP, incentives by
govt. under make in India etc. are driving
supply of smart phones in India
• Tax holiday ,export credits on devices and tariff
cuts on machinery imports
 LoD
• LoD states that other determinants of demand
remaining constant, there is an inverse relatioship
between the price and quantity demanded at a given
point of time.
• Demand refers to price, quantity, time and place
• Gold demand on Akshay Tritiya fell 95% due to
sharp rise in prices by over 52% during last one year
• LOD operates due to:
• The Law of Diminishing Marginal Utility
• Substitution Effect and Income Effect
Law of Demand
 Diminishing marginal utility
BARS TOTAL UTILITY MARGINAL UTILITY
• 1 100   -
• 2 190 90
• 3 270 80
• 4 340 70
• 5 400 60
• 6 450 50
• 7 490 40
• 8 520 30
• 9 540 20
 LOD: Substitution and income
effect
• The substitution effect refers to the substitution of
one product for another resulting from a change in
their relative prices.
• A lower price of good X, with the prices of other
goods remaining unchanged, will increase its relative
attractiveness, inducing consumers to substitute good
X in place of some of the new relatively more
expensive items in their budgets.
• If the price of coffee increases while other prices
(including the price of tea) do not, then coffee
appears to be relatively more expensive and its
demand goes down and vice versa.
Substitution effect
 Income effect
• The income effect refers to changes in consumer’s real
income resulting from a change in product prices. A
fall in the price of a good normally results in more of
it being demanded. A part of this is done to real
income effect (i.e., income adjusted for changes in
prices to reflect current purchasing power).
• If a consumer has a money income of, say, Rs. 10 and
price of X is Re. 1 he can buy 10 units of the good. If
the price of the good now falls to 50 paise, he can buy
the same 10 units with only Rs. 5. The consumer now
has an extra Rs. 5 to spend in buying more of good X
and other goods.
 Supply and LoS

• Supply is the quantity of a good sellers wish to

sell at each conceivable price per pd of time
and hence is a desired flow. Quantity supplied
takes place at a particular price.

• Other things remaining constant, there is a

positive relationship bet the price and quantity
supplied of a product.
Supply function- Linear/Non
linear
 Supply Schedule: linear(Table)

Price Quantity Supplied

0 0
10 1000
20 2000
30 3000
40 4000
50 5000
 Supply function: equation
The supply function can be written in the form of an
equation
Qs = c + dP
Where Qs is quantity supplied
C = the level of supply independent of price
P = the market price of the product
d is the coefficient of price
Supply for Product X = 10 + 2(P)
If the market price is £20, then Qs= 10 + 20 = 30 units
Exceptions to LOD: when demand
curve slopes upward
• The following points highlight the six important
exceptions to the law of demand. The exceptions are:
• 1. Giffen Good
• 2. Snob Appeal or Veblen Good
• 3. Possibility of Future Rise in Prices
• 4. Highly Essential Good.
 Exceptions to LOD: Giffen Goods
• Giffen goods are those which are consumed in
greater quantities when their price rises. These goods
are named after the Scottish economist Sir Robert
Giffen
• Giffen good is a staple food, such as bread or rice,
which forms are large percentage of the diet of the
poorest sections of a society, and for which there are
no close substitutes.
• A rise in the price of such a staple food will not
result in a typical substitution effect, given there are
no close substitutes. In the short run income remains
constant.
 Contd..
• Veblen goods or Snob appeal
• Veblen goods are a second possible exception to the
general law of demand. These goods are named after
the American sociologist, Thorsten Veblen.
• People sometimes buy certain commodities like
diamonds at high prices not due to their intrinsic
worth but for a different reason. The basic object is
to display their riches to the other members of the
community to which they themselves belong.
• This is known as ‘snob appeal’, which induces
people to purchase items of conspicuous
consumption. Such a commodity is also known as
Veblen good.
Veblen good
 Possibility of Future Rise in
Prices:
• If a consumer anticipates that the price of a
commodity will rise in future he will purchase more
of that commodity now. The consumer will purchase
more even if current price is high.
• In all the cases mentioned above, the demand curve
DD1 exhibits positive slope as shown in Fig. 2.3. At
a price OP1, a consumer demands OX1 of a
commodity. As its price rises to OP2, demand also
rises to OX2. Thus, the law of demand breaks down.
 Highly Essential Good:

