Demand and Supply PDF - IITBombay

Demand and Supply Tara Shankar Shaw IITBombay August 7, 2024 Why Demand In the previous class we understood that economic agents specializes in the production in which it has comparative advantage. This holds for firms also. Question: In what terms the producers should ex...

Demand and Supply Tara Shankar Shaw IITBombay August 7, 2024 Why Demand In the previous class we understood that economic agents specializes in the production in which it has comparative advantage. This holds for firms also. Question: In what terms the producers should exchange goods that they has produced? The terms of exchange is determined by the interaction of the consumer and producer of a good and services in the market. Question: What is Market? Does every economic good or service has a market? What is the difference between marketable activity and economic activity? TSS (IITBombay) Demand and Supply August 7, 2024 2 / 24 Who Demand’s In microeconomics economics we are mainly concerned with the demand faced by firms. The demand faced by the firms depends on 1 Total demand in the industry. (Number of consumer in the industry and their market power) 2 Type of Industry and number of producers in the industry Individual Demand: Amount of goods or services each individual agents wants to consume give price of the good or the service Demand of a commodity arises from Consumer’s willingness Ability to purchase goods TSS (IITBombay) Demand and Supply August 7, 2024 3 / 24 Law of Demand “The Law of Demand states that quantity demanded of a good is inversely related to its price other things remaining constant. Why Demand Curve is Negatively Sloped I Substitution Effect I Income Effect Example of a demand equation QxD = a + bPx + θ Linear Demand Function QxD = APxα Iso-Elastic. What are the factors that affects the demand of a good. TSS (IITBombay) Demand and Supply August 7, 2024 4 / 24 Factors Affecting Demand TSS (IITBombay) Demand and Supply August 7, 2024 5 / 24 Demand Curve Faced by Firms Demand Curve Faced by a particular firms Firm depends on the I Size of the Market I Industry’s Organization Price Taker I Perfect Competition Price Setter I Monopoly I Monopolistic Competition I Oligopoly TSS (IITBombay) Demand and Supply August 7, 2024 6 / 24 Concepts Difference between ”Change in quantity demanded” and ”Change in Demand” Diagram of these differences Difference between normal good and inferiror goods Diagram of these differences Gross Substitutes and Gross Complement Diagram of these differences TSS (IITBombay) Demand and Supply August 7, 2024 7 / 24 Demand Functions QxD = f (Px , PY , M, Θ) ∂QxD < 0 Law of Demand ∂Px ∂QxD > 0 Gross Substitutes ∂Py ∂QxD < 0 Gross Complements ∂Py ∂QxD > 0 Normal Goods ∂M ∂QxD < 0 Inferior Goods ∂M QxD = α + βPx + γPy + ηM + Θ Linear Demand Function TSS (IITBombay) Demand and Supply August 7, 2024 8 / 24 Example-1 Japan saw many business failures. Even business that traditionally do well during recession like beer brewing industry, were hit hard. Analyst blame the downturn in the beer market due to two factors. Japanese income declined following recession. Beer tax. As a result top Japanese breweries such as Kirin and Sapporo experienced sharp decline in domestic sales. Meanwhile their competitors-Asahi-touted double digit growth and increase in market share. Question: What are the possible reason to the increase in the growth of Asahi’s beer sold? TSS (IITBombay) Demand and Supply August 7, 2024 9 / 24 Law of Supply Amount of goods or services offered for sale in a market during a period of time is called quantity supplied denoted by QxS “The Law of Supply states that quantity supplied of a good is directly related to its price other things remaining constant.” TSS (IITBombay) Demand and Supply August 7, 2024 10 / 24 Law of Supply Factors affecting Supply I Cost of Production I Production substitutes and Complements F Production Substitutes F Production Complements I Technology I Taxes F Excise Tax F Ad volerem Tax TSS (IITBombay) Demand and Supply August 7, 2024 11 / 24 Equilibrium Excess Demand: ED = D(Px , Py , M, Θ) − S(Px , Pz , Cp , ∆) Auctioneer:Changes the Price Price Adjustment Process ∂ED