Slide 1: 12/29/2011 1 SHIFTS IN DEMAND S S P2 P1 D¹ D² D¹ D² Dº Dº P0 0 θ1 θ0 θ2
Slide 2: SNIPPETS
Demand for maize is expected to rise further and the price of maize
Which was 6800 to 7000 a tonne is also likely to go up
Farmers encouraged by a good price realisation may increase area
under cultivation of maize (ET 8th June)
Jewellery demand constituted about 67% of the total demand for gold
In 2006 with India being the major jewellery buying countries of the
world . The demand for jewellery has picked up recently after witnessing
An average fall of 20% in the recent few quarters on account of
postponement of purchases due to high prices has resulted in a marginal
drop in prices by 0.9%
Supply side:However gold prices are likely to grow up due to reduced
Production of gold to the extent of 2471 metric tonnes (3 yr low)
(ET 4TH June) Slide 3: Coke and
Pepsi suffer their worst summer this year with a sales dip
Of 15-17%. A relatively mild summer in April-May coupled with
shifting consumer preferences towards functional beverages like juices
And juice based drinks ARE THE REASONS FOR THIS
Dabur’s real and pepsi Co’S Tropicana -18% growth (ET-6TH June}
Demand for and production of imitation jewellery increases owing
to fluctuation in prices Of gold and silver ET-7TH June
After being highly popular in Japan , Italy and Germany
Today there are nearly 160 retailers in India as compared to 12 in
2003 for PLATINUM . A record 300% rise in demand in platinum.
Jewellery . Shift in taste for the more elegant and durable metal.
Tanishq and Kiah have come out with platinum range to satisfy
Customers
Slide 4: Of the annual TV sales of about 10 million in India 90 people had
Shifted from curved to flat and now manufactures are advertising the
slim model to resemble the far costlier LCD.Slim category has grown
30-35% already due to advertisement-LG,Samsung and Haier. ET 4TH
June Strong economic growth witnessed in emerging
economies and demand for biofuels leads to
increase in demand for oilseeds in india- ET 28t
Slide 5: A SIMPLE NUMERICAL EXAMPLE-WORLD OIL MARKET
Short run demand for oil D= 35.5 -0.03P
Short run competitive supply of oil S= 18.0 +0.04P
Calculate the following (ALTERNATE SCENARIOS)
Equilibrium price
in the market currently
If OPEC supplies 14bb/year
If demand for oil drops by 5bb/ year
Quantity supplied by Saudi Arabia stops due to political upheaval
(They contribute 3bb per year to OPEC)
ILLUSTRATIONS : 12/29/2011 6 ILLUSTRATIONS 1) GIVEN BELOW IS THE WEEKLY DEMAND AND SUPPLY FOR MILK (A) DERIVE THE DEMAND AND SUPPLY FUNCTION
(B) AT WHAT PRICES WILL NO MILK BE DEMANDED
(C) FIND THE EQUILIBRIUM PRICE & QUANTITY
(D) INDICATE AN INCREASE IN BOTH DEMAND AND SUPPLY (BY 6lts each)
GRAPHICALLY SOLUTION FORM OF A LINEAR DEMAND FUNCTION
Q = α + bP
α = Qty demanded when price = 0
ILLUSTRATIONS : 12/29/2011 7 ILLUSTRATIONS ΔQ= bΔP
b = ΔQ = -2 = -2
ΔP 1
Q = α - 2P – (1)
PUTTING THE VALUE OF b IN eq (1) WE GET
10 = α -2 (13)
α = 36
DEMAND FUNCTION = Qd = 36-2P –(2) : 12/29/2011 8 DEMAND FUNCTION = Qd = 36-2P –(2) SUPPLY FUNCTION :
FOR EVERY ONE RS. Δ IN PRICE LEVEL SUPPLY OF MILK ses BY 2 LAKH