• In case of certain highly essential items such as life-

saving drugs, people buy a fixed quantity at all
possible price. Heart patients will buy the same
quantity of ‘Sorbitrate’ whether price is high or low.
Their response to price change is almost nil.
• In cases of such commodities, the demand curve is
likely to be a vertical straight line (Fig. 2.4). At a
price OP1, the heart patient consumer demands OD
amount of ‘Sorbitrate’. In spite of its price rise to
OP2, the consumer buys the same quantity of it.
Contd..
Determinants of Demand/Types
of Goods
Movement and shift
The extent of increase in QD for
luxury is much greater with
increase in income
Contd..
 Individual Consumer’s Demand
QdX = f(PX, I, PY, T)
QdX = quantity demanded of commodity X
by an individual per time period
PX = price per unit of commodity X
I = consumer’s income
PY = price of related (substitute or
complementary) commodity

T= tastes of the consumer

 QdX = f(PX, I, PY, T)

QdX/PX < 0
QdX/I > 0 if a good is normal
QdX/I < 0 if a good is inferior
QdX/PY > 0 if X and Y are substitutes
QdX/PY < 0 if X and Y are complements
Determinants of supply
 Contd..
• Other things remaining constant, price and quantity
supplied are directly related.
• OTRS, the availability of factors of production, such
as labour or raw materials etc. are directly related to
supply.
• OTRC, cost of inputs affect the supply inversely.
• Changes in the weather can have a considerable
impact on the ability to produce certain products, like
farm produce and commodities. This tends to affect
the primary sector more than manufacturing.
• Taxes have adverse impact on supply whereas
subsidy has positive impact on supply.
 Prices of related goods

• For purposes of supply analysis related goods refer

to goods from which inputs are derived to be used in
the production of the primary good.
• For example, pork is derived from pigs. Therefore,
pigs would be considered a related good to pork.
• In this case the relationship would be negative or
inverse. If the price of pigs goes up the supply of
pork would decrease (supply curve shifts left).
 Chage in QS and Shift in supply

• Change in Quantity supplied occurs due to change in

price when other determinants of supply remain
constant.
• Shift in supply occurs when price remains constant
and other determinants of supply vary.
Contd…..
 Market equilibrium
• Market equilibrium is a market state where the
supply in the market is equal to the demand in
the market.
• The equilibrium price is the price of a good or
service when the supply of it is equal to the
demand for it in the market.
• In other words, consumers are willing and able
to purchase all of the products that suppliers are
willing and able to produce. Everyone wins.
• Although this situation rarely happens in real
life, economists use this as the basis for many
economic theories.
 Market Equilibrium
•Price QS QD
•80 2000 0
•70 1800 200
•60 1600 400
•50 1400 600
•40 1200 800
•30 1000 1000
•20 800 1200
•10 600 1400
•0 400 1600
Competitive Equilibrium: Price
equates supply and demand
 Contd..
• Demand contracts because at the higher price, the income
effect and substitution effect combine to discourage
demand, and demand extends at lower prices because the
income and substitution effect combine to encourage
demand.
• Higher prices encourage suppliers to increase supply and
vice versa.
• In the case of excess supply, sellers will be left holding
excess stocks, and price will adjust downwards and supply
will be reduced. In the case of excess demand, sellers will
quickly run down their stocks, which will trigger a rise in price
and increased supply. The more efficiently the market works,
the quicker it will readjust to create a stable equilibrium price.
 Equilibrium: Think the case of
decrease in demand and supply
 Discussion
• Why demand and supply are shifting?
• What are the effects of these shifts?
• Role of Prices
 Consumer Durables(Research Tree India)
• The consumer durables industry of India has recently witnessed an
upsurge in demand due to the improved financial condition of the
people. The market has recently experienced around 30% growth rate
in demand for electronics and home appliances. Some of the factors
that are said to have promoted the growth of the industry are:
• Higher disposable income
• Changed lifestyle and changed taste
• Affordable prices
• Boom in housing and real estate industry
• Widened market- expansion of rural market
• Increased scope for advertising
• Easy financing- zero interest EMI
• Easy loans and credit card purchases
• Festival deals and discounts
 Factors affecting the real estate
demand in India
• increased affordability
• rapid evolution of nuclear families,
• increasing income, attractive supply rate of dealers,
• lower interest rates
• customer’s confidence*
• mortgage availability
• (India Brand Equity Foundation, 2017)
•  Real Estate Regulation Act
• Benami Transactions Prohibition Act,
• amendments in REITs (Real Estate Investment Trusts)
and Goods and Service tax (GST)
 Determinants of capital structure
in India
• Sample size of 870 companies, study period: 2001 -10.
• Ten independent variables and three dependent
variables were tested using regression analysis.
• Profitability, asset tangibility, size, tax rate, and debt
servicing capacity have significant impact while raising
short term debt.
• Profitability, growth, asset tangibility, cost of debt, tax
rate, and debt serving capacity have significant impact
while raising long term debt.
• Profitability, growth, asset tangibility, size, tax rate, and
debt serving capacity have significant impact while
considering total debt while making capital structure
decisions of Indian companies.(IIM B)
Factors affecting stock prices in
India: Analyse each one
 The consumer surplus
• Consumer surplus is the extra benefit a consumer
gains when the price he actually pays in the market
is less than he would be prepared to pay. It can be
shown graphically as the area from the ‘price line’
up to the demand curve. For example, if a consumer
would be prepared to pay £100 for a tennis racket,
and the market price is £75, their consumer surplus
is £25.
• The idea is central to
how markets work.
It is calculated as:
½(base x height)
 The consumer surplus

