Chapter_2 - Demand Supply ECONOMICS

7/30/2019 Chapter_2 - Demand Supply ECONOMICS

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Copyright 2008 by the McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/IrwinManagerial Economics, 9e

ManagerialEconomics ThomasMauriceninth edition

Copyright 2008 by the McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/IrwinManagerial Economics, 9e

ManagerialEconomics ThomasMauriceninth edition

Chapter 2

Demand, Supp ly, &

Market Equ i l ibr ium


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ManagerialEconomicsManagerialEconomics

2-2

Demand

Quantity demanded (Qd)

Amount of a good or service

consumers are willing & able topurchase during a given period of time


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2-3

General Demand Func t ion

Six variables that influence Qd Price of good or service (P) Incomes of consumers (M)

Prices of related goods & services (PR)

Expected future price of product (Pe)

Number of consumers in market (N) General demand function

( )Taste patterns of consumers ( )Taste patterns of consumers

( , , , , , )d R eQ f P M P P N ( , , , , , )d R eQ f P M P P N


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2-4

General Demand Funct ion

b, c, d, e, f, & gare slope parameters

Measure effect on Qdof changing one of thevariables while holding the others constant

Sign of parameter shows how variable

is related to Qd

Positive sign indicates direct relationship

Negative sign indicates inverse relationship

d R eQ a bP cM dP e fP gN


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2-5

General Demand Funct ion

Variable Relation to Qd Sign of Slope Parameter

P

Pe

N

M

PR

Inverse

Direct

Direct

Direct

Direct for normal goods

Inverse for inferior goods

Direct for substitutes

b =Qd/Pis negativec =Qd/M is positivec =Qd/M is negatived =Qd/PRis positived =Qd/PRis negative

f =Qd/Peis positiveg =Qd/Nis positive

Inverse for complements

e =Qd/ is positive


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2-6

Direc t Demand Func t ion

The direct demand func t ion, or simply

demand, shows how quantity demanded,

Qd, is related to product price, P, when all

other variables are held constant Qd= f(P)

Law of Demand

Qdincreases when Pfalls & Qddecreases whenPrises, all else constant

Qd/Pmust be negative


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2-7

Inverse Demand Func t ion

Traditionally, price (P)is plotted on

the vertical axis & quantity

demanded (Qd)is plotted on the

horizontal axis

The equation plotted is the inversedemand function, P = f(Qd)


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2-8

Graph ing Demand Curves

A point on a direct demand curve

shows either:

Maximum amount of a good that will bepurchased for a given price

Maximum price consumers will pay fora specific amount of the good

i l ii l i


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2-9

A Demand Curve (Figure 2.1)

M i l E iM i l E i


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2-10

Graph ing Demand Curves

Change in quantity demanded

Occurs when price changes

Movement along demand curve

Change in demand

Occurs when one of the othervariables, or determinants of demand,changes

Demand curve shifts rightward orleftward

M i l E iM i l E i


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2-11

Shif ts in Demand (Figu re 2.2)

M i l E iM i l E i


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2-12

Supply

Quantity supplied (Qs)

Amount of a good or service offered

for sale during a given period of time

M i l E iM i l E i


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2-13

Supply

Six variables that influence Qs Price of good or service (P) Input prices (PI)

Prices of goods related in production (Pr) Technological advances (T) Expected future price of product (Pe)

Number of firms producing product (F) General supply function

( , , , , , )s I r eQ f P P P T P F

M i l E iM i l E i


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2-14

General Supp ly Func t ion

k, l, m, n, r, & sare slope parameters

Measure effect on Qsof changing one of thevariables while holding the others constant

Sign of parameter shows how variable

is related to Qs

Positive sign indicates direct relationship

Negative sign indicates inverse relationship

s I r e Q h kP lP mP nT r P sF

M i l E iM i l E i


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2-15

General Supp ly Func t ion

Variable Relation to Qs Sign of Slope Parameter

P

Pe

F

PI

Pr

Direct

Direct

Direct

Inverse

Inverse

Inverse for substitutes

k =Qs/Pis positivel =Q

s/P

Iis negative

m =Qs/Pris negativem =Qs/Pris positive

r =Qs/Peis negatives =Qs/F is positive

Direct for complements

n =Qs/

Tis positiveT

M i l E iM i l E i


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2-16

Direct Supply Funct ion

The di rect supp ly funct ion, or

simply supp ly, shows how quantity

supplied, Qs, is related to product

price, P, when all other variables

are held constant

Qs= f(P)

