Lesson 02

Market Analysis

Ms. HPNI Kumarasinghe

HRD-271-2/Business Economics
Department of Public Administration
Faculty of Management, Uva Wellassa University

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 Learning Outcomes
After successful completion of this lesson, students will
be able to,
 Define Markets
 Define Demand and Classification of Demand
 Understand the Law of Demand
 Identify the determinants of Demand and Demand curve
 Define Supply and Law of supply and identify the supply curve
 Recognize the Market Equilibrium and Disequilibrium
 Identify consumer surplus and producer surplus

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 Market
• Market is a group of buyers and
sellers of a particular good or
service.
• Buyers determine the demand for a
product and sellers determine the
supply of the product.

Competitive market is a market in which there are many buyers and many
sellers in the market so that each has a negligible impact on the market price.

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 Demand
• Demand is the willingness and ability to buy various
quantities at various prices remaining in the market.
• Thus, it is a decision on which wants need to be satisfied.

Three conditions are needed to create Effective demand.*

– Desire to buy
– Willingness to buy
– Ability to pay
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 Determinants of Demand
• Price of the own product (Px)
• Prices of related goods(Po) – (Price of substitute, Price of complements)
• Consumer Income(Y)
• Taste and fashions (T)- due to demographic, cultural and religious
factors
• Climate or weather conditions(C)
• Future expectations(E)
• Size of the population(N)
• Government interventions(Taxes and subsidies)
• Availability of credit ©
• Income distribution (Dis)
• Advertising(A)
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 Demand Function
• Demand function describes the functional relationship between
Quantity demand and its determinants.

• Mathematically Demand for product X can be written as,

Qdx = f ( Px, Pxy, I, T, E, A, N, G)

• Assessing Demand and its determinants is very important for

managerial decision-making. Management has no control over some of
these variables.

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 Demand Curve

A curve illustrating the

inverse relationship between
the price of a product and the
quantity demanded of it, is
the demand curve. It slopes
downward to reflect the Law
of Demand.

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 Law of Demand
• The law of demand explains the relationship between price and
quantity demand when other factors remain in constant.

• According to the law of demand when price increases demand will

decrease. Similarly, when price decreases demand will increase.
Therefore, one can see a negative relationship between price and
quantity demanded when other factors are remaining in constant.

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 Classification of Demand
Direct Demand Vs Indirect Demand
• Direct demand refers to the demand for final product in the
commodity market by households. The purpose of direct demand
is for consumption.
• Indirect demand refers to the demand for factors of production in
the factor market by producers for the purpose of production.
• Both Direct and Indirect Demand are important in Managerial
decision making.*
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 Classification of Demand
Consumer Demand and Market Demand
• Consumer demand refers to the quantity of goods that the
consumer wants to buy at different prices in a given period of
time. Simply it is a single buyer demand for a commodity.

• Market demand refers to the sum of individual demand for a

product at different prices in a given period of time.

• In business economics, much attention is given to market

demand for a firm.
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 Classification of Demand
Consumer Demand and Market Demand
• Aggregation or horizontal summation of individual demands
form the market demand.

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 Changes in Quantity Demanded
A change in quantity
demanded is a movement
from one point to another
point on a fixed demand
curve.

The cause of such change is

an increase or decrease in
the price of the product
under consideration.

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 Changes in Demand
A change in demand is a
shift of the demand curve
to the right (an increase
in demand), or to the left
(a decrease in demand).

Shifts are caused by a

change in one or more of
the determinants of
demand.

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 Supply
• Supply refers to the quantity of goods that either existing or
potential suppliers would want to produce for the market at a
given price during a specific period.

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 Determinants of Supply
• Price of the own product
• Price of related goods
• Price of factor inputs
• Technology
• Time span
• Goals of the producer
• Climate and weather conditions
• Government policy
• Social and psychological factors

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 Law of Supply
• Law of supply explains the relationship between the price and
the quantity supply.
• According to the law of supply when price increases supply
will increase. Similarly, when the price decreases supply will
decrease.
• Therefore, one can see a positive relationship between price
and the quantity supply. Hence, left to right upwards sloping
supply curve can be seen.
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 Supply Curve
A curve illustrating the
positive, or direct relationship
between the price of a product
and the quantity supplied of
it, is the supply curve. It
slopes upward to reflect the
Law of supply.

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 Change in quantity supplied
A change in quantity supplied
is a movement from one point
to another point on a fixed
supply curve.

The cause of such a movement

is a change in the price of the
product being considered.

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 Change in Supply

A change in supply means a

change in the schedule of
supply and a shift of the
supply curve.

Shifts are cause by a change

in one or more of the
determinants of supply.

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 Market Equilibrium
• Market Equilibrium occurs in a market, when all buyers
and sellers are satisfied with their respective quantities at
the market price.

• In economics, at the equilibrium point, three conditions

should be satisfied.
1. Demand = Supply - the demand should equal to supply
2. Demand curve and supply curve should intersect each other.
3. Excess Demand (ED) = Excess Supply (ES) = 0

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 Market Equilibrium

• Only in equilibrium is,

quantity supplied equal to
the quantity demanded.

• At any price level other than

P0, the wishes of buyers and
sellers do not coincide.

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 Market Equilibrium

• The equilibrium price, or market-clearing price, is the

price at which the intentions of buyers and sellers match.

• The equilibrium quantity is the quantity demanded and

quantity supplied that occurs at the equilibrium price
in a competitive market.

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 Market Disequilibria
• Excess demand (Ed), or
shortage is the condition that
exists when the quantity
demanded exceeds quantity
supplied at the current price.

• When the quantity demanded exceeds

the quantity supplied, the price tends to
rise until equilibrium is restored.

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 Market Disequilibria
• Excess supply (ES), or
surplus, is the condition that
exists when the quantity
supplied exceeds the quantity
demanded at the current
price.
• When the quantity supplied exceeds
the quantity demanded, the price
tends to fall until equilibrium is
restored.
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 Increases in Demand and Supply

• Higher demand leads to • Higher supply leads to lower

higher equilibrium prices and equilibrium prices and higher
higher equilibrium quantity. equilibrium quantity.
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 Consumer Surplus and Producer Surplus

Consumer Surplus is the

difference between the
consumer’s willingness to
pay and the price.

Producer Surplus is the

difference between the
price and the producer’s
willingness to provide.

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 Consumer Surplus and Producer Surplus

Consumer Surplus is the

difference between the
consumer’s willingness to
pay and the price.

Producer Surplus is the

difference between the
price and the producer’s
willingness to provide.

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 THANK YOU!

4/25/2024 5-28 HRD-271-2/Business Economics