• As consumer cosumer more units of a product, his

Consumer surplus declines due to the law of
diminishing marginal utility.
• Therefore, in the above diagram, as consumption
rises from zero, at C, to Q, marginal utility falls. As
utility falls, the price that consumers are prepared to
pay declines, causing the demand curve to slope
down from A to B.
• Solve some numerical
 Numericals
• P = 90 - 3Q Domestic Market Supply: P = 10 + Q
Rs.90 is consumer’s willingness to pay, 30 actual price a consumer
pays
Rs.10 is price at which supplier is willing to supply and the actual
price he receives is 30
• a) Given the above information, find the equilibrium price and
quantity in this market. Solve for the market equilibrium price and
quantity:
90 – 3Q = 10 + Q, 80 = 4Q, Q = 20, P = 10 + 20 = 30. So the
equilibrium price and equilibrium quantity are P = 30 and Q = 20
• b) Calculate the value of consumer surplus and producer surplus.
½(base x height)
• consumer surplus is (1/2)(20)(90 - 30) = 600, Producer surplus is
(1/2)(20)(30 - 10) = 200
 Producer surplus and economic
welfare
• Producer surplus is the additional private benefit to
producers, in terms of profit, gained when the price they
receive in the market is more than the minimum they
would be prepared to supply for. In other words they
received a reward that more than covers their costs of
production.
• The producer surplus derived by
all firms in the market is the area
from the supply curve to the price
line, EPB.
• ABF is the economic welfare or
community surplus.
 Total Economic Surplus
• Suppose the market demand and supply functions are given by
Qd=60-P and Qs=P-20. Determine the consumer and producer
surplus and total economic surplus
• Maximum P= 60 and Y intercept of supply is 20. In other words,
consumer is willing to pay maximum 60 and supplier is willing
to supply at a minimum price of 20.
• Eq. P and Q will be where Qd=Qs or 60- P = P-20 or 2P=80 and
P= 40
• By putting P value in demand fn. Q=20
• CS= ½( 20x (60-40) or 200
• PS=1/2(20 x ( 40-20) or 200
• Total economic surplus=CS+PS or 400
 Application of D &S analysis
• Price rationing is a method of rationing that allocates the
limited quantities of goods and services using markets and
prices. Price rationing works like this. If the quantity of a given
commodity becomes increasingly limited, then the price rises.
• Price rationing of
Sugar/ onion etc.
Price rise signals to the cons-
mers to cut demand and pro-
ducers to increase supply known
As rationing effect and incentive
Effect.
Price Ceiling: keeping price below eqm price
•National Pharmaceutical Pricing Authority, price
control on hundreds of live saving drugs (stents,
cancer drugs). Min of food and civil supplies
controls prices of various non agriculture products.
Objectives:
a) to protect the interests of the vulnerable sections
of the consumers given the income distribution";
(b) to facilitate investment in priority industries
which are essential for laying the foundation for
rapid economic development of the country.
 Price floor
• (c) to prevent monopolistic exploitation by a few-
firms belonging to a single industry, and
• (d) to ensure a reasonable degree of price stability.
• P* is eqm price, Pceiling (rent control) is controlled
price. S> D. This signals producers to fill in the gap.
It may also lead to black marketing. Suppliers may
not be interested to build more bldgs, due to rent
conrol.
• Price floor is a minimum price at which a product or
service is permitted to sell. Ex. Minimum wages,
PDS prices of food grains.
 Discuss
• The usual argument against the minimum wage
considers only the microeconomic perspective of the
law of supply and demand for an employer:
minimum wage laws increase unemployment by
increasing the price of labor, thereby lowering
demand for labor. However, from a macroeconomic
perspective, minimum wage laws may actually
increase employment! Why? (mpc, AD, efficiency
