Basic Elements of

Demand and Supply

Market Demand
What is MARKET?
A market is a mechanism
through which buyers
(demanders) and sellers
(suppliers) communicate
to trade goods and
services.
What is DEMAND?
 Demand is a schedule that
shows various amounts of a
good or service a buyer is
willing and able to
purchase at each possible
price during a particular
period.
Factors affecting the amount
of product demanded
Price of the product
Prices of related products
Consumer income
Expectations of future price
changes
Tastes
Number of Consumers
Individual Demand
vs.
Market Demand
Individual Demand

Demand of a
particular buyer
 Market Demand

Sum of individual
demands of all
buyers in the market
THE DEMAND CURVE AND THE
LAW OF DEMAND
The Demand Schedule and
Demand Curve for CDs
 Demand Curve

A market demand curve is a

graphical portrayal of the
data comprised by a
market demand schedule
 Law of Demand

Price and quantity demanded

are inversely or negatively
related, assuming that other
factors affecting the quantity
demanded remain the same.


PRICE

DEMAND

PRICE
Law of Demand

DEMAND
Change in quantity
demanded
What explains the
Law of Demand?
1. Substitution effect
2. Income effect
3. Law of Diminishing
Marginal Utility
 Substitution Effect
When the price of the product falls,
other determinants of demand
remaining the same, its price falls
relative to the prices of all other
like goods. Consumers have an
incentive to substitute the cheaper
good which are now relatively
more expensive.
Market Supply
 The market supply
is the total of all
individual producer
supplies.
 MARKET SUPPLY FUNCTION

Market supply function is the

algebraic expression of the market
supply schedule. Market supply
schedule can be defined as the
tabular statement which represents
various amounts of a commodity
that the entire producers in the
whole economy are willing to
supply at optimal price, at any
given time.
Market supply schedule

Individual supply per day

Price of
the Market
product X supply
per unit A B C per day
(in Rs.)

100 750 500 450 1700

200 800 650 500 1950

300 900 750 650 2300

400 1000 900 700 2600

 MARKET SUPPLY
CURVE
 Market
Equilibrium
 Market Equilibrium

The operation of the market depends o

n the interaction between buyers and s
ellers.

An equilibrium is the condition that exists

when quantity supplied and quantity de
manded are equal.

At equilibrium, there is no tendency for t

he market price to change.
Market Equilibrium

Only in equilibrium i
s quantity supplied
equal to quantity d
emanded.
At any price level
other than P0, the
wishes of buyers a
nd sellers do not c
oincide.
Market Disequilibria

Excess demand, or shor

tage, is the condition th
at exists when quantity
demanded exceeds q
uantity supplied at the
current price.
When quantity deman
ded exceeds quantity s
upplied, price tends to
rise until equilibrium is re
stored.
Market Disequilibria

Excess supply, or surplu

s, is the condition that e
xists when quantity sup
plied exceeds quantity
demanded at the curr
ent price.
When quantity supplied
exceeds quantity dem
anded, price tends to f
all until equilibrium is res
tored.
Consumer
Behavior
 Consumer Behavior

The behavior that consumers displa

y in searching for, purchasing, usin
g, evaluating, and disposing of pro
ducts and services that they expec
t will satisfy their needs.
 Personal Consumer

The individual who buys goods an

d services for his or her own use, f
or household use, for the use of a
family member, or for a friend.
 Types of Decision Roles

