Economics for Managers
by
y Paul Farnham
Chapter 2:
Demand, Supply,
Demand
Supply and
Equilibrium Prices
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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
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2.3
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)
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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)
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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
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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
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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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2.10
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
2.11
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
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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
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2.13
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
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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
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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)
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2.18
Prrice
Supply Curve
f
for
aP
Product
d t
B
P2
P1
0
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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
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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
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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
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2.24
Market Equilibrium
Figure 2.6
Supply
PE
Market
equilibrium
occurs where
demand
equals supply
Demand
e a d
0
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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
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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
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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
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2.29
Do you have any
questions?
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2.30