wage theory, increase in technology)
Price control and minimum support price
Incidence of Indirect taxes
Due to increase in price after GST, incidence of tax on
consumer and producer depends upon the PED. If PED is
inelastic, tax burden will fall on consumer and if PED is
elastic, it will fall on producer.
The incidence of a tax on cigarettes - an example: Sharing
the burden equally by the producer and the consumer .
 Incidence of subsidy
• A subsidy is an amount of money given directly to
firms by the government to encourage production
(shift supply righ ward)and consumption ( due to
lower price).
• A unit subsidy is a specific sum per unit produced
which is given to the producer.
• S is original supply. S+ subsidy is new supply due to
subsidy
• AB is subsidy, of which, AF benefit goes to
consumer and AF benefit goes to the producer in
terms of increased revenue..
 1. The effect of a specific per unit subsidy
2. The incidence of a subsidy: Who is better off
 Deadweight loss
• Deadweight loss is loss in total surplus
that occurs when the economy produces
at an inefficient quantity.
• When markets do not decide the eqm
price and Quantity demanded and
Quantity supplied as government
enforces price ceiling and price floor
which lead to inefficiencies and dead
weight loss.
• While enforcing price ceiling and price
floor, there occur shift in the surplus from
consumer to producer and vice-versa.
 Deadweight loss
• Suppose the market demand and supply functions are given by Qd=60-P and Qs=P-
20. Determine the consumer and producer surplus if a price ceiling of 32 is imposed
in this market. What is the amount of dead weight loss? What is P when Q=0, P=60
• Maximum P= 60 and Y intercept of supply is 20. In other words, consumer is willing
to pay maximum 60 and supplier is willing to supply at a minimum price of 20.
• Eq. P and Q will be where Qd=Qs or 60- P = P-20 or 2P=80 and P= 40
• By putting P value in demand fn. Q=20 CS= ½( 20x (60-40) or 200
• PS=1/2(20 x ( 40-20) or 200 Total economic surplus=CS+PS or 400
• If price ceiling 32 is imposed the =CS and PS will change.
• Supplier due to lower price of 32 will reduce supply Qs=P-20 or Qs=32-20=12. Due
to lower supply, demand will also be limited to 12 only
• New CS and PS will be: CS=1/2(12x(60-32)=336/2=168
• PS=1/2(12x(32-20)=144/2=72 and Total Economic Surplus= 240
• Earlier Economic surplus=400 Dead weight loss=160
 Application of supply and demand analysis
-Why prices are increasing? Is it driven by
aggregate demand or aggregate supply.
-Once we know what is driving prices, we can take
appropriate decisions at the firm as well as the
national level.
-We have supply bottlenecks, we can address these
bottlenecks by taking appropriate investment
decisions.
-We know what are the constituents of AD and AS
and in a given situation what works which does
not.
 Contd..
GST slabs are decided invariably demand and
supply conditions.
Administered prices, price ceiling and floor
prices and subsidies have equity consideration
at the centre.
 Practice questions
Question 1
If the demand and supply curve for computers are:
D = 100 - 6P, S = 28 + 3P
where P is the price of computers, what is the quantity of computers bought and
sold at equilibrium.
Question 2
The quantity demanded of Good Z depends upon the price of Z (Pz), monthly
income (Y), and the price of a related Good W (Pw). Demand for Good Z (Qz) is
given by equation 1 below: Qz = 150 - 8Pz + 2Y - 15Pw
Find the demand equation for Good Z in terms of the price for Z (Pz), when Y is
$50 and Pw = $6.
Question 3
Beef supplies are sharply reduced because of drought in the beef-raising states,
and consumers turn to pork as a substitute for beef. How would you illustrate this
change in the beef-market in supply-and-demand terms? (income and sub. Effect)
Question 4
In December, the price of Christmas trees rises and the quantity of trees sold also
rises. Is this a violation of the law of demand?
 Contd……

