DEMAND AND SUPPLY

Staples and Office Depot Merger

• 1997, Staples and Office Depot wanted to merge

• FTC analyzed the effect of proposed merger on consumers.

• How would Staples’ lawyer argue the case?

Staples and Office Depot Merger

• Staples’ argued that you could buy office supplies from any stationary store, Wal-Mart, Kmart

• Computers from a number of small computer stores and online

• Thus, merger would lead to a 6% market share

Staples and Office Depot Merger

• Would FTC have the same opinion?

• FTC argued that Staples and Office Depot belonged to “one stop shopping for all office supplies”.

• Three major players- Staples, Office Depot, Office Max

• Merger would significantly increase prices

Market

• What constitutes a market is in the eye of the beholder

• How to define a market?

What is a Market?

• Product• Buyers• Sellers • They together (sometimes the Govt.) interact

(invisible hand).• Market is not industry

Coca Cola Inc.

Coca Cola Inc.

• Coca Cola is reviewing price of Coke. How should it view its market?

• Coke and Pepsi constitute about 80% of the soft drinks market.

• So is this Coca Cola’s market?

Coca Cola Inc.

• “Stomach Share”- Coke’s share of portable liquid that a human consumes

• Coca Cola accounts 3% of the total liquid consumed by humans

• Competing with coffee, tea, hard liquid etc• SSNIP Test- Small but significant non transitory

increase in price, test

SSNIP Test

• Identify smallest relevant market within which the firm / cartel can exercise price increase (“Relevant Market”)

• Smallest set of firms (including the concerned firm/cartel) that can sustain an increase in price of 5% for around a year

DEMAND SIDE OF MARKET

Coca Cola Inc.

• Coca Cola is reconsidering the price for Minute Maid

• Would an increase in price lead to an increase in revenues?

Demand and Managerial Decisions

• How much should a firm produce?• Should the firm increase its capacity?• Entry decisions to new markets• Price/advertising changes

=> All require knowledge of the market demand

WHAT IS DEMAND?Individual Demand-The quantity of a product

that an individual will purchase at a particular price, ceteris paribus.

14

Demand for PC

• Late 1990’s, Price of HP – Rs. 50,000 • Only source of income gives Rs. 1 lakh

annually

• Demand for HP?• Increase in income – Rs 5 lakh annually• Sony enters the market.

WHAT IS DEMAND?

Individual Demand-The quantity of a product that an individual will purchase at a particular price, ceteris paribus.

• Demand influenced by preferences (Willingness)

• Demand backed by ability to pay16

DEATH OF PC?

• What is the reason for decrease in sales of PCs since the third quarter of 2010?

• Why did PC sales increase in later part of 2009?

• Why are i-pad sales on the rise?

DEATH OF PC?

• Change in Preferences: Saturation of the market with net-books

• Economic Uncertainty: Affecting future income

• External Disruptions: Japan Earthquake etc

Demand For Big Macs**

• Mc Donald dwarfs competition: 36,000 restaurants in 122 countries. Burger King- 11,200 restaurants in 57 countries

• Sales figures since mid 1980s

Reasons

• Price increase- Average check $4 versus 15 cent

• Health concerns• Proportion of 15-29 years shrunk from 27.5%

to 22.5 %• Increase competition from other fast food

joints• Multimillion dollar law suit- “Super Size Me”

Individual Consumer’s Demand

quantity demanded of commodity X by an individual per time period

price per unit of commodity X

consumer’s income

price of related (substitute or complementary) commodity

tastes of the consumer

QdX =

PX =

I =

PY =

T =

QdX = f(PX, I, PY, T)

Coca Cola Inc.

• Coca Cola is reconsidering the price for Minute Maid

• Would an increase in price lead to an increase in demand?

Law of Demand

Law of demand: Ceteris Paribus, when the price of a product falls, the quantity demanded of the product will increase, and visa versa.

Demand Schedule and Curve

• Demand Schedule and Curve: Represent amount of a quantity that will be demanded at various prices

• Sometimes referred to as the “ demand” of a consumer.

Demand Schedule and Curves

A Demand Schedule and Demand Curve

Pointers on Demand Schedule• Market demand pertains to a particular time

period. Longer the time period greater demand

• Demand curve slopes downwards

• Demand curve assumes , other prices, Income, tastes to be constant.

