MARKETS AND COMPETITION

The terms supply and demand refer to the behavior of people......as they interact with one another in markets. A market is a group of buyers and sellers of a particular good or service. Buyers determine demand... Sellers determine supply

DEMAND

Quantity Demanded refers to the amount (quantity) of a good that buyers are willing to purchase at alternative prices for a given period. Demand means desire backed by adequate purchasing power.

Meaning of Demand

Demand in Economics means EFFECTIVE DEMAND , that is one which meet with all its 3 crucial characteristics: Desire to have a good Willingness to pay for that good Ability to pay for that good In absence of any of these 3 characteristics , there is no effective demand

Factors Influencing Individual Demand

Products Own Price Consumer Income Prices of Related Goods Tastes and Habits Consumer Expectations about the product Advertisement Effect

Factors Influencing Market Demand

1. Price of the product 2. Distribution of Income and

Wealth in the Community 3. Communitys common Habits and scales of preferences 4. General standards of Living & Spending Habits of People 5. Number of buyers in the Market and Growth of Population 6. Age Structure and Sex ratio of the Population

Factors Influencing Market Demand

7. Future Expectations 8. Level of taxation and Tax Structure 9. Inventions and Innovations 10. Fashion trends 11. Climate or Weather Conditions 12. Customs 13. Advertisement and Sales Propaganda

Demand Function
A function is that which describes the relationship between a variable and its determinants. Thus, demand function for a good relates to quantities of good which consumers demand during some specific period to the factors which influence that demand.

Demand Function

A demand function is a causal relationship between a dependent variable (i.e., quantity demanded) and various independent variables (i.e., factors which are believed to influence quantity demanded

Demand Function
To put it mathematically, the demand function for a good X can be expressed as follows: Dx = f (Y, Px, Ps, Pc, T, u) Where Dx = demand for good x Y = consumers income Px = price of good x Ps = prices of substitutes of x Pc = prices of complements of x T = measure of consumers tastes & pref. u = other determinents

The Demand Schedule and the Demand Curve

The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded. The demand curve is a graph of the relationship between the price of a good and the quantity demanded. Ceteris Paribus: Other thing being equal

Demand Schedule

Price of Wheat (Rs.)

10.00 20.00 30.00 40.00 50.00 60.00

Quantity of Wheat Demanded

10 8 6 4 2 0

Demand Curve
Price of Wheat (Rs.)

60.00 50.00

40.00 30.00 20.00 10.00

10

12

Quantity of Wheat (kg)

Market Demand Schedule

Market demand is the sum of all individual demands at each possible price. Graphically, individual demand curves are summed horizontally to obtain the market demand curve. Assume the wheat market has two buyers as follows

Market demand as the Sum of Individual Demands

Quantity Quantity Price of Wheat Demanded(kg.) Demanded(kg.) (Rs.) Customer A Customer B + = Market

10.00 20.00 30.00 40.00 50.00 60.00

10 8 6 4 2 0

6 5 4 3 2 1

16 13 10 7 4 1

Demand Curve

The demand curve shows how the quantity of a good depends upon the price. According to the law of demand, as the price of a good falls, the quantity demanded rises. Therefore, the demand curve slopes downward. In addition to price, other determinants of how much consumers want to buy include income, the prices of complements and substitutes, tastes, expectations, and the number of buyers. If one of these factors changes, the demand curve shifts.

Demand Curve

Explanation:

A, B and C are points on the demand curve.

Each point on the curve reflects a direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on.
The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price of a good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C).

Shifts in the Demand Curve

Price

Increas e in demand

Decrease in demand

D2
D1 D3
Quantity

Law of Demand
The law of demand states that, other things equal (ceteris paribus), the quantity demanded of a good falls when the price of the good rises.

The Law of Demand

The Law of Demand is simply the statement that as the price of a good decreases (increases), more (less) of it will be purchased. That is, the demand curve is downward sloping. There are two factors that explain this relationship: 1. As the price of a good increases, consumers will substitute into other goods (substitution effect); 2. As the price of a good increases, consumers will have less real income to purchase all goods (income effect).

The Law of Demand

The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product. The chart below shows that the curve is a downward slope.

Chief characteristics of the Law of demand are as follows:

Inverse Relationship Price, an independent variable, & Demand, a dependent variable Other things remain the same Reasons underlying the Law of demand- 2 reasons are there
Income effect Substitution effect

Assumptions of the Law

The Law of Demand in order to establish the Price-Demand relationship makes a number of assumptions as follows: No change in consumers income No change in consumers preferences No change in fashion No change in Prices of related goods No expectations of future Price Changes or Shortages

Assumptions of the Law

No changes in size, age composition and sex ratio of the population No change in range of goods available to the consumers No change in the distribution of income and wealth of the community No change in government policy No change in Weather conditions

In short the Law of demand presumes that, except the price of the product, all other determinants of its demand are unchanged

Exceptions to the law of Demand

Giffen Goods (inferior goods) introduced by Robert Giffen. When the price falls, people change preference for want of quality Articles of snob appeal when the price rises, demand also rises. Speculation Consumer psychological bias/ illusion people dont buy at clearance sales.

Elasticity of Demand

Elasticity is a general measurement concept . It is a measure of the sensitiveness of one variable to changes in some other variable. It is expressed in terms of percentage, and is devoid of any unit of measurement. Demand elasticities refer to the elasticities of demand for a good with respect to the determinants of its demand. There is one demand elasticity with respect to each demand determinant. Thus there are as many demand elaticities as the number of determinants. The

Types of Elasticities
Price

elasticity of Demand Income elasticity of Demand Cross elasticity of Demand Promotional Elasticity of Demand

Price Elasticity of Demand

It is termed as the extent of change of demand for a commodity to a given change in price, other demand determinants remaining constant. e= The %change in qty. demanded The % change in price Or, e= Net change in Qty demanded / Net change in price

Original Qty. Demanded Original Price

Cont

Representing it in Symbols e = del Q / del P Q P

= del Q x P Q del P Where Q= original demand (say Q) P= Original price (say p) Del Q= change in demand Del P = change in price

Types of Price elasticity

Perfectly Elastic demand e= Perfectly inelastic demand e= 0 Relatively elastic demand e 1 Relatively inelastic demand e 1 Unitary elastic demand e= 1

Measurement of Price Elasticity

Point Method del Q Ep= Q del P P 2. Arc Method Q1-Q2 Ep= Q1+Q2 P1-P2 P1+P2
1.

Measurement of Price Elasticity

Total Revenue or Expenditure method

Weekly demand (units) Total Revenue of the firm (Rs.) Elasticity of Demand

Price (Rs.)

9
8 7 6 5 4

50
150 200 300 360 450

450
1200 1400

Ep = 1 Ep 1

1800 1800 1800

3
2 1

550
700 900

1650
1400 900 Ep 1

Determinants of Price Elasticity

Degree of necessity The proportion of Consumers Income Spent on the commodity Habits Existence of Substitutes Number of uses of commodity Durable goods Time Range of prices

Significance of Price Elasticty

Pricing under imperfect competition Policy formulation by the govt. Resource Prices Terms of trade Rate of Exchange Public utilities