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Demand and Its Determinants

Elasticity of Demand

Demand and Revenue

Demand under various Mark

Condition

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Demand is the relationship between the quantity of a

product that will be purchased in a particularmarket within a given time period and the severalvariables that influence it.

as the relationship between price and quantity,

is subject to change over time due to changes inthe underlying factors held constant by the staticnotion of demand. Changes in demand "shifters"are often included in economic estimation ofdemand representing anticipated dynamics in

these determinants.

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yPrice of the Product

yPrices of Related Goods

yIncome

yOther Factors

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y For practically all economics goods, price and quantityare inversely related. The higher the price, the smallerthe quantity demanded and vice versa.

Price of the Product

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y Many goods are consumed either in lieu of, or togetherwith other products. Goods that may be consumedinstead of a product are called substitutes of that

product, while goods that are consumed with it are itscomplements.

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y An increase in the incomes of potential buyers has apositive effect on the quantities demanded of an entirerange of products. This is true of most economics

goods, the so called normal goods. There is however avery small number of products called inferior goods,the demand for which actually declines s income rise.

y

y

Example: Electric fan to air conditioner

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y hifting taste of the market

y Expectations about future prices

y Availability of products

y Incomes and other contingencies

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y Price elasticity of demand (PED) is defined as theresponsiveness of the quantity demanded of a good orservice to a change in its price.

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y Anumber of factors determine the elasticity:

y Substitutes: The more substitutes, the higher theelasticity, as people can easily switch from onegood to another if a minor price change is made

y Percentage ofincome: The higher the percentage

that the product's price is of the consumer'sincome, the higher the elasticity, as people will becareful with purchasing the good because of itscost

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y Necessity: The more necessary a good is, the lower theelasticity, as people will attempt to buy it no matter theprice, such as the case ofinsulin for those that need it.

y

Duration: The longer a price change holds, the higherthe elasticity, as more and more people will stopdemanding the goods (i.e. if you go to the supermarketand find that blueberries have doubled in price, you'll

buy it because you need it this time, but next time youwon't, unless the price drops back down again)

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y Afirm considering a price change must know whateffect the change in price will have on total revenue.Generally any change in price will have two effects:

y the price effect: an increase in unit price will tend toincrease revenue, while a decrease in price will tend todecrease revenue.

y the quantity effect: an increase in unit price will tendto lead to fewer units sold, while a decrease in unitprice will tend to lead to more units sold

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Aset of graphs shows therelationship between

demand and totalrevenue.As pricedecreases in the elasticrange, revenue increases,

but in the inelastic range,revenue decreases

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y Monopoly

y Pure Competition

y Oligopoly

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y In economics, a monopoly(from Greek monos /(alone or single) +polein / (to sell)) existswhen a specific individual or an enterprise has sufficientcontrol over a particular product or service to determine

significantly the terms on which other individuals shallhave access to it

y A monopoly is a market situation where only one fim

sells a product which has no close substitutesExample: Local Bus

Small-town Newspaper

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y Single Seller: In a monopoly there is one seller of themonopolized good who produces all the output.[3] The

firm and industry are identical. In a PC market thereare an infinite number of sellers each producing aninfinitesimally small quantity of output.

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y arket Power: Market Power is the ability to affectthe terms and conditions of exchange.[4] It is the abilityto set your own price.[5]Although a monopoly's market

power is high it is not absolute.Amonopoly faces anegatively sloped demand curve not a perfectlyinelastic curve. Consequently, any price increase willresult in the loss of some customers. The monopoly'sobjective is to maximize profits.

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y High Barriers to Entry and Competition:Monopolies derive their market power from barriers toentry - circumstances that prevent or greatly impede a

potential competitor's entry into the market or abilityto compete in the market. There are three major typesof barriers to entry; economic, legal and deliberate.[6]

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y At the opposite end of the industry spectrum is purecompetition, a market condition with the followingcharacteristics:

There are many sellers ( buyers ), and not one dominates

The firms sell identical, or homogeneous products.

Entry into the industry is unhampered

Buyers and sellers have perfect knowledge at with respectto prices being affect

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y An oligopolyis a market form in which a market orindustryis dominated by a small number of sellers(oligopolists). The word is derived, by analogy with

"monopoly", from the Gr

eek oligoi 'few' andpoleein'to sell'. Because there are few sellers, each oligopolistis likely to be aware of the actions of the others. Thedecisions of one firm influence, and are influenced by,the decisions of other firms.

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CharacteristicsPerfect

CompetitionMonopolisticCompetition

Oligopoly Monopoly

No. of firmscompeting

with eachother

Large number LargeNumber

Small Number Single Firm

Nature of theProduct

Undifferentiated Differentiated Undifferentiatedor

differentiated

Uniquedifferentiatedproduct with

no close

substitutes

Entry to themarket

No barriers toentry

Few barriersto entry

Many barriers toentry

Many barriersto entry, oftenincludinglegalrestrictions

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CharacteristicsPerfect

CompetitionMonopolisticCompetition Oligopoly Monopoly

Availability ofinformation tomarket

participants

Completeinformationavailable

Relativelygoodinformation

available

Informationlikely to beprotected by

patents,copyrights,and tradesecrets

Informationlikely to beprotected by

patents,copyrights,and tradesecrets

Firms Controlover price

None Some Some, butlimited byinterdependent behavior

Substanial

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Mr. Darwin D. Superio

Master in Business Administration

Mr. Darwin D. Superio

Master in Business Administration