CHANGE IN DEMAND V/S A CHANGE IN QUANTITY DEMANDED

P

Quantity

25

20

15

10

5

5 10 15 20 25 30

D1D2

10 15 20

The demand curve shifts when income, tastes, the price of related goods, or

expectations change. (i.e.

whenever ceteris paribus is violated)

A change in quantity demanded occurs when you move along the demand curve, it is a result of a change in price of that good alone.

A change in demand (shift in the curve) occurs when something other than the price changes.

Demand for Samsung Galaxy S3

• Priced at Rs 40,000

• Your current income is Rs 50,000 p.a.• How much will you demand at this price?• Now assume your income increased to Rs 12

lakhs p.a.

CHANGE IN DEMAND V/S A CHANGE IN QUANTITY DEMANDED

P

Quantity

25

20

15

10

5

5 10 15 20 25 30

D1D2

10 15 20

The demand curve shifts when income, tastes, the price of related goods, or

expectations change. (i.e.

whenever ceteris paribus is violated)

A change in quantity demanded occurs when you move along the demand curve, it is a result of a change in price of that good alone.

A change in demand (shift in the curve) occurs when something other than the price changes.

•Normal good: A good for which the demand increases as income rises and decreases as income falls.

•Inferior good: A good for which the demand increases as income falls and decreases as income rises.

Variables That Shift Market DemandIncome

Normal and Inferior Goods

• A particular good may be normal for one segment but inferior for the other

• Increase in income:- Normal Good: Shifts the demand curve

outside- Inferior Good: Shifts the demand curve inside

– Substitutes Goods and services that can be used for the same purpose.– Complements Goods and services that are used together.

Variables That Shift Market Demand

Price of related goods

Consumers can be influenced by an advertising campaign for a product.

Tastes

Demand for Samsung Galaxy

• What if Apple slashed the price of 4S model?From Rs 41,000 to Rs 30,000

• What happens to the demand of Samsung Galaxy if the tariff rates of 3G plan increases?

Demographics The characteristics of a population with respect to age, race, and gender.

Population and demographics

Expected Future PricesConsumers choose not only which products to buy but also when to buy them.

Variables That Shift Market Demand

Variables That Shift Market DemandVariables That Shift Market Demand Curves

Variables That Shift Market DemandVariables That Shift Market Demand Curves (continued)

Market Demand

• Market Demand: Total quantity of a good that would be purchased at a particular price, ceteris paribus

Market Demand Curve

• Horizontal summation of demand curves of individual consumers

• Exceptions to the summation rules– Bandwagon Effect

• collective demand causes individual demand– Snob (Veblen) Effect

• conspicuous consumption• a product that is expensive, elite, or in short supply

is more desirable

Market Demand Function

quantity demanded of commodity X

price per unit of commodity X

number of consumers on the market

consumer income

price of related (substitute or complementary) commodity

consumer tastes

QDX =

PX =

N =

I =

PY =

T =

QDX = f(PX, N, I, PY, T)

SUPPLY SIDE OF MARKET

SUPPLY

Supply-The quantity of a product that an individual

or a group will sell at a particular price, ceteris paribus.

Supply of PCs

• Assume the price of PC is Rs 50,000 (pre determined)

• How many PC s would you as HP would be willing to sell?

• Assume that you sell whatever you produce.

SUPPLYSupply-The quantity of a product that an individual

or a group will sell at a particular price, ceteris paribus.

• Depends upon available resources • Depends upon available technology

Supply of PCs**

• What were the reasons for the decline in production of PCs ?

SUPPLY OF PCs

• Japan Earthquake• Price of Microchips• Wages and Incomes• and so on..

Individual Firm’s Supply

quantity supplied of commodity X by an individual firm per time period

price per unit of commodity X

Extraneous factors

price of inputs

Technology

QsX =

PX =

E =

PY =

T =

QsX = f(PX, E, PY, T)

Law of Supply

Law of supply: Ceteris Paribus, when the price of a product rises, the quantity supplied of the product will increase, and visa versa.

Supply Schedule and Curve

• Supply Schedule and Curve: Represent amount of a quantity that will supplied at various prices.

• Sometimes referred to as the “ supply” of a firm.

