Lecture 2 slides

Economics for Managers by y Paul Farnham

Chapter 2: Demand, Supply, Demand Supply and Equilibrium Prices © 2005 Prentice Hall, Inc.

2.1

Demand The functional relationship between the price of a good or service and the quantity demanded by consumers in a given time, all else held constant

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2.2

Non-Price Factors I fl Influencing i Demand D d 1. Tastes and preferences

Affected by socioeconomic factors such as age, sex, race, marital status,, and education level 2. Income

The llevell off iincome affects Th ff t demand for normal goods and inferior goods © 2005 Prentice Hall, Inc.

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Non-Price Factors I fl Influencing i Demand D d 3.

Prices of related goods Substitute goods – when one good can be used in the place of another Complementary p yg goods – two or more goods that consumers use together

4.

Future expectations

5.

Number of consumers

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2.4

Demand Function QXD = f (PX, T, I, PY, PZ, EXC, NC, … where QXD = quantity tit demanded d d d off good dX PX = price of good X T = variables representing tastes and preferences I = income i (continued on next slide) © 2005 Prentice Hall, Inc.

2.5

The Demand Function QXD = f (PX, T, I, PY, PZ, EXC, NC, … where PY and PZ = prices of goods Y and Z, Z which relate to consumption of good X EXC = consumer expectations t ti about b t future prices NC = number b off consumers ( (NOTE: Ellipsis p is used to indicate many y other variables that influence demand) © 2005 Prentice Hall, Inc.

2.6

Demand Curves Figure 2.1

P1 P2

A B

The demand curve shows the relationship between price of a good and quantity demanded, all else constant

Demand 0 © 2005 Prentice Hall, Inc.

Q1 Q2

Quantity 2.7

More About D Demand dC Curves ƒ Demand shifters: variables held

constant when defining a demand curve but b t would ld shift hift if their th i values l changed ƒ Negative N ti (inverse) (i ) relationship: l ti hi where h an increase in one variable causes a decrease in another ƒ Change in quantity demanded: results when consumers react to change in price of a good © 2005 Prentice Hall, Inc.

2.8

Increase in Demand Figure 2.2

A change in demand occurs when one or more of the factors are held constant in d fi i a given defining i demand curve change

D2 D1 P1 0

Q1

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Q2

Quantity 2.9

Individual Versus M k t Demand Market D d Curve C ƒ Horizontal summation of individual

demand curves: for every yp price,, the quantity that each person demands at that price determines market quantity demanded at that price ƒ The market demand curve, DM,

considers quantities demand at prices other p

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Individual Versus Market D Demand dC Curve Figure 2.3

P1 DB

DM = DA + DB

DA 0

Q1

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Q2

Q3 Q4 Quantity

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Linear Demand F Functions ti and d Curves C ƒ Mathematical relationships with

no exponents p that take a value other than 1 ƒ Simplification of analysis ƒ Best representation of individuals’ behavior ƒ Not all demand functions are li linear © 2005 Prentice Hall, Inc.

2.12

Demand Function as an E Equation ti (for (f copper) ) QD = 10 - 50PC + 0.3I + 1.5TC + 0.5E where

QD = quantity demanded of copper PC = price of copper I = consumer income index TC = index showing uses for copper E = expectations index © 2005 Prentice Hall, Inc.

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Managerial Rule of Thumb: D Demand dC Considerations id ti Managers must • Understand what influences

demand • Determine which factors they can

influence • Determine D t i h how to t handle h dl factors f t

they cannot influence © 2005 Prentice Hall, Inc.

2.14

Supply The functional relationship between the price of a good or service and the quantity that producers are willing to supply in a given time, all else held constant.

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2.15

Non-Price Factors I fl Influencing i Supply S l ƒ State of technology ƒ Input prices ƒ Prices of goods related in

production d ti ƒ Future expectations p ƒ Number of producers ƒ Changes Ch in i trade t d barriers b i © 2005 Prentice Hall, Inc.

2.16

The Supply Function QXS = f (PX, TX, PI, PA, PB, EXP, NP, … where

QXS = quantity tit supplied li d off good dX PX = price of good X TX = state of technology PI = prices i off the th inputs i t off production d ti

(continued on next slide)

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2.17

The Supply Function QXS = f (PX, TX, PI, PA, PB, EXP, NP, … where

PA, PB = price of goods A and B B, related to good X EXP = producer expectations about future prices NP = number of producers ( (NOTE: Ellipsis p is used to indicate many y other variables that influence supply) © 2005 Prentice Hall, Inc.

2.18

Prrice

Supply Curve f for aP Product d t B

P2 P1

0 © 2005 Prentice Hall, Inc.

Supply Relationship between price of a good and quantity supplied

A

Q1

Figure 2.4

Q2

Quantity 2.19

Supply Relationships ƒ Not all supply curves are linear ƒ Supply curve does not show actual

price of product but the relationship of alternative p prices and quantities q ƒ A positive relationship is shown as

upward p line where increase in one variable causes increase in another variable © 2005 Prentice Hall, Inc.

2.20

Changes (Increase) i Supply in S l Figure 2.5 S1 S2 P1 0

Q1

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Q2

A change in supply occurs when one or more of the factors held constant in defining a given supply curve change

Quantity 2.21

Change in Q Quantity tit Supplied S li d A price change causes movement from one point to another • An increase in price of a substitute

good causes the supply curve to shift to the left; a decreases shifts it to the right • If the price of a complementary good increases, the supply increases • An increase in the number of producers shifts it to the right © 2005 Prentice Hall, Inc.

2.22

Managerial Rule of Thumb: S Supply l C Considerations id ti Managers must • Examine technology and costs of

production • Find ways to increase productivity

while lowering production costs

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2.23

Demand, Supply, and d Equilibrium E ilib i ƒ A price for a good or service is

determined when the market reaches equilibrium ƒ The quantity demanded of good X equals the quantity producers are willing g to supply pp y ƒ An upset in equilibrium pushes the price back toward equilibrium © 2005 Prentice Hall, Inc.

2.24

Market Equilibrium Figure 2.6

Supply PE

Market equilibrium occurs where demand equals supply

Demand e a d 0 © 2005 Prentice Hall, Inc.

QE

Quantity QE = equilibrium quantity 2.25 PE = equilibrium price

Lower-ThanE ilib i Equilibrium Prices P i ƒ Consumers demand more of a

g good than producers p are willing g to supply at that price ƒ Supply and demand become unstable ƒ An adjustment process begins which seeks to again bring equilibrium © 2005 Prentice Hall, Inc.

2.26

Changes in Equilibrium P i Prices and d Quantities Q titi ƒ Change in demand ƒ Change in supply ƒ Changes on both sides of the

market k t

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2.27

Summary of Key Terms ƒ ƒ ƒ ƒ ƒ

Demand Functional relationship p Normal and inferior goods Substitute and complementary p yg goods Individual and market demand functions ƒ Demand shifters ƒ Negative (inverse) and positive (direct) relationships © 2005 Prentice Hall, Inc.

2.28

Summary of Key Terms ƒ ƒ ƒ ƒ

Change in quantity demanded Linear demand and supply pp y functions Supply Input p prices p and prices p related in production ƒ Supply shifters ƒ Equilibrium price ƒ Lower-than-equilibrium price © 2005 Prentice Hall, Inc.

2.29

Do you have any questions?

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