Supply Demand Analysis: Related Goods

Transcription

1 SRING 0 Supply Demand Analysis: Related Goods Depending on the relationship that exists between two goods, they can be identified as: () Substitutes () Complements () Derived Demand (4) Jointly Supplied Based on the relationship between two goods, what happens in the market of one good may affect what happens in the market of the related good. This is what is shown in this lecture note. Substitute Goods When two goods serve similar needs they are said to be substitutes of each other. Let us take the case of Nike and Adidas sneakers which are close substitutes. Suppose the price of Nike shoes increases, maybe because cost of production for Nike has increased. This has an effect not only on the market of Nike shoes, but also on the market of Adidas shoes.. Initially the market of Adidas shoes is at an equilibrium at E* where rice = and uantity Demanded equals to uantity Supplied at.. First, when the price of Nike shoes increases, the uantity Demanded for Nike shoes decreases from to as shown in Figure... eople who were previously buying Nike, switch to buying Adidas sneakers, because Adidas sneakers serve the same purpose as Nike sneakers. A. Thus more of Adidas shoes are buying at the existing price,. B. i.e., the Demand for Adidas increases C. which leads to a rightward shift of the Demand Curve from to. 4. This leads to a rise in rice of Adidas from to 4. by in Fig.. 5. With a rise in price, producers have the incentive to increase production and thus UANTITY SULIED increases from to 4. by in Fig.. Fig. Nike Shoes S Fig.. Fig. Adidas Shoes 4 D Recall when cost of production goes up, per unit profit decreases and producers are willing and able to produce less at existing rice- thus Supply decreases and the Supply Curve shifts inwards for Nike Sneakers

2 SRING 0 Complement Goods When two goods have to be consumed together or jointly, the two goods are said to be complements of each other. Examples include DVD and DVD players, Cell phone and Cell phone chargers, Laptops and Antivirus programs etc. Let us take the case of washing machines and jet powder which are jointly used and thus complements. Suppose the price of washing machines decreases, maybe because cost of production for washing machines has gone down. This has an effect not only on the market of washing machines, but also on the market of Jet owder.. Initially the market of Jet owder is at an equilibrium at E* where rice = and uantity Demanded equals to uantity Supplied at.. First, when the price of washing machines decreases, the uantity Demanded of washing machines increases from to as shown in Figure... When more washing machines are being bought, there is a greater demand for Jet powders ( since people need jet powder to wash clothes ). A. Thus more of Jet owder is bought at the existing price,. B. i.e., the Demand for Jet owder increases C. which leads to a rightward shift of the Demand Curve from to. 4. This leads to a rise in rice of Jet powder from to With a rise in price, producers have the incentive to increase production and thus UANTITY SULIED of Jet owder increases from to 4. by in Fig. by in Fig.. Fig.. Fig. Washing Machine Fig. Jet owder S 4 E* D Recall when cost of production goes down, per unit profit increases and producers are willing and able to produce more, and thus Supply increases at existing price level i.e the Supply Curve shifts out for washing machines

3 SRING 0 Derived Demand There are a lot of goods that are demanded for the production of other goods. Examples include steel for making cars, electronic chips for making cell phones, wood to make tables etc. So each of these goods : steel, electronic chips and wood are demanded because there is a demand for cars, cell phones and tables respectively. Thus their demand is derived from the demand of cars, cell phones and tables respectively. Thus these goods are said to have derived demand. Let us take the case of cars and steel. We want to see what happens in the market of steel ( which is an input for cars) when the demand for cars increases.. Initially the market of car and steel are at equilibrium at E and E respectively.. Then, suppose the demand for cars increases. This leads to an outward shift of the Demand Curve of cars from D to D. As the price rises from to, car producers increase production and thus UANTITY SULIED increases from to.. When there is increased production of cars, A. it automatically means that automakers are purchasing more steel at the existing price,. B. Thus the Demand for steel increases C. and hence Demand Curve of steel shifts rightwards from to. 4. This leads to a rise in price of steel from to With a rise in price, producers have the incentive to increase production and thus UANTITY SULIED of steel increases from to 4. As shown in Fig.. by in Fig. by in Fig.. Fig.. This may be because of many reasons such as aggressive advertisement by car producers, reduced availability of buses and trains ( as is the case of the U.S.), change in taste and fashion so that it is deemed as fashionable to ride in cars instead of rickshaws and so on.

4 SRING 0 Fig. Car Fig. Steel E 4 E D D Joint Supply ften to provide one good, another good automatically gets produced. For instance, when a farmer produces beef he also ends up producing leather. Similarly, when wool is produced, mutton is automatically produced; when petrol is produced, so is octane. So, goods which display this relationship are jointly supplied i.e. when one is supplied, the supply of the other good is automatic. Let us take the case of Beef and Leather. Beef and Leather are jointly supplied, because when a cow is slaughtered for its meat, you also get the leather as a by-product. We want to see what happens in the market of leather when the demand for beef increases.. Initially the market of beef and leather are at equilibrium at E and E respectively.. Then, suppose the demand for beef increases. This leads to an outward shift of the Demand Curve of Beef from D to D. As the price increases from to, farmers are enticed to produce more beef and thus the uantity Supplied of beef increases.. When there is increased production of beef, A. it automatically means that more leather is produced at the existing price,. B. Thus the Supply of Leather increases C. and thus the Supply Curve of leather shifts rightwards from tos This leads to a fall in rice of leather from to With a fall in price, consumers have the incentive to buy more leather and thus UANTITY DEMANDED of leather increases from to 4. in Fig.4. by in Fig 4. by in Fig.4. Fig.4.

5 SRING 0 Fig 4. Beef Fig 4. Leather S 4 E E 4 D D THE END