Supply Schedule and Curve**

Pointers on Supply Schedule• Market supply pertains to a particular time

period. Longer the time period greater supply

• Supply curve slopes upwards

• Supply curve assumes , prices of resources and inputs, Technology to be constant.

CHANGE IN SUPPLY V. A CHANGE IN QUANTITY SUPPLIEDP

Quantity(cans)

4.00

3.50

3.00

2.50

2.00

5 10 15 20 25 30

S1

10 15 20

S2

The supply curve shifts when resource prices change, technology improves, or shocks occur. (i.e. whenever ceteris paribus is violated)

A change in quantity supplied occurs when you move along the supply curve, it is a result of a price change alone.

A change in supply (shift in the curve) occurs when something other than the price changes.

Variables That Shift SupplyVariables That Shift Market Supply Curves

Variables That Shift Market Supply Curves (continued)

Variables That Shift Supply

Putting Demand and Supply Together

Market Coordination

• Check out the following clip from the “Hudsucker Proxy.”

• The clip nicely shows how markets coordinate prices and eliminate excess supply and excess demand.

Hudsucker Graphic

S

D2

Price of

Hula Hoop

Quantity of Hula Hoops

$3.99

$1.79

Surplus of hoops before the craze

Free

D1

Market clearing price

Market Equilibrium

• Market equilibrium is determined at the intersection of the market demand curve and the market supply curve.

• At equilibrium price there is no tendency to change the price.

Shortage

• When the price is below the equilibrium quantity demanded exceeds quantity supplied

• Shortages put upward pressure on the price

60QS QD

Surplus• When the price is above the equilibrium

quantity supplied is greater than the quantity demanded.

• Surplus puts downward pressure on demand

61QD QS

Equilibrium Price

• Only at $1 per pound would there be no tendency for price change.

• At any point in time, observed price may not be the equilibrium price.

• Market forces always push the market price towards equilibrium.

Markets are never in equilibriumbut they always tend to the

equilibrium

63

Which market can be characterized by the following graph?

P

Q

Which market can be characterized by the following graph?

65

P

Q

The Effect of Demand and Supply Shifts on Equilibrium

The Effect of an Increase in Supply on Equilibrium

The Effect of Shifts in Supply on Equilibrium

The Effect of Demand and Supply Shifts on Equilibrium

The Effect of an Increase in Demand on Equilibrium

The Effect of Shifts in Demand on Equilibrium

Price of Personal Computers**

• From 1986- 2006, massive increase in demand for PCs

• For the same period, surge of PC producers and their production.

• Increase in supply more than the demand• What is the effect on the equilibrium price and

demand?

Price of Coffee**

The Effect of Demand and Supply Shifts on Equilibrium

How Shifts in Demand and Supply Affect Equilibrium Price (P) and Quantity (Q)

SUPPLY CURVE UNCHANGED

SUPPLY CURVESHIFTS TO THE RIGHT

SUPPLY CURVE SHIFTS TO THE LEFT

DEMAND CURVE UNCHANGED

Q unchangedP unchanged

Q increasesP decreases

Q P

DEMAND CURVESHIFTS TO THE RIGHT Q

P

Q increasesP increases ordecreases

Q P

DEMAND CURVESHIFTS TO THE LEFT

Q decreasesP decreases

Q increases or decreasesP decreases

Q decreasesP decreases orincreases

The Effect of Demand and Supply Shifts on Equilibrium

How Shifts in Demand and Supply Affect Equilibrium Price (P) and Quantity (Q)

SUPPLY CURVE UNCHANGED

SUPPLY CURVESHIFTS TO THE RIGHT

SUPPLY CURVE SHIFTS TO THE LEFT

DEMAND CURVE UNCHANGED

Q unchangedP unchanged

Q increasesP decreases

Q decreasesP increases

DEMAND CURVESHIFTS TO THE RIGHT Q increases

P increases

Q increasesP increases ordecreases

Q increases or decreases P increases

DEMAND CURVESHIFTS TO THE LEFT

Q decreasesP decreases

Q increases or decreasesP decreases

Q decreasesP decreases orincreases

The Effect of Demand and Supply Shifts on Equilibrium

FIGURE 3-11Shifts in Demand and Supply over Time

The Effect of Shifts in Demand and Supply over Time