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ManagerialEconomics
[MGT609] Trupti MishraShailesh J Mehta School OfManagementIIT Bom a!
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"eman#$ %a& of "eman# "eman# Sche#ule$"eman# 'ur(e$"eman#
)unction
)actors a*ecting "eman# 'hange$Shift in the "eman# Suppl!$ %a& of Suppl! Suppl! Sche#ule$Suppl! 'ur(e$Suppl! )unction )actors a*ecting Suppl! 'hange$Shift in the Suppl! Mar+et E,uili rium
"eman# -nal!sis
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What is demand?
- relation sho&ing the ,uantities of a goo#that consumers are &illing an# a le to u!at (arious prices per perio#. other things
constant/
"eman# 1ants 2 3ee#s
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Law of Demand
4elationship et&een 5rice an# ,uantit!#eman#e# is an economic la&/
The ,uantit! of a goo# #eman#e# perperio# relates in(ersel! to its price. otherthings constant/
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Exception to Law of Demand
2 Gi*en Goo#s2 e len E*ect2 5re#iction2 "emonstration e*ect2 Share Mar+et2 Insigni7cant proportion of Income spent2 Goo#s &ith 3o su stitute
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Demand Schedule and DemandCurve
In#i(i#ual point on #eman# cur(e $ sche#ule sho&s ,uantit!#eman#e# an# entire #eman# cur(e$sche#ule sho&s #eman#/
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Factors In uencing Demand
5rice of goo# or ser(ice (P) Incomes of consumers (M) 5rices of relate# goo#s 8 ser(ices (P R )
Taste patterns of the consumer T: E;pecte# future price of pro#uct (Pe) 3um er of consumers in mar+et (N)
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Factors In uencing Demand
Variable Relation to Qd Sign of Slope Parameter P Inverse b = Qd/ P is negative
M Direct for normal goodsInverse for inferior goods
PR Direct for substitutesInverse for complements
d = Qd/ PR is positive
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
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Factors In uencing Demand
Variable Relation to Qd Sign of Slope Parameter P Inverse b = Qd/ P is negative
M Direct for normal goodsInverse for inferior goods
PR Direct for substitutesInverse for complements
d = Qd/ PR is positive
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
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Demand Function
Demand function sho&s relation et&een 5 8
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Mar+et "eman#
Mar+et #eman# is the sum of all in#i(i#ual#eman#s at each possi le priceGraphicall!. in#i(i#ual #eman# cur(es are
summe# hori=ontall! to o tain the mar+et#eman# cur(e/
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Change in the Demand Curve
Change in -uantit. demandedOccurs &hen price changesMo(ement along #eman# cur(e
Change in demandOccurs &hen one of the other (aria les. or determinants ofdemand . changes"eman# cur(e shifts right&ar# or left&ar#
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Change in the Demand Curve
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Shifts in Demand
Q d0 ?.?0
0@00?00
$uantit.
' r
i c e
& / u p e e s
(
900
P
A00 >00 ?.>00
?.A00
?0
0
A0
C0
>0
60
@0
D0
D0
D1
D2
"eman#increase
"eman##ecrease
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?@
Price of
Cigarettes,per Pack.
Number of CigarettesSmoked per Day
0 0
4s/00
" ?
-
A tax that raisesthe price ofcigarettes resultsin a movements alongthe demand curve.
'
?
4sC/00
1 2ovement 1long the DemandCurve
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?D
Do Soaring 'rice and 2ounting Demand inIndian old 2ar3et Spea3 of a 'aradox
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?9
Suppl.
Suppl! of a goo#s refers to the (arious,uantities of the goo# &hich a seller is&illing an# a le to sell at a #i*erentprices in a gi(en mar+et. at a particularpoint of time/
%a& of Suppl!
The la& of suppl! states that. otherthings e,ual. the ,uantit! supplie#of a goo# rises &hen the price of thegoo# rises/
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0
Factors In uencing Suppl.
5rice of goo# or ser(ice (P)Input prices (PI )5rices of goo#s relate# in pro#uction (Pr)
Technological a#(ances (T)E;pecte# future price of pro#uct (Pe)3um er of 7rms pro#ucing pro#uct (F)
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- Suppl! function. or suppl!. sho&s relation et&een P 8Q s &hen all other (aria les are hel# constant
Q s = g(P)
Suppl! Sche#ule2 The suppl! sche#ule is a ta le that sho&s the
relationship et&een the price of the goo# an# the,uantit! supplie#/
Suppl! 'ur(e
2The suppl! cur(e is a graph of the relationshipet&een the price of a goo# an# the ,uantit!
supplie#/
Suppl. Function
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Suppl. Schedule4 Example
>A/00C/>0A/00
?/>0??/0000/>000/00
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>A/00
00/>0
00/00
A5rice of Ice2cream'one 4s:
2ar3et suppl. Schedule
D
0
0
B
?A
C/>0
A/00
?/>0
??/00
6
C
0
?0
@
C
?
