Download MANAGERIAL ECONOMICS 11th Edition

Demand and Supply
Chapter 3
Chapter 3
OVERVIEW
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Basis for Demand
Market Demand Function
Demand Curve
Basis For Supply
Market Supply Function
Supply Curve
Market Equilibrium
Chapter 3
KEY CONCEPTS

demand
 direct demand
 utility
 derived demand
 demand function
 demand curve
 change in the quantity
demanded
 shift in demand
 Supply
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supply function
supply curve
change in the quantity
supplied
shift in supply
equilibrium
market equilibrium price
surplus
shortage
comparative statics
analysis
Demand
The Demand Curve is the relationship between the price of a good or service
and the quantity demanded by consumers of the good or service.
The Law of Demand P  Qd 
We work with equations because they are easier to work with
they are becoming increasingly popular for managerial purposes
computers have simplified the process of estimation
Demand Curve
 Demand

Demand curve shows price and quantity
relation holding everything else constant.
 Change
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in Quantity Demanded
Quantity demanded falls if price rises.
Quantity demanded rises if price falls.
 Role

Curve Determination
of Non-Price Variables
Change in non-price variables will define a
new demand curve.
Relation Between the Demand
Curve and Demand Function
 Movements
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A rise in price causes upward movement
along a given demand curve.
A price decline causes downward movement
along a given demand curve.
 Demand
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
Along Demand Curve
Curve Shifts
Demand increases if a non-price change
allows more to be sold at every price.
Demand decreases if a non-price change
causes less to be sold at every price.
Basis for Demand
 Direct
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
Demand
Demand is the quantity customers are willing
to buy under current market conditions.
Direct demand is demand for consumption.
 Derived
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Demand
Derived demand is input demand.
Firms demand inputs that can be profitably
employed.
Determinants of Demand
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Demand is determined by
Price – movements along the demand curve
prices of related goods – shifts the demand curve
Income - shifts the demand curve
Advertising – shifts the demand curve
Taste and preferences of buyers - shifts demand
Price expectations, population, ect.
Industry Demand Versus Firm Demand

Industry demand is subject to general
economic conditions.
• Cyclical factors
• Systemic factors
• Political decisions
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Firm demand is determined by
• economic conditions and competition.
Market Demand Functions
Consumer A
Consumer B
Consumer C
P = 10
P=6
P=2
P = 12 – QA
P = 10 – 2QB
P = 10 – QC
Market Demand = 2
Market Demand = 12
Market Demand = 22
P’s are the same add the Q’s
QA = 12 – P
QB = 5 – 0.5 P
QC = 10 – P
QA + QB + QC = QM = 27-2.5 P
[ P = 10 ] [ QM = 2 ]
General Demand Function
with Shift Factors
This would be the typical demand curve for a product. It could be the
company’s specific product, or the industry’s demand for a specific product.
For example, Ford’s demand for mid-sized cars, or all auto-makers demand for
mid-sized cars
QXM = f(PX,PY,I,A,POP)
Prices of Related Goods – Substitutes / Complements
Income - Inferior / Normal
Population at an Aggregated Level
Linear Demand Curve
Demand for Apples
QXM = a1Px + a2PY + a3I + a4A + a5 POP
QM = -500(Px) + 450(PY) + 1,000(I) + 1500(A) + 220(POP)
P(X in pennies)
PY = Price of Grapes 1.00 a pound; I = 20; A= 10 thousand;
POP in thousands = 50
Q = -500(Px) + 450(100) + 1,000(20) + 1500(10) + 220(50)
Q = -500(Px) + 45,000) + 20,000 + 15,000 + 11,000
Q = -500(Px) + 91,000
P = 182 - .002Q
Changes in demand determinants
An increase in advertising by 1 thousand dollars
Would result in a 1500 increase in Q
Q = -500(Px) + 92,500
Q – 92,500 = -500(Px)
-.002Q + 185 = (Px)
The individual firms demand curve would be a fraction of the total market demand curve. i.e. If company A
controlled 50% of the apple market, a $1Million dollar increase in income would raise the sale of their apples
by approximately, 500 pounds.
Don’t forget, direct demand is demand for actual consumption (output) derived demand is demand for inputs
that stems from demand for outputs. i.e. The demand for wood or brick increases because of the demand for
new homes.
Basis For Supply
 Firms
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Offer Supply To Make Profits
When prices rise, firms boost the quantity
supplied.
When prices fall, firms cut the quantity
supplied.
 Everything
That Affects Marginal
Production Costs Affects Supply
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If MC falls, supply rises.
If MC rises, supply falls.
Market Supply Function
 Determinants
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Supply is determined by price, prices of
other goods, technology, and so on.
 Industry
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of Supply
Supply Versus Firm Supply
Firm supply is determined by economic
conditions and competition.
Industry supply is the sum of firm
supply.
Supply
The supply curve is from a firm’s
perspective.
How much will the firm supply of
product X at a given PX?
© 2009, 2006 South-Western, a
part of Cengage Learning
Supply Curve
 Supply