1) The Initiator - the person who proposes a brand

(or product) for consideration;
2) The Influencer- someone who recommends a
given brand;
3) The Decider- the person who makes the ultimate
purchase decision;
4) The Purchaser - the one who orders or physically
buys it;
5) The User - the person who uses or consumes the
product.
 Consumers become aware of a
problem in a variety of ways
including:
1. Out-of-Stock/ Natural Depletion: When a
consumer needs to replenish stocks of a
consumable item e.g. ran out of milk or bread
2. Regular purchase: When a consumer purchases
a product on a regular basis e.g. newspaper,
magazine
3. Dissatisfaction: When a consumer is not satisfied
with the current product or service
4. New Needs or Wants: Lifestyle changes may
trigger the identification of new needs.
 e.g. the arrival of a baby may prompt the
purchase of a cot, stroller and car-seat for baby
5. Related products: The purchase of one product
may trigger the need for accessories, spare
parts or complementary goods and services.
e.g. the purchase of a printer leads to the
need for ink cartridges
6. Marketer-induced problem recognition: When
marketing activity persuades consumers of a
problem.
7. New Products or Categories: When consumers
become aware of new, innovative products
that offer a superior means of fulfilling a need.
 e.g. need for plethora of products such
as a new mouse or printer.
 In order to understand consumer behavior, it
is important to investigate factors that
motivate consumers to take a particular
course of action.
One approach, to understand motives comes
from Abraham Maslow, The Hierarchy of
Needs (based on five levels of needs and
organized accordingly to the level of
importance)
Maslow's five needs are:
1. Physiological - basic levels of needs such as
food, water and sleep
2. Safety- the need for physical safety, shelter
and security
3. Belonging- the need for love,
friendship and also a desire for group
acceptance
4. Esteem- The need for status,
recognition and self-respect
5. Self-actualization The desire for self-
fulfillment (e.g. personal growth, artistic
expression)
1-40
 External Influences on Purchase
Decision
1. Culture - the broadest and most abstract of
the external factors.
2. Subcultures - based on age, geographic,
religious, racial, and ethnic differences.
3. Social Class - refers to relatively homogenous
divisions in a society, typically based on socio-
economic variables such as educational
attainment, income and occupation.
4. Reference Groups - group that is used for
individuals guidance in order to assist with
their knowledge and attitudes
 Types of Reference Groups

1. Aspirational groups - refer to a group to which

an individual does not currently belong, but
possibly aspires to become a member because
the group possesses characteristics which are
admired.
2. Associative Reference Groups - refers to a
group or groups to which an individual belongs,
such as friends, family and work groups that can
exert a positive influence on consumers.
3. Disassociative Reference Groups - a group
which has a negative image; individuals may
disapprove of the disassociative group's values,
attitudes or behaviours and may seek to
distance themselves from this group.
4. Opinion Leaders can exert considerable
social influence because of their product
knowledge, expertise and credibility.
 Consumer Decision Styles

1. Quality conscious/Perfectionist: a
consumers search for the very best quality in
products; quality conscious consumers tend to
shop systematically making more comparisons
and shopping around.
2. Brand-conscious: buy expensive, well-known
brands or designer labels.
who score high on this dimension tend to believe
that the higher prices are an indicator of quality
and exhibit a preference for department stores or
top-tier retail outlets.
3. Recreation-conscious/ Hedonistic: a consumers
engagement in the purchase process.
who score high on this dimension regard
shopping itself as a form of enjoyment.
4. Price-conscious: a consumer who exhibits price-
and-value consciousness.
 who score high on this dimension carefully shop
around seeking lower prices, sales or discounts
and are motivated by obtaining the best value
for money.
5. Novelty/fashion-conscious: a consumers
tendency to seek out new products or new
experiences for the sake of excitement
keep up-to-date with fashions and trends,
variety-seeking is associated with this dimension.
6. Impulsive: a consumer who is somewhat
careless in making purchase decisions, buys on the
spur of the moment and is not overly concerned
with expenditure levels or obtaining value.
 who score high on impulsive dimensions tend not
to be engaged with the object at either a
cognitive or emotional level.
7. Confused (by over-choice): a consumers
confusion caused by too many product choices,
too many stores or an overload of product
information; tend to experience information
overload.
8. Habitual / brand loyal: a consumers tendency to
follow a routine purchase pattern on each
purchase occasion, consumers have favorite
brands or stores and have formed habits in
choosing, the purchase decision does not involve
much evaluation or shopping around.
The Concept of
Elasticity
Demand
Elasticity
What is Elasticity?
 What is Elasticity?
The responsiveness of a dependent
economic variable to changes in
influencing factors.
 What is Elasticity?
The responsiveness of a dependent
economic variable to changes in
influencing factors.
Measurements of how responsive an
econimic variable is to a change in
another.
 What is Elasticity?
The responsiveness of a dependent
economic variable to changes in
influencing factors.
Measurements of how responsive an
economic variable is to a change in
another.
Refers to the degree of responsiveness
in supply or demand in relation to
changes in price.
WHAT IS DEMAND ELASTICITY?
 Demand Elasticity
Refers to how sensetive the demand
for a good is to change in other
economic variables.
The responsiveness of quantity
demanded to a change in any one
of econonic factors such as the price
of a commodity, the money income,
the prices of related goods, the
tastes of the people, etc.,
 Types of Demand Elasticity

