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Market Analysis
• It is a documented investigation of a Market
that is used to inform a firm's planning
activities particularly around decision of:
• inventory,
• facility expansion, purchases of capital
equipment, promotional activities, and many
other aspects of a company.
• Not all managers are asked to conduct a
market analysis, but all managers must make
decisions using market analysis data and
understand how the data was derived.
• So all managers need a reasonable
understanding of the tools most used for
making sales forecasts and analyzing markets.
• A large number of market analysis techniques
are related to sales forecasting, others are
more general techniques for analyzing
• The literature defines several areas in which
market analysis is important.
• These include: sales forecasting, market
research, and marketing strategy.
• Sales forecasting and market analysis are
complementary skills that any marketing
manager should possess
Market Equilibrium
• Situation where the supply of an item is
exactly equal to its demand.
• Since neither there is surplus nor shortage in
the market, there is no innate tendency for
the price of the item to change.
• Markets exist in all types of goods and
services, and as economists, we are interested
in how they work and what causes them to
• The market price is determined by the
interaction of market supply (producers) and
market demand (consumers).
• The point at which the quantity demanded
equals the quantity supplied is the equilibrium
• This point states the price of the good (P1)
and the market quantity (Q1).
• Assuming that neither curve shifts, then market
forces will maintain the equilibrium price.
• For instance, assume that the price rises above
P1, then the firms will react by wishing to
supply more (the price is higher, therefore, the
revenue will be higher), at the same time
consumers will demand less.
• The outcome is that there is excess supply.
• In other words, supply is greater than demand.
• This situation results in producers having
unsold stocks.
• In this case, producers will wish to sell stocks
as they cost money to produce and maintain.
• Therefore, to sell them they will reduce the
price of the good (contraction in supply).
• The lower price will encourages more demand
for the good
The new equilibrium price will be P2.
• (extension in demand). This process continues
until the supply and demand are again in
• If the position of either the demand and / or
supply curve shifts, then the equilibrium price
and quantity will change. For instance, if the
good becomes more fashionable, then the
demand curve will shift from D1 to D2.
Market Equilibrium Price
• In this note we bring the forces of supply and
demand together to consider the
determination of equilibrium prices.
• The Concept of Market Equilibrium
• Changes in the conditions of demand or
supply will shift the demand or supply
This will cause changes in the
equilibrium price and quantity in the market.
Changes in Market Demand and Equilibrium Price
• The demand curve may shift to the right (increase) for
several reasons:
• A rise in the price of a substitute or a fall in the price of
a complement
• An increase in consumers’ income or their wealth
• Changing consumer tastes and preferences in favour of
the product
• A fall in interest rates (i.e. borrowing rates on bank
loans or mortgage interest rates)
• A general rise in consumer confidence and optimism
• The outward shift in the demand curve causes
a movement (expansion) along the supply
curve and a rise in the equilibrium price and
quantity. Firms in the market will sell more at
a higher price and therefore receive more in
total revenue.
• The reverse effects will occur when there is an
inward shift of demand. A shift in the demand
curve does not cause a shift in the supply
Demand and supply factors are
assumed to be independent of each other
although some economists claim this
assumption is no longer valid!
Changes in Market Supply and Equilibrium Price
The supply curve may shift outwards if there is
• A fall in the costs of production (e.g. a fall in labour or
raw material costs)
• A government subsidy to producers that reduces their
costs for each unit supplied
• Favourable climatic conditions causing higher than
expected yields for agricultural commodities
• A fall in the price of a substitute in production
• An improvement in production technology leading to
higher productivity and efficiency in the production
process and lower costs for businesses
• The entry of new suppliers (firms) into the market
which leads to an increase in total market supply
available to consumers
• The outward shift of the supply curve
increases the supply available in the market at
each price and with a given demand curve,
there is a fall in the market equilibrium
price from P1 to P3 and a rise in the quantity
of output bought and sold from Q1 to Q3.
• The shift in supply causes an expansion along
the demand curve.
• Important note for the exams:
• A shift in the supply curve does not cause a
shift in the demand curve.
• Instead we move along (up or down) the
demand curve to the new equilibrium
• A fall in supply might also be caused by the
exit of firms from an industry perhaps because
they are not making a sufficiently high rate of
return by operating in a particular market.
• The equilibrium price and quantity in a market
will change when there shifts in both market
supply and demand.
• Two examples of this are shown in the next
• In the left-hand diagram above, we see an
inward shift of supply (caused perhaps by
rising costs or a decision by producers to cut
back on output at each price level) together
with a fall (inward shift) in demand (perhaps
the result of a decline in consumer confidence
and incomes).
• Both factors lead to a fall in quantity traded,
but the rise in costs forces up the market
• The second example on the right shows a rise
in demand from D1 to D3 but a much bigger
increase in supply from S1 to S2.
• The net result is a fall in equilibrium price
(from P1 to P3) and an increase in the
equilibrium quantity traded in the market.
The importance of price elasticity of demand
• The price elasticity of demand will influence
the effects of shifts in supply on the
equilibrium price and quantity in a market.
This is illustrated in the next two diagrams.
• In the left hand diagram below we have drawn
a highly elastic demand curve.
• We see an outward shift of supply – which
leads to a large rise in equilibrium price and
quantity and only a relatively small change in
the market price.
• In the right hand diagram, a similar increase in
supply is drawn together with an inelastic
demand curve.
• Here the effect is more on the price.
• There is a sharp fall in the price and only a
relatively small expansion in the equilibrium
Economic surplus(consumer Surplus and Producer
• Consumer surplus is a measure of the welfare that
people gain from the consumption of goods and
services, or a measure of the benefits they derive
from the exchange of goods.
• Consumer surplus is the difference between the
total amount that consumers are willing and able
to pay for a good or service (indicated by the
demand curve) and the total amount that they
actually do pay (i.e. the market price for the
• The level of consumer surplus is shown by the
area under the demand curve and above the
ruling market price as illustrated in the
diagram below:
Consumer surplus and price elasticity of demand
• When the demand for a good or service is
perfectly elastic, consumer surplus is zero
because the price that people pay matches
precisely the price they are willing to pay.
• This is most likely to happen in highly
competitive markets where each individual
firm is assumed to be a ‘price taker’ in their
chosen market and must sell as much as it can
at the ruling market price.
• In contrast, when demand is perfectly
inelastic, consumer surplus is infinite.
• Demand is totally invariant to a price change.
• Whatever the price, the quantity demanded
remains the same.
• Are there any examples of products that have
such a low price elasticity of demand?
• The majority of demand curves are downward
• When demand is inelastic, there is a greater
potential consumer surplus because there are
some buyers willing to pay a high price to
continue consuming the product.
• This is shown in the diagram below:
Changes in demand and consumer surplus
• When there is a shift in the demand curve
leading to a change in the equilibrium market
price and quantity, then the level of consumer
surplus will alter.
• This is shown in the diagrams above.
• In the left hand diagram, following an increase
in demand from D1 to D2, the equilibrium
market price rises to from P1 to P2 and the
quantity traded expands.
• There is a higher level of consumer surplus
because more is being bought at a higher
price than before
• In the diagram on the right we see the effects
of a cost reducing innovation which causes an
outward shift of market supply, a lower price
and an increase in the quantity traded in the
• As a result, there is an increase in consumer
welfare shown by a rise in consumer surplus.
• Consumer surplus can be used frequently
when analysing the impact of government
intervention in any market – for example the
effects of indirect taxation on cigarettes
consumers or the introducing of road pricing
schemes such as the London congestion