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Demand analysis ppt @ mbabecdoms
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Demand analysis
Firms sell goods/services to buyers Consumers (individuals) : utility Firms : make profits
Willingness to pay: maximum price buyer will pay for a good Point of indifference between buying and not
buying Lower price always preferred by buyer
Willingness to pay is determined by Buyer’s tastes or needs Income and wealth
Normal/inferior goods Cyclical/acyclical demand
Substitutes Complementary goods
Demand curve for an individual buyer Willingness to pay for
different quantities of the good Or, quantity demanded at each
price Usually downward sloping:
lower willingness to pay for additional units Lower utility of consumption
for consumers Lower productivity of
resources for firms
Shifts in demand curve
Market demand Sum of individual demand curves Aggregate quantity demanded at each price Arrays individual buyers in order of willingness to pay Identical goods? Product differentiation?
Market segments / Price discrimination Different segments willing to pay different prices Consumer surplus Can firms exploit this?
Feasible? Fair?
Price sensitivity of demand Slope of market demand curve Flat demand curve: very price sensitive: Elastic
Goods with good substitutes Luxury items ?
Steep demand curve: less sensitive: Inelastic Necessities
Time-frame: easier to find substitutes over long run
Demand curves Accept as given? Seek to modify?
Supply analysis
Supply curve How much the firm will sell at each price Assumption: price-taking firm
Time-frame of supply decision Long run: compete in the market at all? Short run: how much to produce & sell?
Short run supply Based on costs
Fixed costs: incurred regardless of volume ‘headquarter’ costs, depreciation, rent, labor….
Variable or marginal costs: cost per additional unit produced Raw materials, electricity, labor….
In the short run, fixed costs are inevitable Should not affect short run supply decisions (?)
Marginal costs Cash costs: out-of-
pocket Opportunity costs:
foregone profits
Marginal cost curve : Short run supply curve
Long run supply: entry & exit Recover both fixed and variable costs Fixed costs
Out-of-pocket costs Opportunity costs: return on capital
Shifts in supply curve Input costs Technology
Market supply curve Sum of individual supply curves Usually slopes upward
Less efficient firms enter market when price is high Arrays firms from most efficient to least
Market equilibrium
Interesection of market demand and supply curves
Disequilibrium will cause price to adjust and yield new equilibrium
Real world: series of small disequilibriums, series of price adjustments
Currency markets: rapid, continuous adjustments
Supply elasticity Flat supply curve: very sensitive to price: Elastic Steep supply curve: less sensitive: Inelastic
Varies over the range of output Elastic when spare capacity is available Inelastic when capacity constrained
Profit calculation based on equilibrium price
Average and marginal costs
Marginal cost determines supply volume
Average costs at that volume
Market adjustment
Shifts in demand and supply curves Increase: shift to the right Decrease: shift to the left
Impact on quantity and price
Inelastic curves: adjustment largely through price Elastic curves: adjustment largely through quantity Short run versus long run
Perfect competition
Three assumptions:1. Identical products
2. Many small price-taking buyers and sellers
3. Full information
Excess profits more firms enter increased supply lower price zero excess profits
Three more conditions:
1. Identical sellers
2. Free entry
3. Free exit
Zero excess profits Long run
profitability?
Departures from perfect competition
Most markets have far from perfect competition Exceptions: commodities
Secret of long run profitability: deviations from perfect competition
Few sellers or buyers Extreme case: monopoly or monopsony Oligopoly
Collusion Cartels: incentives to cheat the cartel
Societal impact: anti-trust regulation
Entry and exit barriers First mover advantage
Headstart on learning curve Economies of scale Reputation and branding
High exit costs May lead to firms accepting sustained losses
Product differentiation Special attributes: Real or imaginary
Differences among sellers Least cost producer Innovation
Imperfect information Search costs protect
existing relations and discourage competition
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