Supply curve shows price and quantity relation
holding everything else constant.
 The
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Curve Determination
Price-quantity Supplied Relation
A rise in price will increase the quantity
supplied.
A fall in price will decrease the quantity
supplied.
 Along
a supply curve, all non-price
variables are held constant
Relation Between Supply Curve
and Supply Function
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Movements Along Supply Curve
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A rise in price causes upward movement along a
given supply curve.
A price decline causes downward movement along a
given supply curve.
Supply Curve Shifts
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Supply increases if a non-price change allows more
to profitably produced and sold.
Supply decreases if a non-price change causes less
to be profitably produced and sold.
Supply Determinants
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Anything that affects the cost of doing business
will impact the firm’s decision to supply.
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Labor costs
Materials costs
Overhead
Advertising
Productivity
Technology
Taxes
Also, changes in the number of suppliers.
Market Supply Curve
Market Supply
Q = B1PX + B2PY + B3W + BYG
PX = price of apples in cents
PY = price of grapes in pennies, as a substitute labor picks applies or grapes
can’t do both effectively
W = wages of workers in dollars
G = other goods such as pesticides on government regulations cost of
chemicals the cost is 1,000
Q = 350(PX) – 100(PY) – 1,000(W) – 200(O)
Assume PX, PY = 100; W = 4 dollars an hour; O = 50,000;
Q = 350PX – 10,000 – 4,000 – 10,000
Q = 350PX – 24000
PX = .003Q – 68.57
When do suppliers enter the market?
How much does the price of apples have to be for the apple industry to produce
any apples? ANS. 24,000/350 = 68.6; About 70 cents per pound
What if wages drop down to 2 per hour?
Q = 350PX – 22,000; 22,000/350; then firms will startr63 cents…
Market Equilibrium
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Demand and Supply Balance
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Equilibrium exists if perfect balance exists
in the quantities demanded and supplied.
Equilibrium reflects productive and
allocative efficiency.
 Surplus
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and Shortage
Surplus is excess supply.
Shortage is excess demand.
Market Equilibrium
Using the demand curve from slide 12 and the supply curve from slide 20.
350PX – 24,000 = -500PX + 91,000
PX = 135.3 or $1.35 per pound…
At a price of Q $1 what is the amount of the supply?
Change the shift factors of either supply or demand.
The Market for Autos
 Demand
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Shifts in the demand curve
 Supply
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Shifts in the supply curve
 Equilibrium
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Changes in market equilibrium
Comparative Statics
 Changes
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in Equilibrium
Equilibrium exists when there is no economic
incentive for change in demand or supply.
Changing demand or supply affects
equilibrium.
 Comparative
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
Statics
Study of how equilibrium changes with
changing demand or supply.
Change continues until a new equilibrium is
established.
© 2009, 2006 South-Western, a
part of Cengage Learning
© 2009, 2006 South-Western, a
part of Cengage Learning