• .
 Contd…
Question 9.Given the following data of a good.
P = 80 - Q (Demand)
P = 20 + 2Q (Supply)
We saw in the last question the equilibrium quantity will now be 18 (instead of
20) and the equilibrium price is now 62 (instead of 20). Which of the following
statements is true:
(a) Tax revenue will equal $108
(b) Price increases by $4
(c) Quantity decreases by 4 units
(d) Consumers pay $70
(e) Producers pay $36
Question 10
Which of the following factors will cause the demand curve for labor to shift to
the right?
(a) the demand for the product by labor declines.
(b) the prices of substitute inputs falls.
(c) the productivity of labor increases.
(d) the wage rate declines.
(e) None of the above.
 Contd..
• In winter season, the prices of woolen wear is
typically higher than in summer. In case of mangoes
the reverse is true. Why?
• Historically, all the Gs /Ss prices as well as Quantity
demanded have gone up. LOD does not hold good.
Why?
• How do marketers create demand and how do the
theory of demand helps them to devise their
marketing strategies?
 Question
• Let us assume we have a product with a price of Rs.100 per unit.
Now the govt. has increased tax by 5% to the seller which
increased the cost of production. Pl. explain the following with
the help of graph.
i. Do the cost of production affects demand and supply.
ii. Will there be movement or shift along the supply
iii. Will the cost of production make the good less profitable
iv. To make the same profit as before application of tax, how much
Price the seller should increase presuming that (i)
demand of the good is totally inelastic and (ii)
demand of the product is totally elastic.
Explain with the help of digrams.
 Explanation
i&ii. Imposition of tax will increase the cost of
production which will shift the supply curve to the
left and the equilibrium price will go up whereas
the quantity supplied and demanded will decrease.
- However the extent of change in price and Quantity
demanded and supplied will vary from good to
good depending upon whether it is essential or non
essential good.
iii. Since tax will increase cost of production, supplier
will continue to maintain the supply in case of
essential as increase in price will not change the
demand. In case of nonessential, supply will
decrease.
 Contd..

• Iv. If demand is perfectly inelastic, seller shld

increase price.
• If demand is perfectly elastic, he should not increase
price at all.
 Quiz
1. An increase in the price of a product will reduce the amount of
it purchased because:
A. supply curves are up sloping.
B. the higher price means that real incomes have risen.
C. consumers will substitute other products for the one whose
price has risen.
D. consumers substitute relatively high-priced for relatively
low-priced products.
2.
2.Which of the following will not cause the demand for product
K to change?
A. an equal change in the price of close-substitute product J
B. an increase in consumer incomes
C. a change in the price of K
D. a change in consumer taste
 Contd..
3.Which of the following would not shift the demand curve for beef?
A. a widely publicized study which indicates beef increases one's cholesterol
B. a reduction in the price of cattle feed
C. an effective advertising campaign by pork producers
D. a change in the incomes of beef consumer
4.If the price of K declines, the demand curve for the complementary product J will:
A. shift to the left.
B. decrease.
C. shift to the right.
D. remain unchanged.
5.A firm's supply curve is up sloping because:
A. the expansion of production necessitates the use of qualitatively inferior inputs.
B. mass production economies are associated with larger levels of output.
C. consumers envision a positive relationship between price and quality.
D. beyond some point the production costs of additional units of output will rise.
6. An effective ceiling price will:
A.induce new firms to enter the industry. B. result in a product surplus.
C. result in a product shortage D. Clear the market