Chapter 3 Supply and Demand Managerial Economics: Economic Tools for Today’s Decision Makers, 5/e...
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Transcript of Chapter 3 Supply and Demand Managerial Economics: Economic Tools for Today’s Decision Makers, 5/e...
![Page 1: Chapter 3 Supply and Demand Managerial Economics: Economic Tools for Today’s Decision Makers, 5/e By Paul Keat and Philip Young.](https://reader036.fdocuments.in/reader036/viewer/2022081416/56649d425503460f94a1d41c/html5/thumbnails/1.jpg)
Chapter 3Chapter 3Supply
and Demand
Managerial Economics: Economic Tools for Today’s Decision
Makers, 5/e By Paul Keat and Philip Young
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Supply and Demand
• Market Demand• Market Supply• Market Equilibrium• Comparative Statics Analysis
• Short-run Analysis• Long-run Analysis
• Supply, Demand, and Price
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Learning Objectives
• Define supply, demand, and equilibrium price.• List and provide specific examples of nonprice
determinants of supply and demand.• Distinguish between short-run rationing function
and long-run guiding function of price• Illustrate how concepts of supply and demand can
be used to analyze market conditions in which management decisions about price and allocations must be made.
• Use supply and demand diagrams to show how determinants of supply and demand interact to determine price in the short and long run
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Market Demand
• Demand for a good or service is defined as quantities of a good or service that people are ready (willing and able) to buy at various prices within some given time period, other factors besides price held constant.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Market Demand
Market demand is the sum of all the individual demands.
Example demand for pizza:
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Market Demand
The inverse relationship between price and the quantity demanded of a good or service is called the Law of Demand.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Market Demand
• Changes in price result in changes in the quantity demanded.• This is shown as movement along the
demand curve.
• Changes in nonprice determinants result in changes in demand.• This is shown as a shift in the demand
curve.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Market Demand
• Nonprice determinants of demand• Tastes and preferences
• Income
• Prices of related products
• Future expectations
• Number of buyers
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Market Supply
• The supply of a good or service is defined as quantities of a good or service that people are ready to sell at various prices within some given time period, other factors besides price held constant.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Market Supply
• Changes in price result in changes in the quantity supplied.• This is shown as movement along the
supply curve.
• Changes in nonprice determinants result in changes in supply.• This is shown as a shift in the supply
curve.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Market Supply
• Nonprice determinants of supply• Costs and technology
• Prices of other goods or services offered by the seller
• Future expectations
• Number of sellers
• Weather conditions
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Market Equilibrium
• Equilibrium price: The price that equates the quantity demanded with the quantity supplied.
• Equilibrium quantity: The amount that people are willing to buy and sellers are willing to offer at the equilibrium price level.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Market Equilibrium
• Shortage: A market situation in which the quantity demanded exceeds the quantity supplied.• A shortage occurs at a price below the
equilibrium level.• Surplus: A market situation in which the
quantity supplied exceeds the quantity demanded.• A surplus occurs at a price above the
equilibrium level.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Market Equilibrium
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Comparative Statics Analysis
• A commonly used method in economic analysis: a form of sensitivity, or what-if analysis
• Process of comparative statics analysis• State all the assumptions needed to construct the model.• Begin by assuming that the model is in equilibrium.• Introduce a change in the model. In so doing, a
condition of disequilibrium is created.• Find the new point at which equilibrium is restored.• Compare the new equilibrium point with the original
one.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Comparative Statics: Example
Step 1
• Assume all factors except the price of pizza are constant.
• Buyers’ demand and sellers’ supply are represented by lines shown.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Comparative Statics: Example
Step 2
• Begin the analysis in equilibrium as shown by Q1 and P1.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Comparative Statics: Example
Step 3• Assume that a new
study shows pizza to be the most nutritious of all fast foods.
• Consumers increase their demand for pizza as a result.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Comparative Statics: Example
Step 4
• The shift in demand results in a new equilibrium price, P2 , and quantity, Q2.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Comparative Statics: Example
Step 5
• Comparing the new equilibrium point with the original one we see that both equilibrium price and quantity have increased.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Comparative Statics Analysis
• The short run is the period of time in which:• Sellers already in the market respond to a
change in equilibrium price by adjusting variable inputs.
• Buyers already in the market respond to changes in equilibrium price by adjusting the quantity demanded for the good or service.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Comparative Statics Analysis
• The rationing function of price is the change in market price to eliminate the imbalance between quantities supplied and demanded.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Short-run Analysis
• An increase in demand causes equilibrium price and quantity to rise.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Short-run Analysis
• A decrease in demand causes equilibrium price and quantity to fall.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Short-run Analysis
• An increase in supply causes equilibrium price to fall and equilibrium quantity to rise.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Short-run Analysis
• A decrease in supply causes equilibrium price to rise and equilibrium quantity to fall.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Comparative Statics Analysis
• The long run is the period of time in which:• New sellers may enter a market• Existing sellers may exit from a market• Existing sellers may adjust fixed factors of
production• Buyers may react to a change in equilibrium
price by changing their tastes and preferences or buying preferences
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Comparative Statics Analysis
• The guiding or allocating function of price is the movement of resources into or out of markets in response to a change in the equilibrium price.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Long-run Analysis
• Initial change: decrease in demand from D1 to D2
• Result: reduction in equilibrium price and quantity, now P2,Q2
• Follow-on adjustment:• movement of resources
out of the market• leftward shift in the
supply curve to S2• Equilibrium price and
quantity now P3,Q3
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Long-run Analysis
• Initial change: increase in demand from D1 to D2
• Result: increase in equilibrium price and quantity, now P2,Q2
• Follow-on adjustment:• movement of resources
into the market• rightward shift in the
supply curve to S2• Equilibrium price and
quantity now P3,Q3
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Supply, Demand, and Price:The Managerial Challenge
• In the extreme case, the forces of supply and demand are the sole determinants of the market price.• This type of market is “perfect competition”
• In other markets, individual firms can exert market power over their price because of their:• dominant size.• ability to differentiate their product through
advertising, brand name, features, or services