M n ri l E n miM n ri l E n mi


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2-17

Inverse Supply Funct ion

Traditionally, price (P)is plotted on

the vertical axis & quantity

supplied (Qs)is plotted on the

horizontal axis

The equation plotted is the inversesupply function, P = f(Qs)

Managerial EconomicsManagerial Economics


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2-18

Graph ing Supply Curves

A point on a direct supply curve

shows either:

Maximum amount of a good that will beoffered for sale at a given price

Minimum price necessary to induceproducers to voluntarily offer a

particular quantity for sale



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2-19

A Supp ly Curve (Figure 2.3)



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2-20

Graph ing Supply Curves

Change in quantity supplied

Occurs when price changes

Movement along supply curve

Change in supply

Occurs when one of the othervariables, or determinants of supply,changes

Supply curve shifts rightward orleftward



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2-21

Shif ts in Supp ly (Figu re 2.4)



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2-22

Market Equ i l ib r ium

Equilibrium price & quantity are

determined by the intersection of

demand & supply curves

At the point of intersection, Qd= Qs Consumers can purchase all they want

& producers can sell all they want atthe market-clearing or price



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2-23

Market Equ i l ib r ium (Figure 2.5)



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2-24

Market Equ i l ib r ium

Excess demand (shortage)

Exists when quantity demandedexceeds quantity supplied

Excess supply (surplus)

Exists when quantity supplied exceedsquantity demanded



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2-25

Value of Market Exchange

Typically, consumers value the

goods they purchase by an amount

that exceeds the purchase price of

the goods

Economic value

Maximum amount any buyer in the market

is willing to pay for the unit, which ismeasured by the demand price for theunit of the good



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2-26

Measu ring the Value of Market

Exchange

Consumer surplus Difference between the economic value of a

good (its demand price) & the market pricethe consumer must pay

Producer surplus For each unit supplied, difference between

market price & the minimum price producerswould accept to supply the unit (its supplyprice)

Social surplus Sum of consumer & producer surplus Area below demand & above supply over the

relevant range of output



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2-27

Measu ring the Value of Market

Exchange (Figu re 2.6)



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2-28

Changes in Market Equ i l ib r ium

Qualitative forecast

Predicts only the direction in which aneconomic variable will move

Quantitative forecast

Predicts both the direction and themagnitude of the change in aneconomic variable



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2-29

Demand Shi f ts (Supply Cons tant)(Figu re 2.7)



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2-30

Supply Shi fts (Demand Cons tant)(Figu re 2.8)



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2-31

Simultaneous Shi f ts

When demand & supply shiftsimultaneously Can predict either the direction in

which price changes or the direction inwhich quantity changes, but not both

The change in equilibrium price orquantity is said to be indeterminatewhen the direction of change dependson the relative magnitudes by whichdemand & supply shift



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2-32

S

D

S

S

D

Simultaneous Shi f ts:(D, S)

Q

Price may rise or fall; Quantity rises

P

A

Q

P

BP

Q Q

CP



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a age a Eco o csa age a Eco o cs

2-33

D

Simultaneous Shi f ts:(D, S)S

D

S

S

Q

Price falls; Quantity may rise or fall

P

A

Q

P

B

P

Q Q

CP



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gg

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S

Simultaneous Shi f ts:(D, S)

D

S

D

S

Q

Price rises; Quantity may rise or fall

P

A

Q

P

B

P

QQ

CP



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gg

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Simultaneous Shi f ts:(D, S)S

D

S

D

S

Q

Price may rise or fall; Quantity falls

P

A

Q

PBP

QQ

CP



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gg

2-36

Cei l ing & Floor Prices

Ceiling price Maximumprice government permits

sellers to charge for a good

When ceiling price is belowequilibrium, a shortageoccurs

Floor price

Minimumprice government permitssellers to charge for a good When floor price is above equilibrium,

a surplusoccurs



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gg

Cei l ing & Floo r Prices(Figure 2.12)

Qx

Quantity

Price

(dollars)

Qx

Px Px

Quantity

Price

(doll

ars)Sx

Dx

2

50

1

6222

3

32 84

Panel A Ceiling price

Sx

Dx

2

50

Panel B Floor price

Chapter_2 - Demand Supply ECONOMICS

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