1. PriceElasticity of Demand
2.Income Elasticity of
Demand
3. Cross Elasticity of Demand
PRICE ELASTICITY OF DEMAND
The degree of responsiveness of
quantity demanded of a good to a
change in price.
Defined as:
The ratio of proportionate change
in the quantity demanded of a
good caused by a given
proportionate change in price.
 CONCEPT OF PRICE
ELASTICITY OF DEMAND
UNITARY DEMAND
INCOME ELASTICITY OF DEMAND

The degree of change on

responsiveness of quantity demanded
of a good to a change in the income
of a consumer.
Defined as:
The ratio of percentage change in
the quantity of a good purchased
per unit of time to a percentage
change in the income of a consumer.
CROSS ELASTICITY OF DEMAND

Measuring the responsiveness of

quantity demanded of a good to
changes in the price of related goods.
Defined as:
The percentage change in the
demand of one good as on result of
the percentage change in the price
of another good.
 Types of Cross
Elasticity of Demand
SUBSTITUTE GOODS
COMPLEMENTARY GOODS
UNRELATED GOODS
 Supply
Elasticity
 SUPPLY ELASTICITY
Responsiveness of the quantity
supplied of a good to a change in
its price.

Percentage change in quantity supplied

ES =
Percentage change in price
The supply elasticity is the proportional
change in quantity demanded relative to
the proportional change in price.

%Q S
es
%P
TYPES OF SUPPLY
ELASTICITY
TYPES OF SUPPLY ELASTICITY

ELASTIC SUPPLY means that

quantity changes by a greater
percentage than the
percentage change in price.
TYPES OF SUPPLY ELASTICITY

INELASTIC SUPPLY means that

quantity doesn't change much
with a change in price.
TYPES OF SUPPLY ELASTICITY

PERFECT INELASTIC SUPPLY: If as a

result of a change in price, the
quantity supplied of a good remains
unchanged, we say that the
elasticity of supply is zero.
TYPES OF SUPPLY ELASTICITY

RELATIVELY LESS-ELASTIC SUPPLY: If as a

result of a change in the price of a good
its supply changes less than
proportionately, we say that elasticity of
supply is less than one.
TYPES OF SUPPLY ELASTICITY

RELATIVELY GREATER ELASTIC SUPPLY:

If elasticity of supply is greater than
one when the quantity spply of a
good changes substaintially in
response to a small change in price
of the good
TYPES OF SUPPLY ELASTICITY

UNIT ELASTIC SUPPLY: If the relative

change in the quantity supplied is
exactly equal to the relative change
in price, the supply is said to be
unitary elastic.
TYPES OF SUPPLY ELASTICITY