Qs = α + 2 P – (3) ( α in this case =0)
(B) WHEN NO MILK IS DEMANDED DEMAND FUNCTION IS AS FOLLOWS
Q=0
Q= 36-2P
2P = 36
P = 36/2 =18
CONCEPT OF ELASTICITY : 12/29/2011 9 CONCEPT OF ELASTICITY Responsiveness of QUANTITY DEMANDED to
a) Price
b) Income
c) Advertisement outlay
d)Cross elasticity
Price elasticity Ep = Percentage change in quantity demanded Percentage change in price Income elasticity Percentage change in Quantity demanded
Percentage change in Income Advertisement Elasticity : Percentage change in Advertisement expenditure Percentage change in Quantity demanded
Slide 10: 12/29/2011 10 CROSS ELASTICITY PERCENTAGE CHANGE IN QUANTITY DEMANDED OF X PERCENTAGE CHANGE IN PRICE OF Y
WHERE X&Y ARE RELATED GOODS
PRICE ELASTICITY OF DEMAND : 12/29/2011 11 PRICE ELASTICITY OF DEMAND RESPONSIVESS OF THE QUANTITY DEMANDED TO CHANGE IN PRICE
ep = PERCENTAGE Δ in Qty demanded PERCENTAGE Δ in PRICE USING CALCULAS WE GET P δQ δP Q δQ = INFINITISMAL Δ IN QTY
δP = INFINITISMAL Δ IN PRICE
P = ORIGINAL PRICE OF GOOD
Q = ORIGINAL QTY OF GOOD
PRICE ELASTICITY OF DEMAND : 12/29/2011 12 PRICE ELASTICITY OF DEMAND WITHOUT USING CALCULAS
LET Q1 & P1 BE ORIGINAL VALUES
Q 2 & P2 BE NEW VALUES ep = Q 2 - Q1 P1 P2 - P1 Q1 EG ASSUME P1 = 5 , P2 = 10
Q1 = 20 , Q 2 = 10 ep = 10 - 20 5 = -0.5 10 - 5 20 So As PRICE ses Qty DEMANDED FALLS BY (-0.5) 50%
INCOME ELASTICITY (ey) δQ X Y Q2 - Q1 X Y1 : 12/29/2011 13 INCOME ELASTICITY (ey) δQ X Y Q2 - Q1 X Y1 THE FOLLOWING TABLE SHOWS THE QUANTITY DEMANDED OF MEAT AT VARIOUS INCOME LEVELS . FIND ey BETWEEN
SUCCESSIVE LEVELS OF INCOME INCOME QUANTITY (kg/ MONTH) DEMANDED ey 10 2
20 1.5
8000 30 0.67
16000 35 0.33
18000 25 -2.29 δY Q = Y2 - Y1 Q1
INCOME ELASTICITY (ey) : 12/29/2011 14 INCOME ELASTICITY (ey) APPLY δQ γ Q2 - Q1 γ1 δγ Q1 γ2 - γ1 Q11 = . = 10 - 4000 = 2 2000 10 CROSS ELASTICITY (ecxy)
FIND THE CROSS ELASTICITY OF DEMAND BETWEEN
(a) COKE (X) AND PEPSI (Y)
(b) COKE (X) AND SUGAR (Z) exy = δQx . Py
δPy Qx exZ = δQx . Pz
δPz Qx
Slide 15: 12/29/2011 15 exy = δQx . Py = (10 -15) X 11-13 13 15 = 2.17 δPy Qx exz = δQx . Pz δPz Qx = (12 -15) 11-10 X 10 15 = -2 x & γ = SUBSTITUTES
x & z = COMPLEMENTS
Slide 16: 12/29/2011 16 RELATIONSHIP BETWEEN AR, MR AND ELASTICITY
TOTAL REVENUE ( TR)= PRICE(P) X QUANTITY (Q)
AVERAGE REVENUE (AR) =TOTAL REVENUE PER UNIT
AR= R/Q =PQ/Q
MARGINAL REVENUE ( MR) = ADDITIONAL REVENUE WHICH A SELLER
OBTAINS BY SELLING AN ADDITIONAL UNIT
MR= δR
δQ
R = P.Q ……………………..eq1
Differentiating both sides of the equation we get
MR= δR =P δQ +Q δP …………...eq2
δQ δQ δQ
P+ Q X δP
δQ
Slide 17: 12/29/2011 17 P(1+ Q X δP)
P δQ ELASTICITY OF DEMAND =/ep/= P . δQ ………….eq3
Q δP Substituting the value of ep in MR Eq WE GET.Note that elasticity
Of demand has a negative sign so when modulus is removed then
Minus sign appears in the formula as shown below
(Since 1/e= 1/P . - δQ )
Q δP
MR=P( 1-1/e)
MR= AR(1-1/e)
Slide 18: 12/29/2011 18 E=1,MR=0, TR is max and it remains same when
p rises
Ep>1,MR>0, TR falls as price rises
Ep<1,MR<0 TR Rises when p rises RELATIONSHIP BETWEEN ep , MR ,P and TR MR=P(1-1/E)