0
0
Market
F
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2!
S 0
S 2
S 1
Suppl!#ecrease
Q s0 @00?00 900A00 >00
?0
0
A0
C0
>0
60
@0
D0
$uantit.
' r
i c e
& /
u p e e s
(
P
Suppl!increase
Shifts in Suppl.
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2"
!"ili#ri"m refers to a situation in &hich theprice has reache# the le(el &here ,uantit!supplie# e,uals ,uantit! #eman#e#/
E,uili rium price 8 ,uantit! are #etermine#! the intersection of #eman# 8 suppl! cur(es
-t the point of intersection. Q d = Q s
'onsumers can purchase all the! &ant 8pro#ucers can sell all the! &ant at the
mar+et2clearingH price
2ar3et E-uili#rium
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3#
-t 4s /00. the ,uantit! #eman#e# is e,ual tothe ,uantit! supplie#
Demand Schedule Supply Schedule
E-uili#rium
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#$uilibriumprice
Demand
Supply
4s/00
5 6 7++
Equilibrium
#$uilibrium$uantity
$uantit. ofIce;Cream
Cones
'rice of
Ice;Cream
Cone
:87 9 * < = 77
>he E-uili#rium of Suppl. andDemand
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E-uili#rium
S"r$l"s1hen price e,uili rium price. then ,uantit! supplie# ,uantit! #eman#e#/ There is e;cess suppl! or a surplus/ Suppliers &ill lo&er the price to increase sales. there !
mo(ing to&ar# e,uili rium/S%orta&e
1hen price K e,uili rium price. then ,uantit! #eman#e# the ,uantit! supplie#/ There is e;cess #eman# or a shortage/ Suppliers &ill raise the price #ue to too man! u!ers
chasing too fe& goo#s. there ! mo(ing to&ar#e,uili rium/
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Demand
Supply
/00
5 6 7++ uantity of!ce"Cream
Cones
Price of!ce"Cream
Cone
:87 9 * < = 77
/>0
Surplus
QuantityDemanded
QuantitySupplied
Excess Suppl.
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Demand
Supply
/00
5 6 7++ uantity of!ce"Cream Cone
Price of!ce"Cream
Cone
:87 9 * < = 77
?/>0
Shortage
QuantitySupplied
QuantityDemanded
Excess Demand
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" ?
Supply
4s/00
5 7++ uantity of!ce"Cream Cone
Price of!ce"Cream
Cone
:87 9 * < 77
"
4s />0
?/ Lot &eather increases the#eman# for ice cream
/ resultingin a higherprice
A/ an# a higher,uantit! sol#/
3e&e,uili rium
Initiale,uili riu
m
ow an Increase Demand 1@ectsthe E-uili#rium
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Demand
S ?
4s/00
7++ uantity of!ce"Cream
Cones
Price of!ce"Cream
Cone
:87 9 < 77
S
4s/>0
?/ - technical failure re#ucesthe suppl! of ice cream
/ resultingin a higherprice
A/ an# a lo&er,uantit! sol#/
e!equilibrium
Initialequilibrium
ow a Decrease Demand1@ects the E-uili#rium
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3
" ?
S ?
+ uantity of!ce"Cream Cone
Price of
!ce"CreamCone
Q 7
"
%argeincrease in#eman#
P
S
Q 2
3e&e,uili riu
m
Small#ecrease insuppl!
Initial e,uili riumP?
1 Shift in Aoth Suppl. andDemand
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3!
" ?
S ?
+ uantity of!ce"Cream Cone
Price of
!ce"CreamCone
Q 7
"
%arge
#ecrease insuppl!
P
S
Q 8
3e&e,uili riu
m
Smallincrease in#eman#
!nitiale$uilibrium
P ?
1 Shift in Aoth Suppl. andDemand
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3"
1hen #eman# 8 suppl! shift simultaneousl!
'an pre#ict either the #irection in &hich pricechanges or the #irection in &hich ,uantit!
changes. ut not oth
The change in e,uili rium price or ,uantit! issai# to e in#eterminate &hen the #irection ofchange #epen#s on the relati(e magnitu#es !&hich #eman# 8 suppl! shift
Simultaneous Shifts
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What appens to 'rice and$uantit. when Suppl. or DemandShifts?
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