PERFECT ELASTIC SUPPLY: The supply

elasticity is infinite when nothing is
supplied at a lower prce but a small
increase in price causes supply to rise
from zero to an indefinitely large amount
indicating that producers will supply any
quantity demanded at that price.
Economic Models and
Flow of products
The Economic
Models
 Economic modeling is at the
heart of economic theory. Modeling
provides a logical, abstract template
to help organize the analyst's
thoughts. The model helps the
economist logically isolate and sort
out complicated chains of cause and
effect and influence between the
numerous interacting elements in an
economy.
 Types of Models

Visual Models
Mathematical models
Empirical models
Simulation models
 Visual Models
Visual models are simply pictures
of an abstract economy; graphs
with lines and curves that tell an
economic story. Visual device to
present a very general
economic concept.
 Mathematical Models
The most formal and abstract of the
economic models are the purely
mathematical models. These are systems
of simultaneous equations with an equal
or greater number of economic
variables. Some of these models can be
quite large. Even the smallest will have
five or six equations and as many
unknown variables. The manipulation
and use of these models require a good
knowledge of algebra or calculus.
 Empirical Models
Empirical models are mathematical
models designed to be used with data.
The fundamental model is
mathematical, exactly as described
above. With an empirical model,
however, data is gathered for the
variables, and using accepted
statistical techniques, the data are
used to provide estimates of the
model's values.
 Simulation Models
Simulation models, which must be used
with computers, embody the very best
features of mathematical models
without requiring that the user be
proficient in mathematics. The models
are fundamentally mathematical (the
equations of the model are
programmed in a programming
language like Pascal or C++) but the
mathematical complexity is transparent
to the user
 The computerized simulation model can
show the interaction of numerous variables all
at once, including hidden feedback and
secondary effects that are not so apparent in
purely mathematical or visual models. With
such simulations, the careful user, especially if
guided by a good text or instructor, can
reason through the complicated chains of
influence without necessarily understanding
the underlying mathematics. Such models are
therefore quite useful in classroom instruction.
 Comparative Statics Models
Most models used in economics
and virtually all used in economics
textbooks are comparative statics
models. These models try to show
what happens over time (or as time
passes), but time itself is not
represented or embodied directly in
the model.
Economic Strategies
Economic strategy may refer to:

Marketing strategy
Strategic management
Economic policy
Industrial policy
Marketing Strategy
 Marketing Strategy
has the fundamental goal of
increasing sales and achieving
a sustainable competitive
advantage
 Marketing Strategy
It includes all basic, short-term, and
long-term activities in the field of
marketing that deal with the analysis
of the strategic initial situation of a
company and the formulation,
evaluation and selection of market-
oriented strategies and therefore
contribute to the goals of the
company and its marketing
objectives.
 Developing a
Marketing Strategy
 Customized Target Strategy
The requirements of
individual customer markets
are unique, and their
purchases sufficient to make
viable the design of a new
marketing mix for each
customer.
Customized Target Strategy

If a company adopts this

type of market strategy,
they design a separate
marketing mix for each
customer.
 Differentiated Strategy

Specific marketing mixes can

be developed to appeal to
all/some of the segments
when market segmentation
reveals several potential
targets.
Diversity of
Strategies
1.Strategies based on Market
Dominance
2.Entrant Strategies
Strategies based on Market Dominance
In this scheme, firms are classified based
on their market share or dominance of
an industry. Typically there are four types
of market dominance strategies:
Leader
Challenger
Follower
Nicher
 Entrant Strategies
According to Lieberman and
Montgomery, every entrant into a
market whether it is new or not
is classified under any of the ff:
a. Market Pioneer
b. Close Follower
c. Late follower
Market Pioneers

are known to often open a

new market to consumers
based off a major innovation
Market Pioneers
Note that while market pioneers
may have the highest probability
of engaging in product
development and lower switching
costs, to have the first-mover
advantage, it can be more
expensive due to product
innovation being more costly than
product imitation.
Close Followers
If there is an upside potential
and the ability to have a stable
market share, many businesses
would start to follow in the
footsteps of these pioneers. They
are commonly known as close
followers.
Close Followers
Challengers to the Market
Pioneers and the Late Followers
because early followers are
more than likely to invest a
significant amount in Product
Research and Development
than later entrants.
Late Followers

Those who follow after the

Close Followers
Late Followers

It also has perks

They have the advantage
of learning from their early
competitors and improving
the benefits or reducing the
total costs
Late Followers

It also has perks

Late Followers have the
advantage of catching the
shifts in customer needs and
wants towards the products.
Strategic Models
 Strategic Models

Marketing businesses often

use strategic models and
tools to analyze marketing
decisions.
 Strategic Models
Three main models that can be
applied and used within a business
to receive better results and reach
business goals:
a. 3Cs
b. The Ansoff Matrix
c. Marketing Mix Model
3Cs
Developed by Japanese
strategy guru Kenichi Ohmae
Stands for Customer,
Corporation and Competitor
Those are the key factors
which lead to a sustainable
competitive market
3Cs

Each factor is key to the

success of this strategy
3Cs
Corporation factor mainly
focuses on maximizing the
strengths of the business from
which the business can
influence the relevant areas of
the competition to achieve
success within the industry.
3Cs
Customers are the basis to any
business. Without customers you
have no business. The most
important factors of customers
are the wants, needs and
requirements that the business
needs to fulfill in order to attract
buyers.
3Cs
The competition can be
looked at in various different
ways such as purchasing,
design, image and
maintenance. The more
unique steps a business takes
the less competition a business
will face in that field.
The Ansoff Matrix
It was invented by H. Igor Ansoff
It focuses on four main areas, which
are Market penetration, Product
development, Market development
and Product/ Market Diversification.
These are then split into a further two
areas known as the New and
Present
The Ansoff Matrix
From this strategy, businesses are
able to determine the product and
market growth. This is done by
focusing on whether the market is a
new market or an already existing
market, and whether the products
are new or already existing.
The Ansoff Matrix
Market penetration covers
products that are already on
the market and are familiar to
the consumers, this creates a
low risk as the product is already
on the established market.
The Ansoff Matrix
Product development is the
introduction of a new product
into an existing market. This can
include modifications to an
already existing market which
can create a product that has
more appeal in the market.
The Ansoff Matrix
Market development, also known as
market extension, is when an
already existing product is
introduced to a new market in order
to identify and build a new clientele
base. This can include new
geographical markets, new
distribution channels, and different
pricing policies.
The Ansoff Matrix
Market Diversification is the
riskiest area for a business.
This is where a new product is
sold to a new market at the
same time.
Marketing Mix Models (4Ps)

The 4Ps also known as Price,

Product, Place and
Promotion is a strategy that
originated from the single P
meaning Price.
Marketing Mix Models (4Ps)

It was designed as an easy

way to turn marketing
planning into practice. This
strategy is used to find and
meet the consumers needs
and can be used for long
term or short term purposes.
Marketing Mix Models (4Ps)
The price policies and procedures
relate to the price level of the
product and the specific prices that
need to be applied whether it is
one price or a varying price. This
also includes price maintenance
and promotional deals, specials,
credit and repayment terms.
 Marketing Mix Models (4Ps)
The product is a physical object that is
put on a market to be sold with a set
of benefits that will meet customer
needs. This includes policies and
procedures relating to the product
lines including the quality and design
of the product. As well as product
research and development for any
new products being introduced.
Marketing Mix Models (4Ps)
Place includes distribution channels,
market coverage, product inventory,
transportation and distribution sites.
This also includes the degree of
selectivity among the wholesalers
and retailers and the channels
between the factory and the
consumer.
Marketing Mix Models (4Ps)
The promotion is all advertising,
personal selling, promotions and
direct marketing as well as any other
promotional work the business does
for the product. This includes the
selection of trademarks and
branding of the product whether its
a family brand, individual brand or
sale under a private label